Over the last decade, crowdfunding has become popular as the convenience of technology and apps become more prevalent. Basically, crowdfunding is raising capital for a project such as opening a business or paying a large, unexpected bill using word of mouth or social media.
Real estate crowdfunding works in a similar way – it’s the process of getting a group of investors who may not know each other to raise capital for a real estate project. This gives a chance for real estate investors to engage in the real estate market and offers non-professional investors a chance to enter the real estate market, who would have not been able to do otherwise due to lack of funds or experience.
Because of the high cost of real estate often cited as a barrier to entry into Vancouver’s housing market, crowdfunding is becoming an increasingly popular financing tool.
So how does it work?
A company wants to purchase and develop a $1 million rental property and requires a balance of $750,000. If it cannot secure a loan or mortgage, it can reach out to aspiring investors within their network for the balance or use a real estate crowdfunding platform to raise the funds. The company could offer tranches of $500 or more to those who are interested in investing via the platform. Within a short period of time, the crowdfunding investor would easily own a piece of the development without the need for a lawyer, an agent, etc.
Pros of crowdfunding real estate
- It provides an opportunity to an investor to take advantage of a real estate opportunity that would have been otherwise lost due to a lack of funds.
- For someone wanting to invest cash, real estate investing tends to be more stable over time than the volatility risk of the stock market.
Cons of real estate crowdfunding
- There are fees and taxes to consider. Some companies have entry fees and annual subscriptions, that can remove or reduce the profitability of your investment, depending on how much you invest.
- You may have to tie up funds for a longer than expected period due to the illiquidity of the real estate market. This may not be right for you if you are looking for shorter term returns.
- Because real estate is considered an illiquid asset, it may not be as easy to withdraw from the fund as it would be from your stocks in a brokerage account.
If you are looking to buy a home, or sell your home, contact us as we have offices in Vancouver, Seattle, London, and Moscow, and we are firmly established internationally and recognized as a local leader in the real estate market.