Is real estate crowdfunding the investment option for you?

Equity crowdfunding has been a great alternative investment for many, but there are other principles that branched out from it. Some investors direct their funds not only on startups that offer unique products or services as others become virtual landlords through property crowdfunding.

Investopedia defines property or real estate crowdfunding as a way wherein real estate developers “rely on crowdfunding sites to solicit investments from high-net-worth investors who are eager to make an investment in this market.” It makes real estate investing easier for interested parties, helping entrepreneurs to find the funds they need for the launch of their properties.

Platforms like LendInvest, Landbay and Lendy have risen to make real estate investing more interesting because of higher returns. Some sources suggest that peer-to-peer lending (P2P) schemes like crowdfunding in real estate allow for returns in excess of 5-6 percent compared to traditional real estate investment trusts (REITs).

There are three ways to get into real estate crowdfunding: P2P, debt crowdfunding and virtual buy-to-let.

The three forms of real estate crowdfunding

Virtual buy-to-let investment in property crowdfunding is basically equity crowdfunding as investors will be buying a share in a property. They will receive profit through rental income or through the sales made from a property.

By far the most popular way is debt crowdfunding. Investors double as lenders instead of co-owners or shareholders of a property when using debt crowdfunding platforms. By being a lender, the investor will not be subjected to profits and losses made by the property. Instead, investors will have to set their own fair payment terms that the borrower can abide by.

Platforms that offer debt crowdfunding provide security to investors through assets so they have little to worry about. The downside of debt crowdfunding is that the lender will not be able to benefit from the property once the debt has been paid off. He also won’t have any say in how the business runs as he is not a shareholder. Another con is that the lender will only receive a set amount of returns created through interest rates.

Not to be confused with debt crowdfunding, P2P lending is essentially the same principle, but this time, the borrower and lender do not have to go through third-party outlets to secure a deal. It is a good option only if there is an established trust between both parties.

On one hand, P2P lending is relatively cheaper than the other property crowdfunding method. Since there are no crowdfunding portals involved, both parties will not have to spend money on transaction, service and other fees websites charge. Another benefit is that the lender is able to invest in specific properties so there are a lot of options to choose from with regards to how much the investor can spend.

Although good money could be gained from property crowdfunding, tested investors will tell anyone that they should always take caution when making small and big purchases. There are always risks even in ventures like this so understanding all of the aspects that will define the success of a project will always be crucial.