Real estate crowdfunding: Should I be worried?

 Understanding Real Estate Crowdfunding

A successful venture into the real estate crowdfunding grounds requires at least a basic understanding of the concept itself. For starters, real estate crowdfunding is a joint investment from multiple investors in either of the two ways:

The investor purchases shares in entities that themselves invest in a commercial or residential property. The cashflows generated once the property is sold, are equally divided between all the investors upon loss or profit on a periodic basis, typically quarterly.

The second way includes investing in debt or securities. In this type of real estate crowdfunding, investments are made in borrowers’ loans. The plus side: it allows for a more consistent stream of income with a lower degree of risk.

The other side of the story

Start-ups in real estate crowdfunding are valued on the metrics of top-line revenue and growth, so their incentive to focus on immediate profitability is very little. This means companies are taking on as many deals as they can without focusing on the underwriting standards.

Further consequences include real estate crowdfunding companies competing against each other to get the highest chunk of valuations from top venture capital companies creating a vicious feedback loop. Big names like Fundrise and Realty Mogul will continue to decant into space, attracting the market for as many deals as possible to boost their valuation.

The only concern however, is that many sponsors and deals which shouldn’t be funded are also funded in the name of retail investments without the investor being aware of all the possible risks. This means investors who are just starting out are setting themselves up for a rude awakening when the deals go haywire.

As soon as deals go bad, investors will start losing their money. These quality firms may seem to be working well enough for now, but for those who don’t know, majority of the 140+ real estate crowdfunding companies are owned and run by entrepreneurs who understand very little of real estate investments.

If you have any questions, email me at JZStarnes@gmail.com. I am a REALTOR® with Savvy + Co. Real Estate.

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