Wondering what real estate crowdfunding is all about? We have answers in this article. Keep reading to learn more.
Understanding Crowdfunding
Crowdfunding entails raising funds from several investors through the internet. This method is popular among small entities wanting to raise capital to scale their businesses. In the United States, many small companies started embracing crowdfunding in 2012 following the approval of the Jumpstart Our Business Startups Act. This rule lowered several reporting requirements for companies and reduced Securities and Exchange Commission regulations on mid-sized and small businesses, thus allowing wider use of funds sourced via crowdfunding. However, the law imposed limits on the amount of money each investor could inject into a crowdfunding offering based on various factors like income and net worth.
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In 2015, the Securities and Exchange Commission enacted a rule that allowed companies to run securities ads under the condition that any investor wanting to invest is confirmed as accredited. Moreover, that rule allowed companies to collect up to $80 million yearly from accredited investors.
In 2020, the Securities and Exchange Commission established “Regulation Crowdfunding,” which now allows companies to use a fundraising model called “Common Owner.” This crowdfunding model can be utilized by real estate entities.
Real Estate Crowdfunding Explained
Simply put, real estate crowdfunding involves using online platforms to raise capital from a large number of investors to purchase or build real estate. The idea is that many people are willing to inject small amounts of money into real estate projects, and if they do, real estate entities can raise huge amounts of cash quickly.
If you invest in a real estate project via crowdfunding, you only become a shareholder, meaning you do not need to acquire entire properties. You will receive profits generated from real estate investments based on the amount you invest. The best part about real estate crowdfunding is that there are companies that allow people to invest as low as $500.
Pros and Cons of Real Estate Crowdfunding
There are several benefits associated with real estate crowdfunding. However, it is crucial to understand its downsides before committing any funds.
Pros
One of the main benefits of real estate crowdfunding is that it allows companies to raise funds quickly from large pools of investors. Furthermore, this method of fundraising has lowered capital requirements by enabling investors to invest small amounts of money.
In most countries, non-accredited investors can participate in real estate crowdfunding, meaning they do not have to meet any net worth or income requirement.
Cons
Most companies embracing real estate crowdfunding are relatively new, making it difficult for investors to discover longer track records of the firms. Moreover, the poor-performing world economy isn’t doing any good to real estate investments. Therefore, profits generated from these investments can be pretty small, thus affecting your passive income.
Investment Limits for Real Estate Crowdfunding
As mentioned earlier, the Securities and Exchange Commission has implemented some limits on investors who wish to engage in crowdfunding. They include:
Less Than $125,000
If your net worth or annual income is less than $125,000, then you can only invest up to $2,600 every 12 months.
More than $125,000
If both your net worth and annual income are more than $125,000, then you are allowed to invest up to 13% of your net worth or yearly income.
Difference Between Real Estate Crowdfunding and Traditional Real Estate Investing
The primary difference between the two is that traditional real estate investing requires massive capital upfront. Also, investors are expected to purchase and manage properties. Real estate crowdfunding, on the other hand, does not require investors to acquire or manage any property. In addition, investors can invest a small amount of money.
Can You Earn Steady Income by Investing via Real Estate Crowdfunding?
Yes! Real estate companies generate revenue mainly in the form of rental income. The profits are then shared among investors, allowing you to earn passively. However, profits generated are determined by the occupancy and performance of the rental property.