As with anything new that breaks from tradition, crowdfunding real estate investments stokes fear in some. We find many of the more irrational fears to be iterations of Internet-phobia backed by little evidence. Some people simply hear words like “Internet-based” and assume risk without actually getting the facts about crowdfunding for investors. The truth is, as usual, more complex. Like anything in the world of real estate or investing, crowdfunding is not without risks. But those risks can be mitigated, and there are also benefits to using crowdfunding platforms.
Crowdfunding is a concept you may already be familiar with through sites such as GoFundMe, Kickstarter, and certain charity platforms. If not, these are sites that allow a person’s social network to contribute toward a pre-selected cause, whether that’s helping a friend repair a car or kicking in on another’s healthcare costs. The same principle can be applied in real estate since 2012 legislation made some critical changes in law that permit crowdfunded real estate investing.
Prior to that point, investors were usually career pros who had plenty of capital that many Americans simply don’t have access to. Crowdfunding has helped change this trend by opening up real estate.
As you many have gathered, this more open market makes it possible for more people to invest. With crowdfunding, you don’t need a lot of money to invest in a portion of a property. Other benefits include the fact that more established crowdfunding platforms are highly transparent, allowing you to do your own due diligence more easily, though many services give you a boost by also thoroughly vetting the investments listed. Crowdfunding allows for easy and flexible diversification. You can easily get in on a broad variety of types of assets, strategically spreading out your wealth and creating a safety net.
Regular readers may recall that the only two ways to lose money in real estate are bad deals and lawsuits. Essentially, most of the risk of crowdfunding is that investors could make bad deals. The reason why actually has nothing to do with crowdfunding specifically. Any investor can make a bad deal for any number of reasons, regardless of how it’s funded.
Another frequently expressed risk is that the investors who are getting into the market via crowdfunding platforms won’t be as knowledgeable, and therefore, more likely to make bad deals. Neither problem is insurmountable.
Let’s take a closer look at the knowledge concern. Fortunately, you can always do things to increase your level of knowledge about this or any subject, and you’re actually already doing it right now for free. Keep reading. Perform your own research, talk to investors who have used the tactics and tools you’re thinking about using yourself, and vet potential platforms carefully. Due diligence is ultimately your responsibility. If still in doubt, contact an expert for help. Taking all these steps thoroughly and in earnest will close knowledge gaps.
As for making good deals, experience is a fine teacher, but mentors help too. Having a qualified team of experts on hand to look at your deals, assist with business structures, and develop tax strategies can also be incredibly valuable. Our skilled real estate attorneys can assist you with all of this and the legal structures that will best protect your new assets.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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