Is real estate crowdfunding dangerous?
Aren’t annual returns of 6% or 10% a bit suspicious?
I’m worried about loss of principal or the operating company going bankrupt…
Many people who have become interested in real estate crowdfunding (real estate crowd-funding) may be feeling these kinds of anxieties.
I have personally experienced both physical real estate investment and real estate crowdfunding, and I believe that being suspicious and thinking, “Could this be a scam?” is by no means a bad thing when it comes to investing.
Rather, what is important is what comes after that.
In conclusion, while real estate crowdfunding is an investment mechanism operated based on law, there is no guarantee of principal, and losses can occur.
In other words,
✅ Real estate crowdfunding itself is not a scam
✅ There are risks such as loss of principal and delays in redemption
✅ Risks vary depending on the operating company and the fund
is what this means.
In this article, I will explain in an easy-to-understand manner, from the perspective of an experienced investor, why real estate crowdfunding is said to be dangerous or suspicious, as well as check points to avoid failure.
Is real estate crowdfunding dangerous? Explaining from the conclusion!
Real estate crowdfunding is an investment that collects funds from multiple investors and aims to distribute profits through the operation or sale of real estate.
While the ease of starting with a small amount is attractive, as long as it is an investment, risks cannot be avoided.
First, let’s correctly understand the dangers.
Real estate crowdfunding itself is not a suspicious mechanism
General real estate crowdfunding is operated based on rules such as the Real Estate Specified Joint Enterprise Act.
To conduct a real estate specified joint enterprise, permissions and registrations corresponding to the business content are required.
In other words, it does not mean that just anyone can freely collect money from investors.
However, just because a company has received permission does not mean that the safety of the investment is guaranteed.
These two points need to be considered separately.
You should understand that there is no guarantee of principal.
Real estate crowdfunding is different from bank deposits.
Just because you invested 100,000 yen does not mean that 100,000 yen will definitely be returned to you.
The invested principal may decrease due to factors such as a decline in real estate prices or failure to sell the property.
If you are actually going to invest, you should consider not only the possibility of making a profit but also the possibility of incurring a loss.
Judge whether it is dangerous on a fund-by-fund basis.
What I think is important is not to judge real estate crowdfunding as a whole.
Even within the same service, the investment target, operation period, and fundraising method differ depending on the fund.
For example,
・Rental apartments in the city center
・Regional residential development
・Commercial facilities
・Hotels and lodging facilities
all have different profit mechanisms and risks.
It is important to look at individual funds rather than assuming that a service is safe just because it is famous.
Why is real estate crowdfunding said to be suspicious?
There are several reasons behind the perception that real estate crowdfunding is suspicious.
In particular, high yields and the complexity of the operational structure tend to lead to anxiety.
High yields such as 6% or 10% per annum are too attractive
Compared to bank deposits, the projected yields of real estate crowdfunding feel attractive.
Some funds even offer annual yields exceeding 10%.
“If it generates that much profit, isn’t there a catch?”
It is natural to think that way.
However, just because the yield is high does not necessarily mean it is suspicious.
This is because there are projects that aim for large profits through real estate development or sales.
On the other hand, projects that can expect high returns may have corresponding risks.
💡 Rather than just the height of the yield, how that profit is generated.
This is what I want to check.
The operational status of invested money is difficult to see
With physical real estate investment, you can check with the management company about the property you own or visit the site yourself.
However, in real estate crowdfunding, the operator handles the management.
Therefore, investors are basically not directly involved in the operation.
If information disclosure is limited, it can be difficult to judge whether the operation is going smoothly.
For my part, I want to place importance not only on the information at the time of recruitment but also on the reports after the operation begins.
There are many reviews on social media and campaigns
In real estate crowdfunding, you also see campaigns where you can get Amazon gift cards for new registrations or initial investments.
The mere existence of bonuses does not make it suspicious.
However,
It is dangerous to believe only advertisements that say things like,
“You are guaranteed to profit just by signing up!”
or “High returns and safe!”
Social media reviews and rankings may sometimes include posts made for advertising purposes.
Use bonuses and reviews only as a reference, and ultimately, you should judge the investment conditions yourself.
5 Risks to Watch Out for in Real Estate Crowdfunding!
The risks of real estate crowdfunding are not just about the possibility of losing money.
You also need to be careful about whether your invested money will be returned as scheduled and about the management status of the operating company.
Here are five typical risks.
1. Risk of principal loss
If real estate operations or sales do not proceed as planned, there is a possibility of principal loss.
Even in funds that adopt a priority-subordinated structure, if losses exceed a certain range, it will affect investors.
The mechanism of principal loss is explained in detail in another article.
Related article:
Does principal loss occur in real estate crowdfunding? Cases where losses occur and points to note
2. Risk of delayed redemption
Even if the investment period is set to 6 months, it does not necessarily mean that the principal will be returned after 6 months.
The investment period may be extended for reasons such as the inability to find a buyer for the real estate.
Click here for how to think about cases where redemption delays occur.
Related article:
What if a redemption delay occurs in real estate crowdfunding? Causes and points to check before investing
3. Risk of the operating company going bankrupt
In real estate crowdfunding, the creditworthiness of the operating company is just as important as the investment target itself.
If the company’s financial situation deteriorates, it may affect operations and redemptions.
How are investors’ funds managed, and what is the financial status of the operating company?
These are points you should also check.
4. Risk of being unable to cancel midway
In principle, many real estate crowdfunding funds do not allow for free cancellation during the investment period.
Even if you suddenly need living expenses, there is no guarantee that you can withdraw your investment immediately.
Therefore, it is fundamental to invest using surplus funds that you do not plan to use in the near future.
