Real Estate Investing vs. Crowdfunding

By The ArborCrowd Team
Nov 2, 2020

There are many ways to invest in real estate, from actively managing your own rental property to passively investing in a real estate deal. Crowdfunding is one method of passive real estate investing. With crowdfunding, deal sponsors use the internet to reach potential investors and showcase the deals they have available. Through a crowdfunding platform, investors pool their resources to buy into large institutional deals for quality properties.

The Pros and Cons of Real Estate Investing

Investing in real estate can help you build wealth in a variety of ways. Rental income can bring cash flow in the short term. In addition, the value of real estate can appreciate over the long term. For these reasons, many investors use real estate investing to diversify their portfolios beyond stocks and mutual funds.

While investors can buy rental property on their own and manage it themselves, most people don’t have the time or expertise to handle all the aspects of property ownership. Owning a property on your own can involve everything from managing paperwork and legal issues to maintaining the property and finding tenants. For these reasons, many people prefer to passively invest in real estate instead.

Passively Investing in Real Estate

In all forms of passive real estate investing, a deal manager or sponsor will find properties to invest in, and then offer investors an opportunity to participate in the deal. This allows investors to participate in larger deals with a lower minimum investment, and they can enter into deals for more expensive properties than they would be able to afford on their own.

After the property has been purchased, the sponsor (or their property manager) handles the maintenance and other daily operations. This means that investors don’t have to worry about finding or managing a property themselves.

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How Crowdfunding is Different

Real estate crowdfunding is a relatively new way to passively invest in real estate. Investors who participate in crowdfunding use an online platform to find opportunities to invest in a property.

Crowdfunding typically has a lower minimum investment than many other forms of passive real estate investing, such as private equity funds or non-traded Real Estate Investment Trusts (REITs). This lower minimum investment enables investors with a moderate amount of capital to participate in bigger deals.

Crowdfunding can also be more transparent than other methods of real estate investing, because it allows investors to choose deals that matches their risk profile and goals. Crowdfunding platforms typically provide specific information about each property, and investors can often find more information about a property online. In addition, investors can research the deal sponsors and learn about their experience and areas of expertise. Some crowdfunders, like ArborCrowd, also offer virtual video tours of their properties, so you can see exactly what you’re buying into.

If you’re interested in learning more about real estate investing and crowdfunding, the video below shares an overview of the real estate investing landscape. Adam Kaufman, co-founder and COO of ArborCrowd, and David Dent, senior research analyst at Yardi Matrix, give their takes on the state of the commercial real estate and crowdfunding industries in a conversation hosted by Suzann Silverman, editorial director of Multi-Housing News.

Expertise and Industry Connections Are Critical

When you’re buying into a deal through a crowdfunding platform, it’s critical to work with experienced operating partners that have a strong network of real estate industry relationships and sponsors that have a track record of success.

Many crowdfunding platforms are operated by tech entrepreneurs who don’t have a long track record in real estate investing. They may be more concerned about showing progress to the venture capitalists that have funded their platforms by offering a lot of deals quickly, rather than choosing the best deals for their crowdfunding investors. Even with the best of intentions, they may not have the experience and expertise needed to evaluate and select quality deals.

ArborCrowd was the first crowdfunding company launched by a real estate institution, and its leadership brings more than 30 years of real estate experience to the table. You can learn more about their expertise in this message from the co-founders, Adam and Ivan Kaufman.

ArborCrowd’s experienced underwriting team applies rigorous standards to find high-quality investments. They weed out more than 500 deals each year that don’t meet their rigorous standards. For any deal that makes it through the first pass, the team does a deep dive to determine the pros and cons. As part of that process, they review revenue and expenses, calculate the net operating income, and evaluate financing options to build out an accurate picture of the property’s potential.

Knowing that the operating partners also have some skin in the game can also help investors build trust in a crowdfunding platform. ArborCrowd affiliates invest in properties up front, before launching them to investors. As a result, ArborCrowd can offer investors first-hand, detailed information about each property and ensure that every deal closes on schedule.

Transparency is Essential for Crowdfunding

With crowdfunding, unlike other forms of passive real estate investing, investors know exactly which property they are investing in. ArborCrowd offers one deal at a time, so investors always invest in a specific property.

ArborCrowd also offers comprehensive documents about each deal, including an offering overview, private placement memorandum, and executive summary. All the documentation is clearly and concisely written, so it’s easy for investors to read and understand.

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