Real estate crowdfunding and buying rental properties on your own are two ways to invest in real estate, and there are pros and cons to each. The primary difference between the two is that real estate crowdfunding is a way to passively invest in real estate, while buying rental properties requires you to take a more active role.
With crowdfunding, you provide the funds for the investment, and a deal manager or sponsor does everything else — from finding the right property to buy to managing it after it’s been rented to tenants.
Buying a rental property on your own requires more work, knowledge, and time on your part. You’ll need to find an appropriate property and negotiate the purchase. In addition, someone needs to manage the property once it has been purchased, and that could be you or a property manager that you hire.
The Challenges of Buying Rental Property
When you buy your own rental property, you have more control, but you also have more responsibility. You can choose the exact property you want based on your risk tolerance and investment goals. However, to be able to choose a property that’s likely to meet your goals, you need to have extensive knowledge of the property market. It’s important to consider the pros and cons of different types of property, such as commercial, industrial and residential real estate.
Once you know what kind of rental property you want, you will also have to consider other aspects of the property, like its location, age, and condition, all of which affect the rental income you receive. For residential rental properties, it’s critical to look at the crime rate in the neighborhood and the school district, since both of those factors are often important to renters. For commercial properties, the right location is especially important.
To ensure that you’re aware of all the expenses associated with owning a rental property, you will also need to research the property taxes and insurance costs for the area you’re considering. In addition, the laws for landlords and tenants vary widely from state to state, and even city to city. Make sure you understand the laws related to finding and evicting tenants, increasing the rent, and maintaining the property appropriately before you decide on a property.
Once you own a rental property, you’ll need to find reliable tenants, collect the rent each month, and keep the property maintained. Of course, you can hire a property manager to handle all of this for you, which typically costs 3-7% of the monthly rental income, on top of the cost of taxes, insurance, maintenance and repairs. If you need to evict a tenant, there may be an additional fee for that as well.
If your rental property is a condo or single-family home that’s part of a homeowner’s association (HOA), that can lead to additional complications. Even if you’ve hired a property manager, you may find yourself acting as the go-between if there are repairs or maintenance that the HOA is responsible for. Many property managers will only handle repairs and maintenance within your unit and often they will only manage the communication with your tenants, not with the HOA.
The Benefits of Real Estate Crowdfunding
In contrast, real estate crowdfunding is typically a hands-off investment. As the investor, you can review the deals that real estate crowdfunding platforms offer and choose the one that is best for you, based on your investment goals and risk tolerance.
Rather than buying a whole property, real estate crowdfunding investors pool their resources with other investors to buy into large institutional real estate deals. This allows investors to participate in larger deals with a lower minimum investment, and they can enter into deals for more expensive properties than they would be able to afford on their own.
With real estate crowdfunding, the deal managers or sponsors will investigate every aspect of a property to assess its potential, which is also known as underwriting. It’s important to work with a crowdfunding platform with an experienced underwriting team that applies rigorous standards to find high-quality investments. At ArborCrowd, the underwriting team reviews revenue and expenses, calculates the net operating income, and evaluates financing options to build out an accurate picture of the property’s potential. You can learn more about ArborCrowd’s underwriting process in this article.
Once the investors have bought into a deal, all of the property management and maintenance is handled by a property manager, who is overseen by the deal manager or sponsor. ArborCrowd also acts as an asset manager on behalf of its investors, monitoring the investment’s performance throughout the investment period. As a real estate crowdfunding investor, you won’t have to deal with finding tenants, making repairs, or collecting rent. The deal manager also handles all of the legal issues related to buying the property and managing tenants. Compared to the hands-on process of buying a rental property on your own, it’s much simpler and easier to passively invest in real estate through real estate crowdfunding.