The Pros And Cons Of Real Estate Crowdfunding In A Time Of Economic Uncertainty
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The word recession can be scary to a lot of people. And in times of economic uncertainty, people tend to have a cash-hoarding mentality. While that strategy might pay off in the very short term, we all know that time in the market (or time in investments) is better than trying to predict when markets will recover.
It’s also worth noting that recessions offer opportunities for savvy investors. That is why the saying “Be fearful when others are greedy and be greedy when others are fearful exists.” A recession, while terrifying for many, is an opportunity to build immense wealth for some. For example, during a recession, property prices may be lower, providing an opportunity to purchase properties at a discount. Additionally, rental properties can provide a steady stream of income, even during a recession. That is why we want to cover the pros and cons of real estate crowdfunding today.
What Is Real Estate Crowdfunding?
Real estate crowdfunding is a method of investing in real estate where a large number of individuals (the “crowd”) pool their money to invest in a property or portfolio of properties. This is typically done through an online platform (like Crowdstreet or RealtyMogul), which acts as an intermediary between the investors and the properties. The platform also handles the management of the properties, including finding and vetting properties, arranging financing, and collecting rent. In turn, the investor is paid a monthly or quarterly dividend for their investment. Simply put, it is like owning rental properties without all the headache of managing it.
Over recent years, this asset class has become an option more people. Real estate crowdfunding isn’t just for the top 1%. With some real estate crowdfunding platforms (like Crowdstreet or RealtyMogul), investors can invest as little as a few hundred dollars and gain access to a diversified portfolio of properties, which would otherwise be out of reach for most individual investors. This allows for a low barrier of entry for investment in the real estate market.
There are different types of real estate crowdfunding, some platforms focus on residential properties, others on commercial properties, and others on a mix of both. Some platforms focus on debt-based investments, such as mortgages, while others focus on equity-based investments, where investors own a share of the property.
Now that you are more familiar with what this investment is, let’s dive into the benefits and pitfalls of investing in it during a recession.
Pros And Cons Of Real Estate Crowdfunding During A Recession
The Cons Of Real Estate Crowdfunding
Reduced demand for rental properties: When money is tight, people may be less likely to move, which can lead to reduced demand for rental properties and lower rental income.
Difficulty obtaining financing: During a recession, it may be more difficult to obtain financing for properties, which can make it harder for crowdfunding platforms to acquire new properties.
Reduced property values: When the economy is in a downturn, property values may decrease, which can lead to losses for investors.
Difficulty in selling properties: In a period of wide-spread financial instability, it may be more difficult to sell properties, which can make it harder for investors to exit their investments.
Limited access to information: Even in a recession, investors may have limited access to information about the properties they are investing in, making it difficult to assess the risk.
Limited liquidity: Real estate investments are typically long-term and may not be easily converted to cash during a recession, which can make it harder for investors to access their money if they need it.
Increased Risk of default: In a recession, tenants may have less ability to pay their rent, which can lead to increased risk of default on mortgages and lost income for the investors.
Potential for discounted prices: During a recession, real estate prices may be lower, providing an opportunity for investors to purchase properties at a discount.
Potential for rental income: Even during a recession, people still need a place to live, and rental properties can provide a steady stream of income.
Tax benefits: Real estate investments often come with tax benefits, such as deductions for mortgage interest and depreciation. Along with cashflow, tax benefits are one of the many reasons why real estate is a great investment.
Hedge against inflation: Real estate has historically been a good hedge against inflation, as property values tend to increase over time.
Diversification: Investing in real estate through crowdfunding can provide diversification within an investor’s portfolio, reducing the overall risk.
Professional management: Crowdfunding platforms typically have experienced professionals managing the properties, which can help ensure a good return on investment even during a recession.
What’s important to understand is that there are risks in any investment and while Real Estate crowdfunding might not be for you, there are a lot of other companies that offer alternative assets that the general public can now invest in (like Yieldstreet) that can help your money grow even in an economic crisis.