I noticed some real estate crowdfunding platforms pay a flat percentage while others payout with equity. Which is better?


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    I noticed some real estate crowdfunding platforms pay a flat percentage while others payout with equity. Which is better?


  • admin

    Good question. There's no one right answer, and it depends on several other variables. In short, risk and potential return will always move inversely; in other words, what you give up in upside with an equity real estate investment, you would be compensated for in the form of consistency and (relative) security of a fixed-rate offering. Here are some quick thoughts on other factors that impact the question:

    • Your investing strategy: are you looking to preserve wealth and conservatively grow real estate income? If so, a fixed-rate debt or preferred equity offering would be preferable. Or, are you looking to bolster the upside potential of your portfolio and pursue more opportunistic, high-yield opportunities, and you're comfortable assuming a bit more risk? If so, a higher-upside common equity deal may be more your speed. Typically high-upside equity deals will also be subject to a more extended hold period - which is part and parcel of increased risk - so keep in mind that your money would tie up for a more extended period.

    • The availability and quality of alternative vehicles: Yields on bonds, treasury notes, and other fixed-rate vehicles should consider in the context of fixed-rate real estate investments. If you can achieve a 5 or 6% return on a T-note (which isn't the case at this moment but maybe in the future), vs. a 7 or 8% back on real estate, you may prefer to opt for the former, which is virtually risk-free.

    • Your experience/acumen with real estate investing: While fixed-rate real estate investments are relatively simple, equity investments can be much more complicated. You'll need to understand market risk factors, distribution waterfalls, and various other elements of the opportunity to make an informed decision. If you don't have the time or knowledge to evaluate these factors, a fixed-rate investment may be preferable.

    • The quality of the platform and real estate company behind the investment: perhaps most important, make sure you know who you're "getting in bed with" on the investment. Do they have a solid track record of delivering on return projections? Do they have boots-on-the-ground experience in the specific market where they're investing? Whether it's a fixed-rate or high-upside equity deal, this is critical.

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    Equity is ownership. So let's say that you are in a project at 20%. Let's assume the property when sales fetch a price higher than predicted but of a shift in that market. At the start of the deal, you could have asked for a flat return of $50k, which included your original investment, or 20% of the deal. So now the deal is sweeter with the market increase, your ROI is $75k.
    It's investment risk. You decide your exposure comfort level. Look at all of the variables, and for the love of tarter sauce, do your due diligence.

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    Crowdfunding has become something of a buzzword among investors these days, and it's notably well-received in the real estate sector. Though it's still in its infancy, real estate crowdfunding is rapidly reshaping the approach people find and invest in properties. This shift has brought advantages not just for investors but also for real estate firms and the real estate market as an entire.