So What Is Real Estate Debt Crowdfunding?
There is no doubt that you know what real estate is as well as debt. But when you think about the question – what is real estate debt crowdfunding, the whole thing might get confusing. Don’t worry, I’ll break it down in this short post.
Real estate crowdfunding is the practice of raising money to finance real estate projects from a group of people making small contributions.
This is an alternative venture financing strategy that has been gaining popularity in recent years. Both from the investor and commercial real estate developer perspectives, this source of financing has so many benefits worth exploring.
But then, when you are just getting started in the scene, you may not know the best one to follow when considering the multiple investment options usually available on real estate crowdfunding platforms.
Let’s look at the core concepts below.
Real Estate Debt Crowdfunding – What Is It?
It is a process in which a group of investors lends to a developer or deal sponsor through a crowdfunding platform and for real estate investment.
Through a real estate debt crowd crowdfunding site, specified and verified property is used as collateral for the lending. Moreover, investors are entitled to receive a fixed rate of return based on the interest rate determined at the time of investment and the amount invested.
In effect, a crowdfunding platform acts as a reputable middleman between the investors and the developers or deal sponsors. Expectedly, the platform verifies the property status and profile of the individuals or companies involved.
Advantages of Real Estate Debt Crowdfunding
#1: Predictable Passive Income
The crowdfunding element makes it easy for investors with small amounts of money to become beneficiaries in lucrative real estate projects. However, you can invest as much money as you like.
The cool thing is the money you invest is relatively guaranteed to give you predictable passive income based on predetermined interest rates. And you don’t have to do active work to earn the money.
#2: Lower Risk
Having valuable property as collateral to back up the loan reduces the level of risk involved.
Using a reputable real estate crowdfunding platform for such investments means that you can have peace of mind while investing money according to your level of risk tolerance.
Without spending any time or money on your end, the platform does the majority of the work involved. The other this about risk consideration is that you can start with a lower amount and build up from there.
#3: Shorter Earning Period
This type of real estate financing strategy is used for new project development. Interestingly, such projects don’t last too long. There is one of the reasons why many people choose real estate debt crowdfunding over equity funding. Most times, the projects will last for like 6 – 24 months.
Having a shorter earning period means that you can reinvest your money in another deal. In case you want to explore the benefits of compound interest in building financial wealth, real estate debt crowdfunding is one of the best ways to do that.