Although the term crowdfunding seems to be the catchword of the day in almost any industry or market, it is especially important when it comes to new real estate investors. If you are looking for a quick and easy way to break into investing in real estate, this is the way to go. Here are just five reasons why crowdfunding is perfect for the new investor.
1) Smaller Initial Investment
Crowdfunding is all about gathering a greater number of investors who only need to begin with a small amount of money to break into the game. For example, with as little as $1,000 you can place your money in something called a Real Estate Investment Trust, REIT, that is a portfolio of commercial real estate properties that are managed by the trust/fund and there can be literally hundreds, if not thousands, of commercial properties in the portfolio. Wouldn’t it be nice to say you own a piece of 100 properties scattered around the United States? (Some properties are even in foreign countries!)
2) Reduced Risk If Invested Wisely
If you choose the right REIT with great asset management and a history of profitability, you have greatly reduced risk. Many real estate investors think that the only real way to make money is to buy up commercial properties such as office buildings, retail stores, medical centers and the likes so that they can own the whole pie. However, with little or no background in real estate, can you be assured that you will manage those types of properties well?
Can you afford enough of them so that if one or two buildings don’t pay their rent you would be able to sustain for months on end with no income? Probably not. When you invest in an REIT, there are so many properties that if one fails to produce a problem, the others take up the slack. It’s great for new investors learning the ropes!
3) Quick Way to Diversify Your Portfolio
It is widely accepted in the business that a diversified portfolio also offers a much lesser exposure to risk. For the same reason that a commercial real estate investor would want to own several properties, so too would an investor want a diversified portfolio. If one market fails, the others might produce. It’s one of the most widely recognized ways to reduce risk for investors.
4) Dividends Paid Regularly
When you invest in a real estate crowdfunding venture, any profits will be paid regularly to stakeholders. Some pay quarterly. Some REITs pay semiannually and others yet distribute dividends annually. By investing in a crowdfunded REIT, the management team does all the calculations and sees to transparency so that all members of the fund know exactly what is happening at any moment with their money. The investors can, if they want, do the calculations themselves based on data made transparent, but why bother when the fund has an audit/accounting team on hand? Get paid regularly or reinvest your earnings to continue growing your investment. It’s a handy way to keep track of earnings without hiring your own accounting firm.
5) An Easy Way to Learn about Commercial Real Estate
Some new investors like to place a bit of money in an REIT to begin learning about investing in commercial real estate. By watching numbers in the fund, they can begin learning what it takes to make a profit. Being able to calculate ROI is one of the hardest things most new investors are confronted with, so learning from the ledgers of your fund can help you learn to balance your own books if you ever decide to venture out on your own.
Here is where you need to do a little leg work prior to joining a trust. Make absolutely certain you will have access to all the pertinent data you will need to begin learning how to calculate your ROI. (These figures would include such things as operating costs, taxes, insurance, loss of income and so on.)
Summing It Up – It’s All Good
While you can have a piece of the pie in a number of commercial properties, there is no need to learn about property management at this time. In fact, you may never need to learn it if you are content to let your wealth grow by placing your investment capital in REITs. It’s a great way to make a huge profit with reduced risk and fewer administrative headaches.
However, the one thing to be aware of is you need to choose the right fund. Check out references and reputation prior to investing and you can sleep well at night, knowing your money is in good hands. That’s right, with the right fund, ‘it’s all good.’