Commercial Real Estate Crowdfunding - Is it the Right Choice for Investors
Commercial Real Estate Crowdfunding – Is It the Right Choice for Investors
Updated on July 15, 2020
In the past, investors interested in commercial property development or ownership faced two options: come up with the cash or qualify for a loan to cover the cost of the project. Most people don’t have cash in the bank to pay for a commercial building outright, so they turn to private investors who bring the money in exchange for equity. In 2012 the laws opened opportunities for others to participate through commercial real estate crowdfunding.
What is Commercial Real Estate Crowdfunding?
Instead of only using a handful of investors to finance the purchase of a commercial building, real estate crowdfunding is a method that uses a larger pool of people who want to join the investment. A crowdfunded effort might involve anywhere from a few dozen up to thousands of investors in the same project. Investors can contribute a small amount of money and receives a proportionate amount of equity. These small investors are known as limited partners, although they don’t have voting rights on the property.
Commercial real estate crowdfunding is a relatively new idea, which is why it isn’t well-known in the industry. As the opportunities continue to change and evolve over the years, more people are interested in joining the efforts to participate in new investments. Not only does crowdfunding open the door for those who didn’t have enough cash for commercial real estate, but it also helps with the diversification of investments.
If you are interested in the commercial real estate investment options that are available, then it’s time to learn about the rules and regulations that affect these opportunities. As you see how crowdfunding works, you will be able to identify the benefits of participating in this investment type.
Commercial Crowdfunding Opportunities
When real estate crowdfunding came online in 2012, it was a new concept. But things exploded quickly, with over 100 commercial real estate crowdfunding platforms online in the first five years. The number keeps growing, giving investors many options to choose a firm that matches their needs.
There are SEC regulations that require these companies to register and follow the rules established to protect investors. Even though the company might be compliant, it doesn’t mean that good investment opportunity is offered. It’s up to each investor to evaluate the project and company. Make sure to weigh the risks and determine the experience and quality of the company that you are considering.
You don’t need to understand the requirements and intricacies of acquiring and managing commercial properties. But you do need to select an investment vehicle that has a proven track record and an investment firm that truly cares about your success. The best solution is to select a firm that has been in business for many years because the portfolio managers have the experience and knowledge to identify optimal investment opportunities.
Why Real Estate Instead of Other Investments?
It’s no surprise that investors are shying away from the stock market. Stock values can change overnight, leaving investors with a loss. Many people are worried about a bear market and the long-term value of stock investments, so they are looking to other options for their investment funds.
Real estate is a new trend that offers promising returns. A building or property holds value when you look at the long-term strategy. Additionally, you still own a physical asset if the market changes and prices drop. Even if the value of the building decreases, there are continuing opportunities to bring in dividends due to rent collection and overall appreciation when you hold onto the property for many years.
When the deal is structured right, high cash flow can be generated through a real estate investment. The dividends can be stable for many years. In comparison, cash is tied up in stocks until the investor decides to sell.
Avoid the Heavy Lifting of Real Estate Investing
One of the barriers of entry to real estate investing is the vast knowledge that needs to be learned before money is put into the purchase of a property. New investors don’t understand the nuances of selecting properties, funding the projects, managing the rentals, maintenance, cash flow, and the other requirements for commercial real estate holdings. As a result, many people have chosen to avoid commercial real estate in the past due to the lack of knowledge and difficulty entering the market.
Commercial real estate crowdfunding has transformed the industry and created more opportunities for people who don’t have experience with real estate holdings. New investors can minimize risk by joining projects that are overseen by managers who understand the industry. Project managers and investment firms have been handling commercial real estate holdings for many years, even before crowdfunding became an option in the industry. These people have applied their knowledge to the crowdfunding platform, giving average investors a new chance to learn and participate.
If you are interested in diversifying your investment with commercial real estate holdings, it doesn’t mean that you need to come up with millions of dollars to buy a property outright. Now, you have the option to invest the amount of your choice in a shared pool with other investors. The investment firm and managers are responsible for using this money to optimize the investments for everyone.
This method of investing is beneficial to reduce the risk of commercial real estate investing. Instead of tying up all of the cash in a single investment, a portfolio can be created that includes various types of buildings and properties. Additionally, the profit margins are higher since there are no corporate shareholders that need to be paid. The investors are a priority, and the systems are set up to minimize the fees that are passed onto those who are participating.
