Pros and Cons of Real Estate Crowdfunding for Retirement
One of the best things about investing in real estate is that you have so many different ways to do it. House-flipping is one option if you want to pocket big profits all at once. Becoming a landlord is another way to go if you’d rather be on the receiving end of monthly rental payments.
Real estate crowdfunding, on the other hand, is an alternative that’s growing in popularity. Massolution estimates that the industry topped $2.5 billion and counting in 2015. If you’re wondering whether you should grab a slice of the pie to bolster your retirement goals, here’s a look at real estate crowdfunding’s finer points.
Real estate becomes more accessible. Private real estate deals have historically been the domain of high net-worth investors who possessed the right connections to gain access to a particular property. Real estate crowdfunding puts a new school spin on the status quo.
That’s a boon to investors who are struggling to find an entry point into the real estate market, says Steve Hovland, director of research for real estate investment management firm HomeUnion in Irvine, California.
“Crowdfunding enables investors of all ages, risk profiles and wealth levels to acquire real estate for the first time,” Hovland says. “With as little as $5,000 down or in some cases even less, investors can buy a stake in a property. From residential projects to shopping malls to office buildings, the possibilities are endless.”
Platforms like RealtyShares, RealtyMogul and Fundrise are removing barriers to investing in real estate that previously shut a large number of investors out of the game. The SEC’s approval of Title III of the JOBs Act in October 2015 widens the possibilities even further by allow non-accredited investors to take part in crowdfunded real estate deals.
The opportunity for diversification expands. With direct ownership, your options are more limited when you don’t have the ability to purchase multiple properties. Real estate crowdfunding eliminates that obstacle.
Instead of being locked in to a single property type, investors have more flexibility where they put their money. They also have a choice between investing in equity in return for a share in a particular property, or debt investments, which are tied to the property’s mortgage.
Jilliene Helman, co-founder and CEO of Los Angeles-based RealtyMogul, cites that reach as being one of real estate crowdfunding’s most appealing features.
“If you buy a property to flip it or rent it out, you’ll most likely feel more comfortable investing in your own backyard,” Helman says. “When you’re investing through a crowdfunding platform, you can invest throughout the country and more easily diversify across property types, investment types and geographies.”
It’s a less stressful way to invest in real estate. Owning a rental property or tackling a flip project is great for investors who prefer an active role but it’s not necessarily a good fit for someone who wants to relax in retirement.
Than Merrill, host of A&E’s “Flip This House” series, cites a laundry list of issues that investors need to keep in mind if they’re taking a hands-on approach.
With house-flipping, Merrill says, investors have to factor in all the costs involved, from buying the property to physical construction, as well as the interest paid to lenders if you’re financing the project. Besides that, there are the tax implications that go along with realizing short-term financial gains.
“Bottom line,” Merrill says, “it takes a long time to master the art of rehabbing. Investors have to be able to anticipate problems and have a counterattack ready.”
Owning a rental house is no less of a challenge, Merrill cautions. There are the difficulties that go along with finding tenants and making sure you’re adhering to the legal guidelines for renting. Then there’s the day-to-day demands associated with managing a property, which can be time-consuming.
Helman points to the passive nature of real estate crowdfunding as being more suited to retirees who have less of an interest in direct involvement.
“Think of it this way,” Helman says. “Do you really want to have to deal with the hassles of fixing and flipping or answering a tenant call at 2 a.m.?”
Understand the risks. While real estate crowdfunding may be more preferable to direct ownership for some retirees, there are some potential drawbacks.
Liquidity is one issue that may be of more concern to retirees. Depending on how a deal is structured, you may be looking at a holding period of anywhere from 18 months to seven years before you’re able to recoup your investment.
In that scenario, owning a rental property or flipping homes could begin to look more attractive because there’s a more immediate payoff. Factoring in the holding period is important if you have a pressing need for sustainable cash flow outside your existing investments.
Robert Kantor, co-founder and CEO of Headwater Capital in Ketchum, Idaho, urges investors to explore the possible pitfalls from every angle.
“In crowdfunded investments, the risk of loss may be higher than represented,” Kantor says. “With crowdfunding deals that are structured as debt or loans, investors may only be looking at the returns without realizing that they’re actually investing in lending money to an owner or developer.”
If the project fails, it’s the investor who shoulders all of the loss. Knowing your individual risk profile and the crowdfunding platform you’re working with can tell you if the relationship is a good match.
Kantor offers advice to investors who are interested in venturing into the real estate crowdfunding arena.
“Ask yourself if the deal structure and company are transparent, with no smoke and mirrors,” he says. “It’s critical to thoroughly understand the structure of the deal you’re considering. If the investment team can’t explain the deal or the company’s operations in a way that you can’t understand, don’t invest.”
Source: money.usnews.com
Accessibility