Crowdfunding real estate: What it is and how it works

For many savvy investors, real estate has become a team sport. It’s a practice known as crowdfunding, where investors pool their money with others on online platforms to buy a property or a share of a property they can’t afford alone. And it’s easier to get involved with than you may think.

Real estate crowdfunding can offer access to private real estate investments, but it may come with limited liquidity, complex fees, and potential loss.

Key takeaways:

• Real estate crowdfunding allows you to pool your money with others to invest in otherwise inaccessible residential and commercial property holdings.
• Online platforms provide unique opportunities for both accredited and nonaccredited investors.
• Investments may be illiquid, fees can vary, and returns are not guaranteed.

What is crowdfunding for real estate?

Crowdfunding invites the public to invest in new real estate opportunities. Websites list these opportunities, allowing potential investors like you to get in on the purchase. No need to have an insider’s tip; every pitch is readily available to browse online.

Everyone who’s interested in the project contributes money, creating a sum of cash used to invest in residential or commercial holdings. You can fund projects to develop new housing, retail, or office space. You can also purchase shares in existing holdings.

There are also different types of investment structures. For example, depending on the platform, you might invest in a fund that holds multiple properties, like a real estate investment trust (REIT), or in individual deals tied to a specific property.

Real estate crowdfunding is not the same as buying a rental property directly or buying shares of a publicly traded REIT in a brokerage account. It may offer a lower barrier to entry, but it also comes with different risks, timelines, and levels of control that you’ll want to consider before investing.

Why do investors seek crowdfunding opportunities?

Crowdfunding continues to grow in popularity, and it’s easy to see why. This strategy has a lot to offer investors compared to traditional methods:

• Diversification. You can add new types of assets to your portfolio. If you currently only invest in residential real estate, you can start investing in commercial real estate.
• Lower startup capital. Because you’re going in with others, each investor needs to provide less capital to participate.
• Larger property holdings. More startup capital from multiple investors means access to more expensive projects.
• Lower risk. Risk is shared across investors, but you can still lose money, and outcomes depend on the investment.
• More access. You’ll find more projects online that would otherwise slip past your radar.
• Less responsibility. Property upkeep and maintenance aren’t your responsibility, saving you time and headaches.
• No mortgage. Many crowdfunding investments don’t involve you taking out a mortgage personally, but structures vary by platform and offering.
• No loan guarantee. In many offerings, investors aren’t personally guaranteeing a property loan, but investment terms and risks vary. Make sure to review the terms in the offering documents.

Common downsides can include limited liquidity, platform and sponsor risk, fees that are hard to compare, and less control than owning property directly. Returns aren’t guaranteed, and your money may be tied up for several years depending on the investment. You may want to consider speaking with a financial professional to understand how this type of investment fits your overall financial goals.

How does crowdfunding work in real estate?

If you want to pursue real estate crowdfunding, you’ll begin online on one of the available crowdfunding platforms. Here, you can look over exclusive property investments and decide what fits your financial interests.

Many crowdfunding sites are open to anyone hoping to invest. However, some sites require that you first qualify as an accredited investor. Accredited investors must meet one of two requirements:

• Annual income is generally over $200,000 (individual) or $300,000 (with a spouse or partner) for the prior 2 years, with that expectation continuing.
• Net worth is over $1 million, excluding primary residence.

Some investments are limited to accredited investors, while others may be open to nonaccredited investors depending on the offering type. Knowing exactly where you stand can help narrow down your options. Here’s how it typically works:

• Pick a platform. Choose a site that offers the types of deals you’re interested in and fits your experience level.
• Review offerings and disclosures. Look closely at the property details, risks, fees, and expected timeline.
• Invest the minimum. Meet the required investment amount to participate in the deal.
• Monitor performance/updates. Track the investment's performance with regular updates from the platform.
• Understand when/how you may be able to redeem or exit. Know the timeline and conditions for getting your money back or selling your stake.

Real estate crowdfunding vs. traditional real estate acquisition

New investment options tend to raise a simple question: what’s different here, and does it make sense for you? Real estate crowdfunding has become a popular new investment strategy, but it helps to see how it compares to more traditional approaches.

A side-by-side comparison of traditional real estate acquisition and real estate crowdfunding will help answer this question.

Traditional real estate acquisition

Traditional real estate acquisition is the most common vehicle for investment properties. You may have already done this process if you’ve purchased a home. This involves signing up for a mortgage from a loan provider. You’ll be responsible for covering the down payment and regular repayments for typically the next 15 – 30 years. However, not all properties are financed the same way. Some buyers choose to pay in cash, which can reduce financing costs, but requires a much larger upfront investment.

In addition to the mortgage, you’ll also pay for:

• Property upkeep
• Maintenance
• Utilities
• Annual property taxes

Real estate crowdfunding

Real estate crowdfunding doesn’t involve a mortgage. Rather than going through the process of applying for a loan and repaying it over many years, you can get started with a buy-in, but minimums can range from very low to much higher depending on the platform and offering. If your experience in traditional real estate has been limited to residential houses, crowdfunding will enable you to invest in a broader range of properties, including malls, hotels, offices, and more.

Instead of going through a bank or mortgage lender, you and the other investors will use online financial technology or crowdfunding sites to invest in a real estate investment trust or a similar financial vehicle. REITs own and operate multiple real estate projects, not just the one you’ve invested in.

There are publicly traded and privately held REITs. When crowdfunding, you’ll be dealing with private REITs/nontraded REITs. Unlike publicly traded REITs that you can buy and sell on an exchange, private REITs are typically less liquid and may require you to hold your investment for a longer period.

They tend to pay out dividends, which are regular payments given out to investors. In addition to this ongoing profit, you may also have the option to sell your share early; however, note that this is not a common occurrence.