Crowdfunding vs. Traditional Real Estate Investing
To help you understand the difference between traditional real estate investing and commercial real estate crowdfunding, there are a few things that have changed the way these deals are created. Previously, barriers made commercial investments out of reach for the common investors. If someone wanted to become an equity partner, then they needed to create a direct relationship with the sponsor who was creating the deal.
Often, the buy-in for commercial real estate investing was at least five or six figures. The large upfront capital made it hard for an average investor to join the project. In comparison, crowdfunding allows investors to join with as little as $1,000. You can start small and build your investment portfolio over time as your investments start to add up and the profits are rolling in.
These commercial real estate crowdfunding opportunities are no longer about who you know or how much cash you are bringing to the table. Instead, it comes down to choosing a trustworthy, reliable crowdfunding firm and joining in the pooled efforts to purchase commercial properties that have a promising future.
Tax Benefits of Commercial Real Estate Investing
A benefit of choosing real estate over other types of investments is the tax options that are available. The IRS has rules in place that make it possible to deduct depreciation associated with properties that produce income. When someone owns a lot of commercial investments, then it means that they are receiving a significant taxable income. The deductions can be used to manage the tax burden. This same strategy can be used with commercial real estate crowdfunding.
Another thing that should be considered is the tax burden that might be realized due to capital gains. If a property is sold and a profit is earned, then the IRS requires that taxes are paid on the profits. On the other hand, these taxes can be deferred by rolling the profits into another investment instead of receiving the cash from the sale.
Choosing an Investment Firm for Commercial Real Estate
Are you ready to enter the commercial real estate investment world for the first time? If you are getting ready to jump into the scene, then you need to know a little bit about choosing the first investment. Getting started on the right foot is critical to ensure that you realize the progress that will build your portfolio for bigger success in the future.
As you are researching your options, you need to take a hard look at the risk and reward spectrum of each investment. The risk is unavoidable in the investment world. But you can manage the risk by taking on the right investment opportunities. The goal is to reduce the risk as much as possible, while still maintaining a healthy margin for potential profits. Crowdfunding is a great solution as you don’t have your cash tied up in a single investment. Instead, you can choose solutions that spread the risk across multiple investments. Other investors are also sharing the risk, helping to decrease the burden that you are carrying.
Evaluate the potential upsides and downsides of the investment so that you know the possible outcomes that you might be facing. What is your risk tolerance? How much can you invest without putting yourself at risk financially? Keep in mind that commercial real estate crowdfunding is a long-term wealth building strategy. When you decide to put your money into the deal, you can’t expect an immediate return.
Ask about the turnaround time for dividends and how long your money needs to stay in the fund. Talk to a tax accountant and/or financial advisor to determine the right financial strategy for your retirement portfolio. Then, look for investment opportunities that match your overall goals, helping you build the assets that are needed for the lifestyle you desire in the future.
Tapping into the Knowledge of a Real Estate Expert
Commercial real estate crowdfunding makes it easy to get started to invest in deals. But this low barrier of entry also makes it easy for investors to fall victim to dishonest deals and scams. If you lack the understanding of the real estate market, then you need to be sure that you are working with an investment firm that has built a solid reputation in the industry. Not only do you need to trust the investment team and property management, but you also need to know what you are investing in and where your money is going.
Full transparency is essential for every investment deal. Never hand over money without clear information about how the portfolios are managed, and the way dividends and profits are distributed. When you choose to join in the commercial real estate crowdfunding, you need to learn about the industry and the specific investment opportunities that you can choose.
You will find plenty of information online about real estate crowdfunding and commercial property investments. But nothing matches the benefits that come from a real-life conversation with your investment team. This conversation will help you learn more about the people you are working with, their history and track record, and what you can expect in the future. As you gather information, you will be in a better position to make wise decisions about the investment opportunities that you select.
Not All Crowdfunding Investments are Created Equal
Choosing the right platform is the most important decision you will make for your investing efforts. Even though there are hundreds of commercial real estate crowdfunding platforms out there, they are not all created equal. You need to take the responsibility to do your due diligence in determining the reputation and quality of the investment team.
Ask questions so that you know the minimum amount of investment required to join the efforts. Also, learn about the fees that are involved and what protections are in place to minimize risk. Don’t overlook the structure of the investment firm. Are there shareholders involved because you are working with a public company? This situation doesn’t eliminate your investment opportunities completely, but you need to understand that your profit margins might be impacted negatively when decisions are made to prioritize shareholders over investors.
Find information about the track record of the investment platform.
How long has the company been in business?
