Why Crowdfunding is Becoming a Widespread Way for Investors to Enhance Their Finances

by | BiggerPockets.com

Why are so many investors turning to crowdfunding?

Crowdfunding has gone from being an up and coming tech movement to being a part of the norm for many investors. Why is that? What are the benefits?

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Crowdfunding 101

Crowdfunding is no longer a new thing. Crowdfunding is essentially a technology driven form of partnership for fundraising and investing. Pools of investors come together on digital platforms to fund tech startups, nonprofit causes, and real estate investments. It’s almost an alternative banking community that empowers investors and fundraisers to connect without all the layers of fund managers and bankers who have proven inefficient, untrustworthy, and expensive.

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Related: How the Biggest Change to Crowdfunding in Years Affects Investors

There is still a variety of forms of crowdfunding, ranging from simple donation crowdfunding to equity crowdfunding. There are peer to peer sites that allow for loaning to individuals who need a bailout, as well as real estate-specific crowdfunding platforms for passive income investors.

Institutional Investors

What many are still not aware of is that institutional investors have moved into many of these crowdfunding platforms. This includes major funds, credit unions, and regional banks. They have found that backing projects like this and getting involved in debt crowdfunding allows them to make greater profits with ease, all while avoiding the liability issues with lending to home buyers directly. This is certainly one reason we haven’t seen mortgage loans for regular buyers bounce back to the same levels seen previous to 2008 and why that may continue to be a slow process.

For Mid-Sized Investment Firms

For smaller and mid-sized real estate investors and firms, this type of strategy enables them to allow individual investors to participate in their success. Greater capital empowers them to continue to expand and to secure great discounts and yields for their investors.

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Related: 4 Crowdfunding Benefits All Real Estate Investors Should Consider

For Individual Investors

Regular individuals now have the opportunity to invest in high performing investments that were previously out of reach through these platforms. For example, someone starting out who lives in a very high cost city can find more profitable investments in more affordable locations and team up with their peers to invest online. They can literally make these investments right from their phones and get regular status updates the same way. The ease, returns, and tech angle make it very attractive, especially to Millennials who want investment options that suit them.

While this space is still evolving and maturing, expect this to be the way for the bulk of individual investors to enhance their finances and lifestyle going forward.

Do you use crowdfunding? Why or why not?

Leave your comments below!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record.

13 Comments

  1. David Thompson

    Hi Sterling,
    Good topic. I think there are some positive things with crowdfunding for some folks, lower minimums maybe a big one and the ability to perhaps diversify w/smaller amounts across several sponsors, niches and geographies. That said, the shortcomings IMO would be lack of learning and interface w/many of these sponsors. They have put up a middleman essentially between the investors and the sponsor. The sponsor is paying for this site for ease in capital raising / reach and puts some of that investor relationship on the site to manage the investor interface. Less communications and direct access to the sponsor is given up for the ease of technology. Good for some and maybe not so good for others.

  2. Matt Faircloth

    Hey Sterling,
    Another great article!
    In my opinion, Crowdfunding is the future of passive real estate investments. Wall Street has become frustrating and doesn’t offer real diversity or control. Crowdfunding will become an alternative to Wall Street for investors who want to diversify their wealth and not have their investments take a hit based on something overseas like Great Britan deciding to leave the EU, or something else completely out of our control. Crowdfunding allows for more access to the deal operator and allows for more transparency to the deal. If it’s local, investors can take a ride by the project or do their own research before investing. As I understand it only accredited investors can participate right now but that will be opened soon to Sophisticated investors also.
    Thanks for putting the conversation out there. I think that more real estate investors need to be talking about this!
    Matt

    • Sterling White

      Thank you for your comment! Everything you stated is very true..Both accredited and non-accredited can now invest. Regulations were passed a little bit ago to allow for it.

      Side note:

      Thanks again for your feedback on the multi-family deal awhile back. Finally closed on it last month!

  3. I am shopping for money for a flip purchase, and very interested in crowdfunding. Probably in the $300k range. However, do these platforms (and the investors that use them) bother with small projects like that? Or are they geared more towards larger deals like apartment building purchases?

    If they do the smaller stuff, how does it work – specifically, can a person get 100% funding for a flip? What is the typical deal structure? thanks! Jeff

    • Matt Faircloth

      Hey Jeff,

      There are a few companies out there that get money to loan on fix and flips from the crowd. Their rates are similar to other hard money lenders, expect to be at 12 to 14 percent interest plus 2 to 4 points. Loan to cost will be around 80% so no 100% financing. Try Path of Land or Fund That Flip for starters.
      If you need a 100% financed deal to make it work and have a track record in flips with success, try contacting a local private money lender and ask them if they would do a Joint Venture with you. A JV is a deal where they post all the cash needed to do the deal, and they get a return on their money plus a chunk of the profit. It has to be a very lucrative deal for them to say yes to this as they need to see some protection against risks. It’s worth a shot.
      Matt

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