When we hear about “startup investing,” we generally think of the big paydays that occur when an early-stage company is acquired or goes public – like Google, Facebook or Tumblr.
1. This One is For Real
You’re probably familiar with real estate as an asset class – perhaps you even own some already. But the real estate investments available on crowdfunding portals are a bit different than your current options. Let me explain…
Generally speaking, individual investors looking for real estate have a few options:
- Buy actual real estate – This is difficult to do: it’s expensive to put down payments on multiple properties, and real estate is time consuming to manage. That said, historically, it’s been a good investment. Real estate has outpaced inflation, and because it’s not highly correlated to the stock market (i.e., when the market zigs, the housing market can zag), it can provide protection for your overall portfolio.
- Publicly Traded REITs – Publicly-traded REITs (or Real Estate Investment Trusts) allow you to buy and sell shares of real estate portfolios through a stock exchange like the NYSE or NASDAQ. This allows you to own multiple properties with a small amount of capital. The biggest downside here is that publicly-traded REITs are highly correlated to the stock market – meaning, if the market drops, so might the value of your REIT.
- Non-Traded REITs – This option offers the best of both worlds. You can own a portfolio of real estate properties without committing a large amount of capital,and the investment doesn’t trade with the market. However, the fees to get involved are far higher than tradable REITs.
Target yields are generally between 5% to 10%, and there’s the potential for capital appreciation as well.
This is a strong alternative to non-traded REITs and a great way to diversify your income investments in a cost-efficient way.
One of the most interesting aspects to equity crowdfunding is that it can offer you exposure to new asset classes – the sorts of investments that are far less known to the majority of retail investors.
For example, most folks are aware that they can invest in sectors like clean energy via publicly-traded stocks or ETFs. But did you know that you could earn income by loaning money directly to clean energy and solar projects?
Basically, developers set up what’s called a “Special Project Entity” (or “SPE”) in order to build, for example, a new solar project. Their ultimate goal is to sell the power the project generates to the local utility. But first the SPE needs seed capital for construction and build-out purposes.
Although these investments offer attractive returns (4% to 7% yields), historically they were generally difficult to find and fund as an individual investor.
But on crowdfunding platforms like Mosaic, you can easily find and evaluate solar projects. Mosaic users have already funded millions of dollars worth of solar projects without a single default or late interest payment.
Mosaic should be posting new opportunities soon…
3. Peer-to-Peer Loans
One of the biggest crowdfunding markets to date is focused on personal loans – and these can pay substantial yields to lenders.
There are many sites catering to this market, but the biggest is LendingClub.
Since its founding in 2007, LendingClub has facilitated over $3 billion in loans on its platform, and is currently issuing $250 million in new loans per month.
Borrowers come to the site when they want to pay down high-interest credit cards, or to make a sizable purchase like a new car.
A typical loan might be $25,000 or $30,000 (LendingClub limits loans to $35,000). Then “the crowd” (many individuals like us) contributes small amounts – maybe $10, $20, $100 – towards the $30,000 loan. The borrower pays us back over time, plus interest. Everything is managed by LendingClub.
Gross yields before fees and defaults have typically ranged from 9% to 14% depending on the credit worthiness of the borrower. The 36-month average is 12.48% — try finding that in your local bank!
Although the average FICO score of a LendingClub borrower is high – currently it’s 703 – there is still the risk of late payments and defaults. Because of these risks, many professionals (including LendingClub) recommend creating a diversified loan portfolio of 200 to 300 loans. For those willing to invest larger amounts, LendingClub also provides a managed service, as well as a fund.
You can learn more on their website »
More to Come…
As crowdfunding continues to mature, we believe more opportunities will emerge to earn attractive financial returns – from investing in high-growth startups for capital appreciation, to investing in real estate or loans to generate current income.
We’ll keep you abreast of these opportunities, as we believe crowdfunding has the power to change the face of finance in this country.
Let us know if you have questions about any of the opportunities and assets we discussed today. You can email us directly at email@example.com.