Do I own a part of the property through my investment?
Debt v. Equity – They Aren’t the Same
Real estate crowdfunding has two subgroups – debt and equity. In the case of a crowdfunded real estate debt investment, the participating investor is acting as a lender for rather than an owner of the property. As such, the investor is entitled to monthly interest as well as a return of any unpaid principal at maturity but does not receive the benefit of property appreciation. The investment is also secured by the property and if the borrower fails to pay interest and principal when due, the investor has recourse and can recover his/her investment through a foreclosure. Conversely, with an equity investment, the investor is an owner of the property, albeit an indirect one. As such, the investor is not secured by the real property and has little recourse if the property investment turns out to be a bad one. However, this additional risk also means the investor is entitled to a greater return, which is usually achieved through property appreciation and realized when the property is eventually sold. To date, approximately 20% of crowdfunded real estate investments have been structured as debt with 80% structured as equity.
You Don’t Really Own Real Estate
Third, investing in a crowdfunded real estate investment does not actually make you an owner of real estate. Rather, you become a member of a Limited Liability Company that in turn holds title to real property (in the case of equity) or makes a loan secured by real property (in case of debt). Your ownership in the LLC is considered personal property rather than real property and your right to share in the income generated at the property is set forth in a governing document for the LLC called an Operating Agreement.
Debt v. Equity – They Aren’t the Same
Real estate crowdfunding has two subgroups – debt and equity. In the case of a crowdfunded real estate debt investment, the participating investor is acting as a lender for rather than an owner of the property. As such, the investor is entitled to monthly interest as well as a return of any unpaid principal at maturity but does not receive the benefit of property appreciation. The investment is also secured by the property and if the borrower fails to pay interest and principal when due, the investor has recourse and can recover his/her investment through a foreclosure. Conversely, with an equity investment, the investor is an owner of the property, albeit an indirect one. As such, the investor is not secured by the real property and has little recourse if the property investment turns out to be a bad one. However, this additional risk also means the investor is entitled to a greater return, which is usually achieved through property appreciation and realized when the property is eventually sold. To date, approximately 20% of crowdfunded real estate investments have been structured as debt with 80% structured as equity.
You Don’t Really Own Real Estate
Third, investing in a crowdfunded real estate investment does not actually make you an owner of real estate. Rather, you become a member of a Limited Liability Company that in turn holds title to real property (in the case of equity) or makes a loan secured by real property (in case of debt). Your ownership in the LLC is considered personal property rather than real property and your right to share in the income generated at the property is set forth in a governing document for the LLC called an Operating Agreement.
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