Benjamin Graham, a British-born American investor, economist and professor, also known as the ‘father of value investing’ once said, ‘Successful investing is about managing risk, not avoiding it.’ All investments have some amount of risk associated with them. In this article, we will look at some risks associated with real estate investing and how Crowdfunding alleviates those risks.
Real Estate Risks
There is no denying the fact that Real Estate investing is one of the oldest and highly preferred means of generating wealth. However, like any other investment, it has its share of associated risks too. Let’s take a look at a few of them:
- The real estate market is unpredictable – A natural disaster or a political unrest can lead to a sharp drop in prices, burning a hole in your pocket if you haven’t diversified enough.
- It is highly location dependent –The returns depend on the region where the property is located. A change in policy might find businesses moving to another region and that can lead to a sudden drop in the demand for rental accommodation. This can cause your rental income to slow down, or worse, stop completely.
- The cost of maintaining the property is always there whether the property is rented or not.
- The property might not be leased all the time leading to loss of revenue.
- Lack of liquidity – Selling a real estate property takes time. It is certainly not the most liquid investment.
While most of these risks can be mitigated by a planned approach to real estate investing and conducting a thorough market research, there is another option that can help alleviate most of these risks effective – Investing in Real Estate through Crowdfunding.
How Crowdfunding alleviates Real Estate risk?
Real Estate Crowdfunding offers an opportunity for investors to participate in the Real Estate market with small amounts of money. It allows you to purchase a small percentage of a property rather than the entire property sharing risk and rewards with other co-owners. Apart from the wide range of benefits offered by Crowdfunding, here are some ways in which it helps alleviate the real estate investment risks.
- Diversification of Portfolio: Diversification is probably the most preferred tool to manage risks by investors. A typical investment portfolio consists of stocks, mutual funds, bonds, etc. While most investors desire to invest in the Real Estate market to diversify their portfolio better, the amount of investment required is so high that many of them opt against it. With Crowdfunding, you just have to invest a small part of the value of the property and earn returns commensurate with your investment. This helps you get exposure to direct real estate and further diversify the portfolio and offer better risk management.
- Exposure to various Real Estate markets: Buying a property requires huge amounts of funds. Typically, investors could invest in one or two properties in their lifetimes. With Crowdfunding, you can invest in multiple properties across various geographies and participate in the growth of the region’s economy. This also hedges you against the risk of any particular property underperforming.
- Short-term and Long-term investment options: By being able to participate with small amounts of money you can diversify your real estate portfolio by allocating capital among short and long-term investments offering different risk-return profiles.
- No more lack of liquidity: Crowdfunding platforms usually allows investors to buy and sell their shares with ease on their platform. Theoretically, it is easy to sell a small portion of the property rather than the entire property
- No property management hassles: Crowdfunding platforms generally provide turn-key real estate investment solutions offering investors hassle-free experience.
- Low minimum investment: No more housing loans, monthly instalments and shelling out all your savings to buy a property. Most platforms have really low minimum amounts for investors wanting to invest in real estate through Crowdfunding. This helps you to mitigate the risk of exposure of capital in one asset.
In a nutshell, investing in Real Estate needs a lot of planning and understanding of the region where you want to invest. Crowdfunding platforms do most of the homework allowing you to focus on the region and type of property that you wish to invest in that meet your financial goals. Real Estate Crowdfunding platforms allow you to get exposure to direct real estate while still being able to invest in other asset classes to construct a portfolio that is balanced and diversified.