Many of our users have been asking about the best way to invest in real estate online. They want to know how to reduce the risks associated with this form of investing. For this reason, we have compiled a list of the biggest mistakes investors make when investing in real estate online. We will show you how to avoid them in order to be more successful.
When investing in real estate crowdfunding, the risk-to-yield ratio is very attractive in comparison with other investments such as stocks. On top of that, it has the advantage of low volatility. Although there is still a risk, consider the following tips before you start to invest. They can help you reach your goals while saving you time, energy, and money.
The 7 biggest mistakes new real estate crowdfunding investors make:
- Insufficient research
- Lack of strategy
- Expecting to get rich quick
- Not diversifying
- Over investing
- Choosing the wrong platforms/projects
- Giving up too early
1. Insufficient research
We will start with the most common and serious mistake out there: lack of research. Proper research is a must for all investors, not only in the real estate market.
When people are buying a new product, such as a TV or a mobile phone, they spend hours researching all kinds of information such as online reviews and comparisons. The same applies to real estate investments. Don’t underestimate the power of research and keep in mind that not all platforms do the research for you. And even if they do, spend some time doing a little research of your own. Such independent information can help reinforce whether an investment is one you wish to go ahead with or to avoid.
2. Lack of strategy
Don’t be afraid of making your own investment plan. Doing so will take you a little time but can save you a lot of money.
Have your investment strategy ready before you dive in. Decide exactly what your goals are, how you want to reach them, and if they are achievable. We recommend using SMART objectives (Specific, Measurable, Achievable, Relevant, Time-based), to set your goals and to keep track of them.
Also, don’t be afraid to use other planning tools such as SWOT analysis for investments or create your own investment checklist to make sure the project you are interested in meets your requirements before you proceed.
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3. Expecting to get rich quick
Don’t anticipate becoming a millionaire after investing in a couple of real estate crowdfunding projects. Keep in mind while real estate is a relatively safe industry for investing in, it comes with costs. One of them is the time it takes to start generating regular returns.
You might earn some yields investing in just one or two projects. However, if you want to generate reliable passive income and reach financial freedom, further diversifying your assets and obtaining more knowledge step-by-step is the way to go.
4. Not diversifying
The importance of diversifying can’t be overstated. Do split up your investment portfolio. The best strategy to reduce the risk related to real estate investments is to diversify your portfolio.
Crowdfunding platforms and marketplaces afford investors a greater opportunity to diversify compared to traditional real estate investing and other types of investments. Don’t overlook this advantage, and do use it to its full potential.
Here is an example of how crowdfunding investor, Marco Schwartz, was able to diversify his portfolio across several platforms all around Europe.
5. Over investing
Think about liquidity and do your research before investing your money. Especially if you have limited assets and little or no experience. It’s much safer to start with smaller investments that are spread across several projects and build your way up to larger sums.
Consider the liquidity carefully. Be aware that some platforms offer a secondary market, which allows investors to liquidate their assets quickly, but some platforms don’t. It’s very easy for investors to overestimate their capabilities and end up having their assets locked into a project with limited options to liquidate it.
Don’t forget to think long-term. Have some backup financial resources in case something goes wrong.
“Never test the depth of a river with both feet” (Warren Buffett)
6. Choosing the wrong platforms/projects
If you haven’t already, read our articles How to choose the right platform and How to choose the right deal. If you have, you already know that each platform offers a variety of projects with multiple risk levels and different returns on investments.
There are two main types of real estate crowdfunding investments: debt and equity. Each type has different liquidity and risk levels. Some projects have a holding period of between 6 - 24 months. However, beware others could have holding periods that go up to several years, which could cause you a lot of trouble without access to a secondary market.
Do your homework. Visit their FAQ pages. Research what types of crowdfunding your platform is offering, and what fees and requirements they have. Do they have a secondary marketplace? How long are the holding periods connected to their projects? How frequently will you receive dividends or rental income? Is it monthly or quarterly?
7. Giving up too early
Get ready to be patient. Give yourself time and room for mistakes. All great investors have failed occasionally. Don’t give up when your first investment doesn’t progress as you expected. Rather find out why you failed. What mistakes did you make? Learn from them in order to avoid making the same or similar mistakes next time you invest.