Thanks for reading the 2nd article in the Real Estate Crowdfunding guide. In case you missed it, the first part is about how real estate crowdfunding works.
Now that you know how it works in general, the next question is obvious – is real estate crowdfunding a good investment?
The answer is obvious as well – It Depends!
Well, that doesn’t help you much. So, we’ll dive into when real estate crowdfunding is a bad investment or a good investment, and how to decide if it’s a good investment for you.
- What is a "Good Investment"?
- Goals Determine Good from Bad Investments
- Deciding What is a "Good" or "Bad" Investment for You
- Creating an Investing Strategy Based on Your Goals
- Is Real Estate Crowdfunding a Good Investment?
a “Good Investment”?
You’ll hear people say “is it a good investment?” or perhaps “they overpaid for the property, it was a bad investment.”
It’s important to note that a good investment for me might be a bad investment for you. It all depends on our unique circumstances, risk tolerance, and our particular goals.
That’s the most important part – knowing your goals. Your goals will help you define exactly what kind of investment you want to make. With solid goals, you’ll know if real estate crowdfunding is a good investment or not, for you.
So, let’s take a step back and talk about goal setting.
Goals Determine Good from Bad Investments
Everyone has a goal to earn more money, so it’s really not a goal. Money really isn’t a goal at all. It’s not good for anything by itself, it can only be used to purchase other goods and services.
So, your goals should be framed around things you want – to pay for your kids education, early retirement, improved living standards, etc.
Then, you need to determine a time-frame to achieve those goals.
If you are looking to have a safe and secure early retirement 25 years from now, you may choose to invest completely differently than if you want to provide for a college education 5 years from now.
Now that you have specific goals, it’s time to convert those goals into a monetary value
Deciding What is a “Good” or “Bad” Investment for You
This is important because different goals lead to different investing strategies. For example, One option may lead you to forego current cash flow if there is potential for greater appreciation in the long run. The other option may have you either preserving
Once you know exactly what your goals are, you need to decide which of the following will help you achieve it the most efficiently.
- Preserving what you have already
- Providing a steady stream of cash flow to pay for an ongoing expense
- Creating a lot of equity you can tap into at a later date
Once you have your primary goal and the general strategy that will get you there the fastest, it’s time to decide what sort of investments are ‘good’ or ‘bad’ for you.
Creating an Investing Strategy Based on Your Goals
There are 3 primary investing strategies to achieve your goals, and then 3 combination strategies where you combine 2 of them. Let’s dive into each one and look at some investing options within them.
Under this strategy, the goal is to preserve the capital you already have and avoid major risks. Perhaps you have $30k saved to buy a car within the next few years and you’d like to earn some returns, but don’t want to risk it.
Also, you may want it to be fairly liquid. Your current car might break down at a random time and you don’t want all of your capital tied up for another 6 months.
The safest investment is some form of
The safest and most liquid option is a money market account. The returns are barely above that of a savings account, but you can access your money at any time.
Providing a Steady Stream of Cash Flow
This is the strategy where income producing property truly shines.
Real estate tends to produce a lot of income and a little but of appreciation, so if you’re looking for income, real estate is perfect.
Similarly, real estate crowdfunding could be a perfect fit because you’re investing in the same kinds of investments.
As an example, let’s consider a real estate deal that provides an overall return of 10% per year.
Most likely, around 7-8% per year is in cash flow (money in your pocket every month) and 2-3% is from appreciation on the asset.
So, if you are trying to pay some sort of monthly expense (such as giving you a living stipend in retirement) then this is perfect.
Creating a Lot of Equity For Later
The goal with this strategy is to save for a long time and tap into it at a later date.
Stocks are a great option here because most of their growth comes from equity appreciation. Think about it another way.
The average dividend (cash in your pocket) of the S&P 500 over the years is around 2%. But, the overall return of the market is around 7-8%. So, 2% is from cash flow and 6% is from appreciation.
Real estate can also be a great option if you are buying in coastal core markets. These are places like Boston, NYC, LA, etc. These cities tend to have very low cash flow but appreciate very quickly.
Capital Preservation + Cash Flow
If you are looking for something with a little more return potential, you might look at short term real estate loans. This is also called private lending or hard money lending.
These generally last from 6-12 months and are the most conservative type of real estate investing. This is because the loan is protected by the equity in the house.
Often, if you do have to foreclose, you can find yourself making more money than if they had just paid the loan.
There are crowdfunding companies that specialize in this sort of investment, so crowdfunding can be a good investment if your time-frame and risk tolerance allows for it.
Capital Preservation + Appreciation
This is a tough one. There may not be a specific class of assets that fit this category, but there are definitely options within other asset classes.
For example, certain stocks may be very stable regardless of market conditions. Some real estate markets are amazingly stable and can provide a way to get a little bit of appreciation as well as capital preservation.
Some people believe that some alternative investments such as precious metals are good for capital preservation and potential appreciation as well.
Cash Flow + Appreciation
If you’re looking for a good combination of cash flow and capital appreciation, then there are really two options.
First, you can find ultra-high-yield stocks that have huge dividends. You’ll need to find some that are undervalued so you can get some appreciation.
Real estate is similar, you’ll need to find good income producing properties that have some opportunity to add value. This could be through renovations, changes in management, etc.
Is Real Estate Crowdfunding a Good Investment?
Real estate crowdfunding can be a good investment in 5 out of 6 of the categories.
If your goal is strictly capital preservation, you probably should not be investing in real estate at all. If you have any of the other 5 goals, real estate crowdfunding can definitely work as a solid investment for you.
The key is to find the right platform that has the type of assets your looking for that will achieve the goals you want.
Other Articles on Real Estate Crowdfunding
- How does real estate crowdfunding work
- Is real estate crowdfunding a good investment
- Property types and classes in commercial real estate