Choosing an established, reputable real estate crowdfunding platform with an experienced team will mitigate exposure to risk, but investments of any kind carry an element of risk and crowdfunding does not eliminate all of those associated with real estate:
Both property prices and rental rates can go down as well as up. Whilst real estate has historically proven to be a reliable form of investment, the market follows cycles and prices may periodically drop. If a property is purchased at the wrong time it can impact on the total returns of an investment.
As with any rental property tenants may decide to vacate, potentially leaving the property empty until replacement tenants are found. This means no rental income which will reduce returns. Professional property management will reduce this potential for risk by securing long-term tenancies and through access to a strong pipeline of future tenants.
Bad tenants may default on their rental payments. Worse still, the eviction process can be very drawn-out, meaning months without the property generating a yield. Ensure your crowdfunding platform employs a thorough tenancy vetting process that includes references, credit checks and employment status.
Over time general wear and tear affects any property and its contents, requiring expenditure to cover the cost of redecoration, renovation and repairs. These expenses may be passed onto investors, thereby affecting investment yields, but some crowdfunding platforms, including Bricksave, set aside a reserve fund to cover maintenance issues, meaning there are no additional costs to investors.
Real estate crowdfunding is a hands-off investment reliant upon a third party to manage the property. If you’re unhappy with the performance of an investment there is little that you can do about it other than, if the option exists, sell your shares on the secondary market. Likewise, should the crowdfunding platform you use go bust, you will still own shares in the SPV but will need to wait for an alternative management company to be appointed. Be sure to research the track record of the crowdfunding platform involved.
Most real estate crowdfunding platforms set a minimum term before you can exit the investment or before the property is sold. Should you want to exit during this period it might be possible to sell your shares onto other investors via a secondary market, assuming there are any investors looking to purchase, or it might be possible to exit early by paying a penalty charge. You should be sure you are comfortable with having your money tied up for the full investment term before deciding to invest.
Investing carries risks, including loss of capital and illiquidity. Please read our Risk Warning before investing.