How many years of experience are brought to the table by the investment team?
How many deals have been completed?
What strategies are used when identifying investment properties?
What is the total amount of funds raised?
How long are the offerings open?
Even though the overall industry of commercial real estate crowdfunding is fairly new compared to other investment opportunities, there is a big difference in the knowledge and experience brought to the table. If a crowdfunding site has only been in business for six months, then there is a big difference in what you can expect compared to a firm that has been in business for four years.
Not only do you need to consider the time the company has been offering commercial real estate crowdfunding opportunities, but, you also need to evaluate the amount of experience that was gained with commercial real estate investing before crowdfunding became available in 2012. Hands-on experience in the industry for many years is an invaluable resource that can help to increase the possibility of long-term success.
These questions give you a feel for the information that you need to be learning about your investment platform. The goal is to determine the stability and potential success of the commercial real estate crowdfunding platform. This information can be used to help you determine whether you should invest your retirement funds into these opportunities.
No-Stress Real Estate Investing
While the barrier of entry is a big hurdle for many investors, you also need to consider the ongoing management and maintenance that will be required for the property. There’s no question that real estate investing can be a stressful experience, especially when you are running into problems such as late rent payments, leaky faucets, or low cash flow to pay for annual taxes and fees.
Instead of struggling through these details by yourself, commercial real estate crowdfunding is a low-stress solution. In this situation, you have partial ownership of the property or portfolio, which means that you don’t have to carry the responsibility of managing the day-to-day details of the investments. There’s no question that you can avoid headaches and frustrations when an experienced team is taking care of the logistics of acquisition and property management.
Other Benefits of Commercial Real Estate Investing
Learning about the overall benefits makes it easy to see why commercial real estate crowdfunding is a great opportunity for both new and experienced investors. Some of these benefits include:
Cash Flow: Even though you will need to commit your investment funds for a minimum of several years, the available cash flow can be beneficial to help with current lifestyle. The investments are structured in a way that offers dividends which are distributed monthly, quarterly, or annually. Investors place their funds as a passive investment in a hard asset. As the demand for office buildings and apartment rentals increases, then the cash flow is impacted positively.
Reduced Fee Structure: Some investment platforms have high fee structures, making it difficult to maximize profitability. If your earnings are going to pay the fees, then it might not leave much left over for your profits. On the other hand, crowdfunding is a method that helps to maintain a sustainable fee structure. In some cases, the middleman has been cut out completely to reduce fees and provide personal attention for
Anticipated Return on Investment (ROI): There is no way to predict ROI with surety. It is important to remember that every investment brings risk to investors. But you’ll see that the yields available from commercial real estate investing tend to be much higher than residential real estate investing. These higher profit margins help to offset the potential risks in the investment.
Tangible Assets: Investors often find it reassuring knowing that their money is intangible When you have these assets in your investment portfolio, there is always a building or piece of land in ownership regardless of the way the market changes. With the stock market, the lack of tangible assets leaves investors with nothing if the stock prices drop. In comparison, the market valuation of real estate might fluctuate over the years. But there will always be a property with some value since a physical asset was purchased with the investment money.
The best way to learn about the other benefits of commercial real estate crowdfunding is by talking to a team that understands the industry and investment opportunities. You can determine your investment goals, identify the services and portfolios that are offered, and put your money in the right place that will help you build wealth going forward.
Is Commercial Real Estate Crowdfunding Right for You?
Never jump to conclusions about your investment opportunities. Just because an investment platform worked well in the past, doesn’t mean that you should dive in without doing your due diligence on the project. Every situation is unique, and you will find many factors that need to be addressed before rushing into the decision.
The best thing that you can do is build a team of experienced investment advisors. For example, you can work with a tax accountant, a crowdfunding investment firm, IRA custodian, and other professionals. Tapping into the experience offered by each professional will ensure the long-term results that you are working to create for your financial future.
Learning More about Real Estate Crowdfunding
It doesn’t take much to get started. As you learn more about these real estate crowdfunding opportunities, you’ll see that the possibilities are open to new and experienced investors alike. The first step is for you to learn more about the opportunities that are available so that you can identify the right way to move forward.
If you are interested in commercial real estate crowdfunding, then we invite you to talk to our team. First National Realty Partners is here to answer your questions and provide the answers that you need to learn more about your opportunities. We are working hard to maintain our reputation as one of the leading investment firms in the crowdfunding industry. Call anytime so that you can see how we are changing the industry and supporting our investment partners.
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