In a prior article, we briefly mentioned other alternatives to real estate syndications. A few of you asked us to expand on the crowdfunding concept. Therefore, based on popular demand, in today’s quick snippet, we will cover some of the pros and cons of crowdfunding (relative to syndications).
As a quick refresher, crowdfunding platforms operate online and pool investors’ capital to invest in various opportunities or a project. An example of crowdfunding site raising capital for a project is Go Fund Me, Fundrise, or Crowdstreet. An example of an investment would be real estate, crypto, art, etc. As you determine which crowdfunding platform to use, you need to ensure it presents investment opportunities that meet your investment vehicle criteria and that it has a strong sponsor vetting process, ease of use, reporting, and access.
1. Convenience. Crowdfunding sites leverage an internet platform to present multiple syndication options across markets and assets classes. It serves as a one stop shop where one can browse and invest in multiple opportunities with just a few clicks.
2. Diligence. The crowdfunding platform is the one who vets the operator before they determine if they will raise capital for their deal. That is not to state you should not do your own vetting and diligence process. However, the crowdfunding platform partially eliminates the sponsor vetting risk as the sponsor must meet the crowdfunding platform’s criteria before their deal can be presented to a pool of investors.
3. Small upfront capital requirement. Investing via a crowdfunding site could be as low as $50 and as high as hundreds and thousands of dollars, thereby making investing in real estate more accessible and allowing one to get over their own initial fear of investing with minimal amount of risk.
4. Duration. Unlike REITs but similar to syndications, when you invest in a deal via a crowdfunding platform, you invest for the duration of the deal, i.e. cannot trade in and out of the investment. The hold period is usually specified upfront, during the investor offering presentations.
1. Less personable. The investing process tends to be less personable – you primarily interact via the platform and most of the time not directly with the operator. In contrast, when investing via a syndication, more often than not, you have direct contact with the deal sponsor or a member of the general partner team.
2. Additional transactional fees. In exchange for the convenience noted above (to scan operators, one-stop shop, accessibility, ease of use, doc compilation and processing, payment processing, etc.), you will likely face additional fees that you would not otherwise incur, if you invest directly in a syndication. This is how these platforms make money.
3. Accredited status required. You must be accredited in order to invest via crowdfunding platform. In contrast, syndications (depending on how they are structured) are open to both accredited and/or sophisticated but non-accredited investors, thereby opening a pool of additional investment opportunities for you.
4. Potentially fewer tax advantages. As always, you should first check with your CPA. However, it might not be uncommon to treat crowdfunding income as ordinary (e.g. like stocks) and therefore may not be able to apply the same tax deferral and tax advantage strategies as with investing directly in real estate/a real estate syndication.
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Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.