So You Want To Crowdfund Real Estate? Then Know the Challenges, Pitfalls and Problems

Few years ago, the term "crowdfunding" saw headlines in real estate industry all over the United States and the awareness among the capital raisers was at an all time high. But the reality of crowdfunding was very much in contrary than it seemed to be.

There are two types of crowd funding real estate investors:

Individual: Some investors would personally like to log-in to online platforms and make their own assessments and judgements of which deals they want to invest in. Regrettably these investors invest in best sales pitch and imperatively not the best deals. This type of investors carries huge risk, they have less experience and litigation prospects are high.

Institution: Crowdfunding is looked by many institutions as an opportunity to diversify their holdings. When an emerging investor decides to diversify into real estate, crowdfunding is considered as a means to enter the asset class0, institutional folks seek hands-off approach where other people does hard work through crowdfunding.

Dealing with two different types of investors can be arduous; the real challenge with crowdfunding real estate is not necessarily the investors, but the issuers (i.e.) the developers who try to fetch money from outside sources that they don’t understand. Believe it or not, the most problems any capital raiser will have are not with the investor who invests $1 billion, but the investor who invested $10,000. The lack of sophistication and understanding, in addition to the lack of experience in risk management and risk knowledge, is a dangerous combination. In addition to the challenges and pitfalls discussed above, one of the most important problems with crowdfunding is the lack of commitment that any crowdfunding platform will give you to fill the offering.

A very minimal percentage of profit is achieved by the investors and developers when they try to raise money from crowdfunding sites. If you are willing to subscribe to the crowdfunding websites to look at the deals, you’ll be heavily charged by the crowdfunding websites, and these charges are not small at all, it costs you thousands, even tens of thousands, to list your deal on one or more platforms. Raising the capital is a difficult task and it’s also the area of cost where you’ll be charged a heavy percentage by the platform, if you want to raise $200,000, the platform might charge you 5% to 15% of the total amount, it not only weakens the investor but it also weakens the return as well as the developer’s profit.

Raising a capital from crowdfunding platform cost you a fortune, by the time you handle legal fees, platform fees, and a good split with the investors, crowdfunding turns a great deal into a average deal at best. Crowdfunding has worked well for many issuers, developers and real estate investors. The best way to raise real estate investment capital is by working with investors who you can really count on.

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