The Pros and Cons of Investing in Commercial Real Estate Via Crowdfunding

The Pros and Cons of Investing in CRE Via Crowdfunding

Investing in commercial real estate through crowdfunding has both pros and cons. If you’re wondering whether to invest your money through commercial real estate crowdfunding, you may want to know more about both the positive and negative aspects.

The Advantages of Investing in Commercial Real Estate via Crowdfunding

  • You can invest in commercial real estate without a relatively large sum of money. Independently investing in larger, more sophisticated commercial real estate projects typically requires very large sums of money. Because crowdfunding allows investors to only fund a portion of the necessary capital required to get a project off the ground, the required dollars are usually significantly less on a relative basis.
  • You can invest in multiple real estate projects to spread out your risk. Because crowdfunding allows for investors to reduce their capital contributions, investors can spread their allocated real estate dollars among multiple projects, increasing their diversification and theoretically reducing their risk.
  • You don’t have to know the “right people.” Because crowdfunding deals are publicly available online, there is no longer a need for investors to be personally connected to the right people or the right networks. Before the advent of crowdfunding, capital for real estate investments could only be raised through friends, family and personal networks.
  • You can invest quickly and easily. Investing in a real estate project through a crowdfunding platform is often extremely user-friendly with an efficient process. Should one decide to independently finance a real estate project outside of crowdfunding, the process can be very confusing and require a degree of expertise. In addition, identifying, structuring and executing a plan for a given real estate project is typically a very challenging and time-consuming endeavor. With crowdfunding, the deal sponsor has already done the work for you.
  • You can choose the projects that resonate with you as an individual. Investing in a REIT is a very viable way to allocate some money towards commercial real estate. However, with a REIT, a fund manager chooses all of the properties on your behalf. With many crowdfunding platforms, one can hand-pick the piece of real estate that best fits them as an individual. For example, an individual can potentially invest in a property that is located in their own community or which serves a social good which satisfies their sense of moral virtue.

You can invest in multiple real estate projects to spread out your risk. This creates a well-balanced portfolio of commercial investments, without having to invest all of your money in commercial real estate.

The Disadvantages of Investing in Commercial Real Estate via Crowdfunding

  • Commercial real estate investments offer very poor liquidity. When investing in any commercial real estate project (crowdfunding or otherwise), one should always ensure a thorough understanding of their ability to pull their capital out. Some crowdfunding platforms will allow individual investors to be bought out of their investment by other investors, but this is rarely a good or reliable option. If investing in a real estate project via crowdfunding, an investor should be committed to not recovering their principal until the project has run its lifecycle as prescribed by the given offering. The associated timing should be well explained in the offering materials.
  • Some commercial real estate projects and/or deal structures are very high risk in nature. It is never wise to assume a commercial real estate project is “safe” just because you read somewhere that commercial real estate is a relatively stable investment class. It’s true that real estate can be a relatively stable asset class, but that does not mean all projects are stable. Some projects are more speculative in nature than others. Different property types have different inherent risks. Even a very stable property can be associated with greater risk due to the manner in which the investment is structured. For example, the risk profile is vastly different for an investor lending money in a 1st mortgage position at a low loan-to-value when compared to an investor contributing equity in a 1st loss position behind multiple senior position lenders. High risk is not necessarily a bad thing if it offers the appropriate rewards, but a prudent investor must ensure they understand the risk/return profile of any investment offering.
  • Sorting through all the investment options can be overwhelming. One of the great things about investing in commercial real estate via crowdfunding is the vast range of available options. However, this can also be a bit overwhelming or confusing when seeking the right investment. Every deal is unique and brings with it different issues for consideration. Sorting through all the available options can require great time and patience. In addition, because crowdfunding is still a relatively new investing concept, there is a learning curve that most individuals need to climb in order to get comfortable.
  • You don’t know what you don’t know. This is a fundamental concept often communicated by Realty Mentors. The investment offerings materials generated by the various crowdfunding platforms are required by law to present factually accurate information relating to any given real estate project. However, are the assumptions being presented fully supported? Are the data sources reliable and objective? Are there risks associated with a given project which are understated or poorly mitigated? Do you know what third-party reports could be procured to better explore particular risks for a given project? In short, without extensive commercial real estate experience, an individual investor may not know what to look for when evaluating some investment opportunities.

Ultimately, whether investing in commercial real estate via crowdfunding is a good idea for you depends on your personal financial circumstances, your financial goals and the amount of knowledge you have (or the amount of mentorship you have) in the commercial real estate arena. It can be a powerful tool for leveraging your investments into greater net worth, but it also needs to be carefully considered to ensure appropriate risk management.

Still not sure whether crowdfunding is the right option for you? If you have any questions about the commercial real estate investing process or crowdfunding specifically, contact the experts at Realty Mentors. We can help you better understand the investment options available to you.

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