5. Risk of falling below the expected yield
Even if you invest in a fund with an 8% annual return, you are not guaranteed to earn an 8% profit.
Distributions may decrease due to a decline in rental income or a drop in sale prices.
The expected yield is merely a figure based on a business plan.
It is important to understand that it represents the profit you can aim for if things go as planned.
Points to identify suspicious real estate crowdfunding!
So, how can you avoid high-risk services and funds?
If it were me, I would check at least the following three things.
Check the operating company’s permits, registrations, and business track record
First, investigate which company is operating the service.
✅ Does it have the necessary permits and registrations for the business?
✅ Are the operating company’s location and representative clear?
✅ Does it have a track record of past offerings and operations?
✅ Are redemption records and operational status disclosed?
However, even for companies that have been established for a long time or have an extensive track record of redemptions, future safety is not guaranteed.
For more information on how to evaluate operating companies, please see this article.
Related article:
How to evaluate real estate crowdfunding operating companies? Checklist for judging reliability
Check the real estate and revenue plan for the investment
In addition to the fund’s yield, information about the investment target is also important.
For example:
・Location of the property
・Usage and age of the real estate
・Revenue plan based on rental income or sale
・Investment period
・Mechanism of fundraising
and so on.
In particular, for funds that rely mainly on capital gains from sales, it is important whether the real estate can be sold at the projected price.
If information is insufficient and you cannot make a judgment, I think it is fine not to force yourself to invest.
Be cautious of solicitations claiming you will “definitely make a profit”
This is not limited to real estate crowdfunding.
In the world of investment,
⚠️ It is safe because the principal is guaranteed
⚠️ You will definitely make a profit
⚠️ This is a limited-time offer, so invest quickly
If you hear words like these, you should be cautious.
In particular, you need to be careful of fraudulent solicitations by unlicensed or unregistered operators, or businesses that do not actually exist.
No matter how attractive the conditions may seem, it is important to have the courage to pass on an investment if you are not convinced.
Investment methods to minimize the dangers of real estate crowdfunding!
As long as it is an investment, it is impossible to completely eliminate risk.
However, it is possible to manage risk depending on how you use your money and how you choose your investments.
Start with a small amount and gain experience
If it is your first time with real estate crowdfunding, there is no need to invest a large amount from the start.
Since there are funds you can participate in from around 10,000 yen, there is a way to learn the mechanism with a small amount.
Actually investing and learning the flow of operation reports, distributions, and redemption is also a valuable experience.
Of course, do not forget that even with a small amount, there is a possibility of a loss of principal.
Diversify across multiple funds and operating companies
Rather than concentrating funds in one fund, dividing them among multiple projects can reduce the risk of depending on a specific project.
For example, instead of putting 300,000 yen of investment capital into one project, you can divide it among multiple operating companies or properties.
However, diversification cannot prevent a decline in the entire real estate market or the simultaneous failure of multiple projects.
Diversified investment is not a panacea either.
Prioritize investment conditions over campaigns
This is a point I personally want to be very conscious of.
Real estate crowdfunding sometimes offers advantageous campaigns.
However, just because you can get a 5,000 yen bonus, there is no need to force yourself to invest in a high-risk fund.
For me, I think in this order:
1. Reliability of the operating company
2. Profit plan and risks of the fund
3. Investment amount and investment period
4. Campaign benefits
I consider them in that order.
Campaigns are just a bonus when you find an investment destination you are satisfied with.
I think this level of distance is just right. 😊
Frequently asked questions about the dangers of real estate crowdfunding!
Finally, I will summarize the questions that beginners are likely to have regarding the safety of real estate crowdfunding.
Q. Is real estate crowdfunding a scam?
Real estate crowdfunding itself is not a scam.
It is an investment business operated based on law, but you need to be careful of fraudulent solicitations using unlicensed/unregistered operators or fictitious investment projects.
Q. What happens if there is a loss of principal in real estate crowdfunding?
There is a possibility of losing part, or in some cases, all of your invested principal.
The method of bearing losses depends on the fund’s contract terms and operational status.
Q. Is the priority-subordination structure safe?
The priority-subordination structure is a mechanism where the operator bears a certain amount of loss first.
However, if losses exceed the scope of the subordinated investment, the investor’s principal may also decrease.
It is not a principal-guaranteed system.
Q. Can beginners start real estate crowdfunding?
Many services allow you to start with a small amount, making it an accessible system for beginners.
However, especially if you have little investment experience, it is important to start only after understanding the mechanism and risks, and without using funds needed for daily living.
Summary | Choose Real Estate Crowdfunding by Understanding the Risks!
Real estate crowdfunding is not necessarily a dangerous or suspicious investment.
On the other hand, it is not an investment with guaranteed safety either.
Here is a summary of the key points.
✅ Real estate crowdfunding is an investment mechanism based on law
✅ There are risks of principal loss and redemption delays
✅ The creditworthiness of the operating company is also important
✅ Do not decide on an investment destination based solely on high yields
✅ Even with small-amount and diversified investments, the risk is not zero
I have personally experienced both physical real estate investment and real estate crowdfunding, and I believe the most important thing in investing is not to imagine only the ‘case where a profit is made’.
Even if the yield is attractive, it is meaningless if the principal is not returned.
Conversely, if you properly understand the risks, real estate crowdfunding becomes one of the options for participating in real estate investment with a small amount of money.
“Stop because it’s dangerous” or “Start because it seems profitable”
Instead of those two choices, understand the risks and returns and make your own judgment.
I would like to value that way of engaging with investment. 😊
Related article:
How to choose a real estate crowdfunding fund! 7 points to check besides yield
