How Investing Small in Real Estate Can Pay Off Big

Known fact; mice do not swallow elephants. The truth in this is clear- we’ve yet to see it happen. Yet, individual investors too often believe they must be able to accomplish this when investing in real estate- the investor must purchase the entire building or nothing at all.  Enter crowdfunding.

Crowdfunding: the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet

The use of crowdfunding to invest in real estate provides the small investor with the opportunity to invest in larger assets and gain many of the same benefits captured by larger investors. People make investments to capture the benefits of the investment opportunity.  Some of these benefits of crowdfunding investments in real estate include:

Investment diversification

Allocation theory suggests that a portfolio have between 5% and 15% of assets in real estate (excluding your personal residence). Thus, investors should have $50,000 to $150,000 in real estate for every one million dollars in net worth.  Ok. Great- who has $50,000 handy for one investment? Crowdfunding offers investment opportunities starting at $500.

Safety of capital

Real estate prices dip, go sideways and rise over time.  Real estate is a quality component of any investment portfolio. Preservation of capital is a cornerstone of sound investment decisions.  Using the prior example, you (the investor) with $15,000 in investable funds can have a “diversified” portfolio with $5,000 in stocks, $5,000 in bonds and $5,000 in real estate (that is professionally managed and appropriately leveraged).  

Inflation protector

Predicting inflation is like betting on who will win the World Series before the season starts- there are just too many factors to consider.  But when inflation does kick in, real estate values usually keeps pace.  Which is why real estate is an important part of a diversified portfolio.

What’s next?

Any investment that has more than one form of yield is a potential winner for the investor.  With bonds the investor gains (hopefully) preservation of capital and one yield generator: income.  With stocks; income with the potential for growth, or appreciation.

With real estate yield entails; income, appreciation, mortgage reduction and tax benefits (sometimes). That’s four types of yield!  This is what makes real estate an important part of a diversified investment portfolio. What makes real estate stand out is that it is a “hard asset” – one that people can see, feel, touch, kick-the-tires. You can see it, Instagram a pic and walk by the physical space.

So, where do you start? Real estate crowdfunding, although new to the investment landscape, is taking the lead in presenting an opportunity for individual investors to become part of a large-scale property that most people would never have a chance to own by themselves. Crowdfunding brings the power of the “crowd” to investment opportunities in real estate assets.  

Choose a platform that provides you (the investor) with a choice of assets, good reporting and the potential for liquidity.