Crowdfunding is a process of funding a project or venture by adding small investments from a large group of investors. It is based on the idea that when enough people make small investments, it’s possible to quickly raise substantial amounts of money. Real estate crowdfunding raises capital for real estate investments. For example, sometimes developers or real estate investors may not be able to fund the entire investment themselves. Thus, they turn to crowdfund to let individual investors help finance the project. The process enables investors to invest in real estate without owning, financing, or managing properties.
Crowdfunding requires a low minimum investment, providing access to assets that would be unaffordable otherwise. It generates high-profit potential through distributions and a tax-free return at the end of the investment. It allows developers to get a wide array of potential investors, leveraging those social networks on technology platforms. Through crowdfunding, investors can commit far lower capital toward any single property, sometimes as low as $500 or $1,000.
As real estate is extremely capital intensive, the idea of crowdfunding is a viable solution for financing real estate. Three crucial players are involved in the process for any crowdfunding opportunity: the sponsor, the platform, and the investor. The sponsor is the real estate professional raising capital to carry out the whole business plan. A crowdfunding platform is essentially a marketplace that connects sponsors looking for capital with investors looking for investments. The investor is the one who contributes their capital to a real estate investment opportunity and gets a share of the profit.
Crowdfunding has the potential to greatly expand the pool of potential investors from whom funds can be raised beyond the traditional circle of insiders, owners, relatives, and venture capitalists. Through crowdfunding, new investors get unprecedented access to historically reserved opportunities for wealthy real estate owners and developers.
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