Real estate crowdfunding sites to explore

Given the recent growth and interest in real estate crowdfunding sites, many firms – including many new startups and market entrants – are competing for your investment dollars. And no two platforms are created equal. Every site will offer its unique feature set, opportunities, potential return on investment, and tools to help you track your investments and their performance.

Real estate crowdfunding is still a relatively new form of investing. It may help to review platform details, disclosures, and user feedback before deciding where to invest.

Compare crowdfunding real estate sites: At a glance

Let’s review some popular or well-established sites that offer access to real estate crowdfunding opportunities.

Fundrise

Fundrise provides a platform for nonaccredited investors to enter real estate crowdfunding at a relatively low buy-in floor. You can get started with as little as $10 through a taxable account, or $1,000 for an IRA. They also offer an easy-to-use online portal to simplify crowdfunding. You can pool money with other investors into REITs involved in:

• Property purchases
• Land purchases
• Real estate development
• Private real estate deals

Fundrise primarily focuses on long-term investments, so you may have your money tied up for years before seeing returns. Think about whether you’re in a good financial position to commit to such a lengthy investment.

RealtyMogul

RealtyMogul offers crowdfunding options for both nonaccredited and accredited investors interested in REITs and individual properties. They vet every posted opportunity  to establish a sense of trust for their listed offerings.

With over $8 billion in property value offered on the platform, RealtyMogul is building a track record aimed at delivering. For accredited investors, 1031 exchanges are available, which help defer capital gains tax from property sales.

Crowd Street

Crowd Street is an accredited-investor-only portal that provides listings for commercial and residential real estate projects. Their investment team applies a due diligence process to every sponsor and investment opportunity. Crowd Street also provides in-depth information for each opportunity, including details on the business plan, financials, return structures, and more.

However, the minimum bid isn’t cheap. At a $25,000 investment floor for many opportunities, you’ll have a significant amount of cash tied up for years. Make sure you can sustain yourself financially during that time.

Willow Wealth

Willow Wealth, formerly known as YieldStreet, is an alternative investment platform that gives investors access to private market opportunities across real estate, private credit, private equity, and more. Investors can choose between individual deals or diversified funds, depending on their goals.

Many offerings on the platform are designed for accredited investors. So, if you want to invest in individual deals, you’ll typically need to meet accredited investor requirements. However, some options, like the Alternative Income Fund, are available to a broader range of investors. For a more hands-off approach, Willow Wealth offers Willow 360, a managed portfolio that automatically allocates your investment with a minimum investment of $25,000.

EquityMultiple

Accepting only around 5% of investment opportunities, EquityMultiple brings to the table a platform of vetted, privately managed commercial holdings. On their website, you’ll find a range of commercial real estate investments across different property types, including hotels, industrial, multifamily, and more.

EquityMultiple is for accredited investors only, but with a $5,000 investment minimum on many properties, it’s an easier way to enter the market if you have the capital.

How to get started with crowdfunding in real estate

As you can see, there are plenty of options when it comes to real estate crowdfunding platforms. But before you sign up, you may want to take the following actions:

• Look into how online real estate crowdfunding can potentially help or hinder your investment portfolio.
• Compare platforms to see which offers the best services, fee structures, terms, investment opportunities, and classes for your individual circumstances.
• Read firsthand member opinions.
• Decide what amount you’re comfortable investing, and keep in mind that you may not be able to access it quickly and could lose money.
• Determine how long you could manage without access to invested capital.
• Consider your expectations for a return on your investment.
• Pick a real estate and property holding that interests you.
• Gather the documents needed to apply as an accredited investor if you meet the requirements.
• Consider talking with a tax professional about potential tax implications.
• Read the offering documents and risk disclosures before investing.
• Review liquidity terms carefully, such as redemption windows, fees, and limits.
• Understand how the platform makes money, including fees at the platform level and investment level.

FAQ about crowdfunding real estate

Below are some of the most common questions about real estate crowdfunding.

How can I start crowdfunding in real estate?

Start by comparing platforms’ minimums, fees, liquidity terms, and eligibility requirements, then review offering documents before investing. Read reviews, but remember that only you can determine if a platform aligns with your goals.

How much money do I need to start crowdfunding a real estate project?

Minimums vary widely by platform and offering, from low minimums on some funds to $5,000, $10,000, or more for certain deals. Make sure to verify minimums before investing.

Is it easy to make money from crowdfunding real estate?

Signing up for a platform is easy, but there’s no guarantee that you’ll make a lot of money, a little, or lose your investment. All investments carry risk, and you should set realistic limits on what you can afford to put into the marketplace. Also, many investments are long-term and may be illiquid; performance can vary by market and project.

What’s the difference between accredited and nonaccredited investors?

The difference set by the Securities and Exchange Commission is as follows: Accredited investors have an annual income of over $200,000 (individual) or $300,000 (with spouse or partner) for the prior 2 years, with the expectation to continue, or a net worth of over $1 million, excluding the primary residence. They’ll get extra access to real estate opportunities. Nonaccredited investors don’t meet this income benchmark and have limited opportunities.

The bottom line: Crowdfunding has changed how people invest in real estate

Real estate crowdfunding has changed the game for investors. Instead of going it alone, you can pool your capital with investors around the country to buy unique residential and commercial property holdings that would otherwise be out of reach.

Even though technology continues to change real estate, the basic playbook remains the same. You need to research, compare, and prepare for any investment venture. Before investing, compare fees and liquidity terms, read disclosures, and remember that returns are not guaranteed.

Remember, crowdfunding is just one strategy to grow along with the market. Learn more about how to start investing in real estate.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.