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| Image by Dimitris Vetsikas from Pixabay |
There is a new way for you to invest in commercial real estate, and it might just do the trick for you. It’s called commercial real estate crowdfunding. Real estate crowdfunding helps individual investors invest in single-asset commercial real estate. It allows them to put their money to work in ways that they could not have if they were to invest individually. A deal sponsor will provide a real estate opportunity, and this is when investors contribute their money to the project. They’ll get a proportional share of the returns in exchange.
To further understand it, you need to know the three main parties when it comes to commercial real estate crowdfunding deals.
- Sponsors are the companies that want to acquire the property and those who negotiate the deal. They are the ones who hire contractors and manage the project on behalf of the investors.
- Crowdfunding platform is the one that acts as the bridge between the sponsor and the investors. They are the ones who advertise the deal to potential investors, manage the paperwork, and collect the investors’ capital.
- Investors are those who look for crowdfunding platforms that give out the best deals. If they consider it as a good fit, then they will invest capital for the deal.
3 Main Types of Commercial Real Estate Crowdfunding Investments
- Common Equity - This is typical of all real estate investments. In a common equity deal, you’ll have an interest in the underlying property’s profits. The thing to remember about this deal is that you don’t have a guaranteed return because it will all depend on the performance of the underlying property.
- Debt - In a debt financing deal, you are considered as the project’s mortgage lender, which means that you are financing the property and, at the same time, receive regular and predetermined interest payments. This has the lowest return potential, but it is considered the safest deal when it comes to investing in crowdfunded real estate.
- Preferred Equity - This is like a combination of debt and common equity. It has a fixed distribution amongst its investors, which makes it the same as the debt financing deal. It is the same with common equity in that when the real estate deal loses profit, preferred equity holders are subordinate to debt holders when it comes to getting payments.
Why You Should Invest in Crowdfunded Estate Deals
There are various benefits as to why you should be an investor in such deals. One common reason that many investors have given is that when it comes to commercial properties, not all investors have access to such kinds of investments. With crowdfunded real estate deals, they’ll be able to have the necessary capital and with less risk as opposed to investing in it by themselves. Commercial real estate crowdfunding also gives them the chance to invest in a specific property, which means that sponsors will only focus their expertise on such deals.
Another thing is that it offers a higher return potential. You can be an investor in a crowdfunded deal and get a share of the rental income. You’ll even get more profit when the sponsor decides to sell the property. With a crowdfunded real estate deal, the only thing that you have to do is to give your investor capital to the deal sponsor, and they will be responsible for doing the rest.
