Understanding and mitigating risks in real estate crowdfunding

As with most investing activities, real estate crowdfunding carries the principle of risk-return tradeoff, in which risk increases with the rise of possible returns. In other words, risk is the price of desire and ambition to magnify the profit potential.

If larger amounts of money were invested in a venture, in view of making bigger profits, there would be substantial losses should the venture fail. And the more ambitious the project, the more likely it can tank due to factors like mismanagement. Inversely, prudent investing will not account for big losses, but will not lead to huge returns either.

Basically, investors must assess themselves for the following:

  • Risk exposure
  • Risk tolerance.

Risk exposure. Even with legal and moral safeguards in place, investors are inevitably exposed to the possibility of losing their placements and incurring liability. This is due to a combination of reasons, some of which are tied directly to projects in the portfolio, or to external factors like force majeure, political instability, or an economic bubble. A good investor is one who accepts this exposure, yet makes sound decisions based on indicators leading to a project’s whopping success or eventual failure.

Risk tolerance. Each investor has a unique perspective on investing. Where some are financially and emotionally ready to lose the entire investment to an ambitious project gone bust, others may not be as willing and capable to take as much gamble. Thus, knowing where one stands, and leveraging investments on that position, can spell the difference between overall success and outright failure in investing.

Risks in real estate crowdfunding

Although real estate crowdfunding makes risk spreading, investment diversification, and “putting eggs in different baskets” a lot easier, investors are still urged to keep the risk-return tradeoff in mind. They must learn to understand, first and foremost, the challenges and threats of funding projects. This is in order for them to build a strategy in mitigating these and, ultimately, in achieving the best possible outcomes.

Moreover, crowdfunded real estate is said to belong to a high-risk asset class, especially that it is practically the online-platform administrator’s word against anyone else’s. This is why investors need to exercise prudence and due diligence at all times in order to attain their profit goals.

The HBR portal, for instance, provides full disclosure on its corporate operations and on every project in the portfolio. While it does not give individualized investment advice, the site contains all resources that investors need in planning their strategy and maximizing the returns on their investment.

On top of that, Humming Crowd Realty and the HBR portal are watched closely by the UAE government, inasmuch as the Web-based investment gateway is new in the Middle East. The evolving policies and best practices are seen to provide the basis for UAE-wide laws and regulations, as well as regional standards.

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