Crowdfunding versus traditional real estate investment

By Benjamin Mariner | Bricksave

June 23, 2023

News > Blog Article > Crowdfunding versus traditional real estate investment

If you’re trying to choose between putting your money into crowdfunding or traditional real estate investment, this article is for you. We explain the benefits of each type of investment, as well as explaining the potential risks and rewards any would-be investors should consider.

Understanding crowdfunding

Crowdfunding has become one of the most innovative ways to invest in the digital age. It’s also helped to level the investment playing field, giving anyone the opportunity to participate by owning assets that used to be well out of their reach.

With crowdfunding, individuals effectively pool their resources in order to invest in or support a variety of different projects and ventures, giving them the opportunity to support those they believe in and share in their success. Often crowdfunding will involve a small number of individuals investing larger amounts of money, or a larger number of individuals contributing a small percentage of the total required to fund a project.

Crowdfunding in real estate

Real estate has always been a popular investment, but with the rise of technology and digital platforms, crowdfunding has become a viable alternative to traditional investment models. As a result, crowdfunding has become an inclusive and collaborative way to invest for a growing community looking to reap the benefits of real estate investing.

Real estate crowdfunding is where a group of individuals pool their financial resources together to invest in property. These resources are used to buy a property outright or to help real estate developers in the form of a loan. When the property is purchased, all returns are divided between the individual investors according to their percentage of the total sum invested. The returns generated come in the form of rental yields and capital appreciation, or pure interest if the investment is in the form of a loan. It's a win-win for everyone involved in the buying and selling of real estate as an investment.

What are the benefits of real estate crowdfunding?

At Bricksave, we believe there are several investor benefits to real estate crowdfunding:

1. You can start investing with relatively small amounts of capital: Crowdfunding allows investors with small amounts to still be able to participate in real estate investments, which were traditionally reserved for wealthy individuals or institutional investors.
2. You can build your own diversified portfolio: Diversification simply means to not put all your eggs in one basket. With real estate crowdfunding, investors can spread their risk by investing in multiple projects, reducing their exposure to a single property or market.
3. You can collect an income from your investments: Real estate crowdfunding platforms provide investors with a share of the rental income or profits from the property after it is sold. It’s a ‘passive’ income because the management of the property is taken care of.
4. Simplicity: Let’s face it, investing in property the traditional way can be a headache even at the best of times. Not only are you responsible for researching properties, but once you’ve made the investment, you’ll be expected to take on the roles of landlord, legal expert and property manager, which can be time-consuming, expensive and stressful. In contrast, crowdfunding investments usually involve a professional management team handling these responsibilities on behalf of investors.

What are the risks with real estate crowdfunding?

Every type of investment carries an element of risk, and real estate crowdfunding is no exception, although the risks associated with it is very different from with other types of investment such as stocks and shares. Investors should be aware of these real estate risks before they make any decisions:

1. Returns are not guaranteed: While real estate has historically proven to be a reliable form of investment, both property prices and rental rates can fluctuate. Purchasing property at the wrong time can affect the total returns of the investment.
2. Property is not a liquid asset: A liquid asset is an asset that can easily be bought or sold. Crowdfunded real estate investments are less liquid than stocks and shares, for example, as they take longer to sell.
3. You cannot get your money back instantly: Most real estate crowdfunding platforms set a minimum term before you can exit the investment or before the property is sold.
    

Understanding traditional real estate investing

As the name suggests, traditional real estate investing has been around for a long time, centuries in fact. It involves buying a property, either individually or through a partnership, and the investment generates a rental income, as well as a potential increase in the value of the property over time – or a combination of both. However, the traditional approach often requires a significant upfront capital investment and hands-on management of the property for the lifetime of the investment.

What are the benefits of traditional real estate investing?

Provided you have access to the necessary capital on an investment property, or can afford to take out a mortgage, the traditional investment approach has several benefits:

1. Control over the property, and the investment: Buying the property yourself means investors have total control over the property and how it is managed, allowing the investor to make decisions that maximise returns, or deciding when is the right time to sell.
2. Financial benefits: Real estate investors can use mortgages or other financing options to increase their purchasing power and potentially enhance returns. However, they will still need to find a deposit to purchase the property, and will need to set aside large cash amounts for maintenance and upkeep.
3. Tax advantages: Depending on where you live, real estate investments can also offer several tax advantages, including deductions for mortgage interest, property taxes, and depreciation.

What are the risks with traditional real estate investing?

As with crowdfunding real estate, the traditional approach also has its fair share of risks for investors to consider. In fact, there are several more risks associated with owning your real estate investments outright. For example:

1. Buying real estate is expensive: Purchasing a property often requires a significant amount of capital, making it difficult for some investors to enter the market.
2. Your investment is exposed to ups and downs: Real estate markets can be volatile, with property values sometimes dropping due to economic downturns, changes in interest rates, or local factors.
3. Management responsibilities can be a burden: Owning the property means taking responsibility for its management, such as repairs, maintenance, and tenant management. This can be time-consuming and expensive, even if you choose a management company to operate on your behalf.
4. Vacancy risk: Rental properties can potentially experience periods where they are without a rent-paying tenant, reducing the overall rental income from the property while adding to the costs of finding new tenants.
5. Property is hard to sell: Real estate can take time to sell, which may make life difficult if you have all your money tied up in the property.
6. Legal and regulatory risks: As the sole owner, real estate investors must deal with various laws and regulations, such as zoning, rent control, and building codes. Non-compliance could result in fines or legal problems.
7. It is hard to own a diversified property portfolio: Buying properties on your own leaves you more exposed to potential losses if things get difficult, such as when property values decline or where rental income falls.
8. It’s easy to become overleveraged: Borrowing money to invest in real estate can amplify gains but also magnify losses in difficult times. High leverage increases the risk of defaulting on mortgage payments, which could mean losing the property altogether.

To find out more about how crowdfunding works, speak to us

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Crowdfunding versus traditional real estate investing – which one wins?

Real estate is just one example of a traditional and popular investment type being transformed thanks to crowdfunding. And many of the risks that make real estate investing challenging – such as vacancy risk, the lengthy sales process and exposure during downturns – can be overcome through crowdfunding. As a result, even established property investors can still recognise the benefits of using crowdfunding to expand their real estate investment portfolio.

With Bricksave you can start investing with as little as $1,000, joining a global real estate community of more than 16,000 people. Find out more about how crowdfunding investing works.