Real Estate Crowdfunding vs MICs in Canada

The term crowdfunded is something we’ve become familiar with in various avenues. Oculus Rift went from Kickstarter crowdfunding to a $2 billion Facebook acquisition thanks to crowdfunding.

The crowdfunding concept is now being applied to real estate.

Real estate crowdfunding platforms are taking markets by storm. The question is, how does it work and is it something Canadian investors should consider?

What is Real Estate Crowdfunding?

Real estate crowdfunding is a method for investing in real estate by pooling money with other investors online through financial technology (fintech) platforms or crowdfunding sites.

This form of investing is gaining a lot of traction in the US investment market largely because it is accessible to all levels of investors. Many young investors want to find a way to get into the real estate market without significant upfront costs, and crowdfunding is one such solution.

It’s not just the US, either. Real estate crowdfunding is taking off in Europe.

What are the benefits?

The notable benefits of real estate crowdfunding are:

Low initial investment costs as some platforms boast a minimum initial investment commitment of $500.
The potential for higher dividends than some REITs and traditional investments.
Access to real estate projects that would otherwise be unavailable due to cost or location.
No hands-on management of investment properties.
Shared ownership risks with other investors.
Access to private real estate projects and properties.
Flexibility to choose real estate investment projects.

All of these benefits sound great, and it’s why many young investors are flocking to this alternative investment. Many of the benefits are also offered by REITs and MICs, except for choosing specific projects — however, this may be more of a risk than a benefit.

What are the drawbacks?

No professional help

Researching and deciding on the risk of each project is the investor’s responsibility. A REIT or mortgage pool managed by a MIC means an expert watching the fund and doing all the risk assessments. This person has years of experience and oversees the fund more regularly than you likely have time. It may look desirable to choose projects with crowdfunding, but this brings additional risk.

Hidden fees

The low cost of crowdfunding makes it desirable. In many cases, the minimum upfront investment amount is just $500, and many of these platforms claim to have low to no fees compared to managed funds. Despite what the websites lead you to believe, there are fees associated with real estate crowdfunding, which can get quite high.

Lack of liquidity

Real estate crowdfunding may appear to have a lot of flexibility, but there is minimal liquidity and control. Trying to sell your crowdfunded investment can be difficult. You may find yourself at the mercy of the website and a negative shift in the real estate market with minimal protection.

Risk and regulations

Crowdfunding isn’t held to the same regulatory standards as a REIT or a MIC. You’re essentially investing in a platform that is unregulated and doesn’t have any guarantees or safety procedures.

Will real estate crowdfunding catch on?

If you asked us if we think real estate crowdfunding will catch on in Canada, we’d have to say a firm, “probably.” There’s a big draw for young investors to “do it alone.” Crowdfunding can provide the illusion of hands-on control. However, does this make it a desirable alternative investment? We think the risks are too high and too much to put on an individual investor.

When it comes to real estate crowdfunding opportunities, it may seem like they’re a great opportunity. However, MICs offer similar benefits without the same risks. Suppose you’re looking for a real estate investment opportunity with low initial investment minimums that allows you access to a diversified real estate pool and reduces risk, thanks to professional help. In that case, a MIC-managed mortgage pool is the right fit. Jordan on our team is here to answer your questions and support you. Get in touch today.