Crowdfunding is the newest way to raise money, and it works beautifully in the right situation. Crowdfunding to pay an unexpected debt or to raise money for a good cause gives us the power to use the 21st century’s digital connectivity in a positive way. Where crowdfunding doesn’t work is in real estate investment. Real estate crowdfunding returns are never as good as promised, and there are some good reasons to avoid this type of investment.
What Is It All About?
Crowdfunding has been possible since the JOBS Act went into effect and changed securities regulations so that nonaccredited investors could invest more easily. Prior to this, you could not invest in a private company unless you had a net worth of $1 million or an annual salary of over $200,000 for two years in a row.
The idea behind the change was to make it easier for small businesses to get the investments they need.
Non-Accredited Investors and Crowdfunding
What does all this have to do with real estate crowdfunding returns? When changes were made to securities regulations, it didn’t take long before enterprising people created small businesses to manage real estate. When you make a real estate investment at a crowdfunding site, you’re actually investing in that small business (in most cases). And in some cases, you can now get started in real estate investment for just $5.
Why It’s Popular
There are a number of reasons crowdfunding real estate investment draws people. For one thing, it requires very little money to get started and appears to offer little risk. And since the vast majority of America’s millionaires became so at least partly through real estate investment, many people see crowdfunding as an easy way to get big real estate crowdfunding returns with little risk.
Why Crowdfunded Real Estate Is Actually a Risky Bet
There’s No Data
The system has not been around long enough to produce any serious, long-term performance data so we can see how crowdfunding real estate investment performs over time and the true risks. These platforms bill themselves as an easy way to bring in real estate crowdfunding returns without any risk: but every investment carries risk.
The only way to minimize risk is to put in the hard work required to understand your investments and carefully choose where you’re putting your money. The assurances of a crowdfunded investment site aren’t enough for you to risk the money you work so hard to earn.
There Are Too Many People Involved
Who has control? Who is making the decisions about which real estate deals to spring for and which to avoid? The whole situation could easily become a case of “too many cooks spoil the soup.” With so many people involved, and everyone with their own idea of how to handle problems, you could have very little say over what’s happening to your money, even as you lose it.
It Complicates Your Taxes
Once again, the crowdfunding sites bill themselves as simple to use, but they’re mainly leaving it to you to figure out the tax structure. In some cases, your income from these investments is taxed at ordinary income tax rates, but if the investment is an equity investment, you have a far more complicated tax structure to work with.
Another complicating factor is state taxes. If you are invested in a property in a state other than where you live, that state may want you to pay taxes, and your crowdfunding site may not give you everything you need to understand where all your money has gone and which states might come knocking for tax money.
You’re Kept in the Dark
When you buy your own real estate, you take the time to understand real estate investments, the ins, and outs of financing, and the local market in places where you’re considering buying a property. As you learn about the market, you can learn how to identify better deals and the highest performing properties.
With crowdfunding, you are completely in the dark about all of this. You’re putting yourself entirely in the hands of whoever is running the site, and they may know a lot more about setting up profitable apps than they do about real estate.
The Investments Aren’t Secured
Most of these real estate crowdfunding investment platforms are completely unsecured. What that means is there’s no third-party acting as a custodian to ensure that investors get some return in case the investment platform goes under.
It’s hard to even find out how well an individual platform is performing, let alone how secure your investment is. The platform may be performing well in terms of traffic and how many people are investing little bits here and there, but actually, be very shaky underneath because of poor investment choices and low cash flow. The whole thing could go belly up quickly, leaving you in the lurch.
Misleading Real Estate Crowdfunding Returns
Since crowdfunding real estate sites have been in operation, they have been returning between 10%-15% on investments. That’s a temptingly high rate. The question is, are these rates misleading?
Crowdfunding for real estate got started just as the real estate market began to recover from the financial crisis of the late 2000s. America’s economy is currently in a boom, and investments are generally doing well everywhere. The question remains whether crowdfunded real estate platforms will start dying off quickly once the real estate market cools.
You’re Not the Priority
The old business model doesn’t apply to Silicon Valley startups. These guys operate on a different model: put in some short term effort and hope for a multi-million-dollar acquisition in a year or two. Improving your investment portfolio is not the goal here. The goal is the platform itself.
This means you can’t expect these crowdfunding sites to care about what’s going to happen to your investments 10 years down the line. Their goal is to build as much volume as quickly as possible—and who cares about risk? Their goals are much different than yours, and they can make a profit even if you don’t make a dime.
Litigation Could be a Nightmare
If hundreds of people are all involved in foreclosing on a single property, how do you work out a satisfactory resolution? Who handles the legal costs? Who handles litigation? Will the platform take care of it all? No one actually knows.
What happens if one of these apartment buildings has a maintenance issue that causes injury because the crowdfunding platform’s owners didn’t do their due diligence and ended up hiring a shady property manager? When the multi-million dollar personal injury lawsuit is filed, will you be liable as an investor? If the injured party learns that there are actually hundreds of owners of the property, will they be motivated to seek an even larger payout on the assumption that there’s plenty of money to be had?
Crowdfunding: It’s Not Worth It
When you consider all the risks, the limited real estate crowdfunded returns are simply not worth it. Check out The Creating Wealth Show today and learn more about how to make smart real estate investments that can actually grow your wealth and bring you the financial freedom you’re hoping for.