Real estate investors are always looking for new ways to finance projects, and one of the newest resources is crowdfunding. In 2013 alone, crowdfunding was used to raise over $100 million for properties all around the country. It’s become so popular there are crowdfunding platforms specifically for real estate.

The concept of crowdfunding is pretty straightforward. Using a crowdfunding platform, people can select an investment and pool their money together to fund a project. There are two types of crowdfunding investments: debt investments and equity investments. With debt investments, individuals are essentially lenders that are providing the capital, which are paid back in installments with interest. In equity investments the person is buying in as a part owner.

Crowdfunding is a viable option for investing in real estate as well as raising the capital needed to make a project happen. As with all types of investing, crowdfunding has its benefits and drawbacks that have to be addressed and assessed before pulling the trigger.

Pros of Real Estate Crowdfunding

1. Easier Access to Investments

Crowdfunding platforms open up a world of investment opportunities for people who are interested in adding real estate to their portfolio. Deals are done online, no industry connections are needed and buy-ins can be as low as $1,000.

2. Investments Have Already Been Vetted

Reputable crowdfunding platforms have a vetting process for their investments. Only legitimate, sound investments are opened up to investors. All the information is made available for review and some platforms help investors keep track of their investments.

3. Huge Investment Selection

Instead of being limited to investment opportunities in your area, you now have the ability to invest in opportunities all over the world. The investment could be a new tech-focused commercial space a phone answering service to handle your customer calls or a luxury high-rise apartment complex. The possibilities are endless and help to diversify your portfolio.

4. Real Estate Investment Without the Management

Some people avoid the commercial real estate game because they don’t want the management that comes with it. Crowdfunding gives you the opportunity to be a silent partner who can reap the rewards without having to deal with the day-to-day operations.

Cons of Real Estate Crowdfunding

1. Accredited Investors Only

Many of today’s crowdfunding platforms are only open to accredited investors. SEC’s Rule 501 of Regulation D establishes the criteria for being considered an accredited investor based on assets. Currently you must have a net worth of $1 million (with or without a spouse) or have an annual income of $200,000+ for at least the last two years.

2. Higher Likelihood of Default

Research from Investopedia has shown that the risk of developers defaulting is higher on crowdfunded projects compared to direct lending. You must do your due diligence and only consider developers with a solid track record in a stable market.

3. Additional Fees

The price that is paid for access to investment information and easy buy-in comes in the form of fees. The crowdfunding platform will have a fee structure that has to be factored in when analyzing an investment’s viability.

4. More Financiers, More Problems

In equity investment crowdfunding each person buying in becomes a silent owner of the property whether it’s restaurant chain or apartment high-rise. The more owners there are the more management is needed to make sure people are compensated appropriately and the more opinions there are on how things should be run.

5. Most Investments Aren’t Liquid

If you get strapped for cash, liquidating your crowdfunding investment may be difficult. You will likely have to wait until the property is sold, which could put some investors in a bind. If the partnership agreement allows, the investor may be able to sell its partnership interest on the secondary market to QuickLiquidity.

— Wendy Brown is Director of Marketing and Sales for PATlive, a company specializing in 24/7 live answering services. You may learn more about PATlive at www.patlive.com.