Crowdfunding is having multiple parties coming together to make a single investment.
With the advent of the digital age, we are anticipating the increase in investments because of technology like electronic documents, E-Signature, and social media. Alll these result to increases in the number of opportunities with investors.
Funding real estate deals through crowdfunding allows investors to diversify their portfolios at lower investment levels and risks.
Debt crowdfunding typically reflects a loan on a project where the security is the lien and the loan amount is less than the market value of the asset, say 75%.
Here are the fundamentals of debt crowdfunding you need to know so that you can decide if you choose to dip your toes in this exciting venture in real estate.
Short Hold Time
Debt investments are often associated with projects that involve the development of land and other real estate properties.
They have a shorter holding period (that is the amount of time the investment is held by an investor.) It is the period between the purchase and sale of an investment. Some hold time may last be as short as six months. Investors who aren’t comfortable with long-term investments can find this an attractive setup.
Lower Risk
This may be the most attractive aspect of debt crowdfunding.
The investment is secured as well as insured by the property. In the event the deal goes south, investors can get their investment through a foreclosure action.
A budding real estate investor can get started with this type of investment.
Steady and Predictable Income
Debt investment returns are particularly predictable. The amount and frequency of return payouts are easy to determine in this type of deal.
Investors can earn from 8% to 12% yearly which is paid on a monthly or a quarterly basis.
Capped Returns
While there is less risk in debt crowdfunding, there is a small catch. The returns are limited by the interest rate of the loan.
If you’re willing to sacrifice the opportunity to earn higher yield for a safer bet, then this is a perfect scenario for you.
You have to be aware of this fact if you’re looking to invest in this type of setup.
High and Additional Fees
Using crowdfunding platforms may entail extra fees that investors need to pay regularly. So make sure that you will have enough information before going in on a deal or investment.
Lower Potential Returns
It is just the way the game goes: less risk means fewer returns. This is a good way to get someone started on an investment in real estate.
There are a lot of ways to get started on investing in real estate. There are high risk, high gain setups and there are low risk, low return types.
These are all made to welcome newcomers and encourage seasoned investors. The real estate investment ecosystem is a great place to build your career and wealth. But the general rule of thumb is to learn as much as you can before entering into a deal or multiple deals. This includes getting someone to mentor or give you advice on your next step.
What’s if your preferred type of investment? High risk or low risk? Let us know in the comments below and why!
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