People who want to diversify their investment portfolio have many choices. Alternatives to the stock market, like real estate, oil & gas, and agriculture, are appealing for a variety of reasons. Until recently, most of these alternative investment opportunities were only available to those institutions or high net worth individuals with a significant amount of capital, connections, and expertise. Private equity, hedge funds, and other institutional investors routinely accessed private deals with entry points of multiple millions of dollars. Even smaller real estate syndications generally start with investment minimums of $100,000 or more. But now, equity crowdfunding platforms have disrupted traditional investment models and allowed a greater number of people to invest in tangible offerings with smaller amounts of money. Equity crowdfunding is valued at about $2.5 billion and is a rapidly growing portion of the $7 trillion commercial real estate market. There are more reasons than ever to invest in equity crowdfunding opportunities. Here are five:
1. Invest Like the Wealthy
When you invest with a crowdfunding platform, you are investing in a private placement listing, meaning securities that aren’t publicly traded. High net worth individuals and family offices who manage their money prefer private placements because these types of investments offer many benefits that aren’t found in the stock market. Sometimes, private placement offerings benefit from the “illiquidity premium,” meaning that higher returns are available to those who are willing to tie up their capital for longer periods. Also, private placements are invested directly in a specific sponsor or project, minimizing counterparty risk from financial institutions and derivative traders.
2. Streamlined Investment
Investing in an online platform is very similar to investing in stocks with a discount brokerage. Crowdfunding platforms allow for a fully online investment experience. There are no back and forth overnight mailings of private placement memorandums and subscription agreements as all aspects of the investing transaction are facilitated online to include document review and signing. Additionally, most platforms provide investors with deal updates and tax documents. Distributions are usually paid via direct deposit into the same bank account in which you invested, so there is no worry about checks getting lost in the mail.
Though a few real estate crowdfunding platforms are raising capital for open-ended funds or REITs, the majority of them offer investments on a per project basis. Meaning, when you invest in a crowdfunding project, you are owning part of a specific property, asset-backed note, or development project, not a pool of money that can be invested however a project sponsor wishes. Because of this, an investor is directly connected to that project. Most platforms offer periodic updates and sometimes photographs on how their project is progressing in addition to expected regular financial reports.
4. Easy Diversification
There are practically endless types of offerings on today’s crowdfunding platforms, ranging from single-family fix-and-flips, to large commercial buildings, to income-producing farms. Investments can be in the form of longer term, equity investments or debt instruments with a shorter, defined term. Because crowdfunding investment minimums are generally small, it’s possible to reduce risk by diversifying across a number of different markets, asset types, or deal structures with a single platform or multiple platforms.
5. Intangible Rewards
In addition to safe yield or the potential for outsized returns, crowdfunding projects offer some intangibles that simply aren’t available in other types of investments. Though you want to invest with a sponsor who has a track record of performance, crowdfunding provides capital to those companies who might otherwise be challenged because of size, experience level, or location. Most crowdfunding projects are sponsored by small businesses, the same ones driving the majority of job growth in the U.S. An investment in a specific crowdfunding project can help grow jobs and stimulate the economy of a specific neighborhood. Investing in a farm or housing development project enables the investor to share in the sponsor’s specific goals related to economic or environmental sustainability.