Real estate crowdfunding: How it works and what to know

Real estate crowdfunding is a way for investors to pool their money on an online platform to buy a property, or a share of one, that they couldn’t afford alone, in return for income or profits. Platforms typically list deals such as apartment buildings, commercial properties, and development projects, and you can invest as an owner (equity) or as a lender (debt). And it’s easier to get involved with than you may think, since you don’t have to buy, manage, or maintain a property yourself.

Crowdfunding can give you access to private real estate investments, but it may come with limited liquidity, complex fees, and the potential for loss. Some platforms also limit participation to accredited investors, so your options may depend on your income and net worth.

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 real estate crowdfunding?

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.

Equity vs. debt real estate crowdfunding

A key factor to consider when looking into crowdfunding is whether a deal you’re looking at is offering equity or debt.

Equity crowdfunding means you’re buying a stake in the property itself. You own part of the property and receive a share of the profits it generates, such as through rental income or from a future sale of the property. This structure works much like a real estate partnership, with a sponsor managing the deal and investors providing the capital.

Debt crowdfunding, by comparison, means you’re lending money to someone who is buying a property. Some debt deals fund short-term loans, such as hard money loans, that borrowers use to buy or renovate property. You don’t get a stake in the property itself but are due regular payments until the loan is paid off. You earn a profit from the interest you receive as part of your payments.

Real estate crowdfunding vs. REITs

Real estate crowdfunding and REITs both offer investors exposure to real estate, but function very differently.

With crowdfunding, you have the opportunity to invest in specific real estate deals or properties. REITs, by contrast, are investment funds that own a wide range of properties, so you don’t get to make your own selections about specific properties to invest in.

REITs work similarly to exchange-traded funds (ETFs) in that they trade on the stock market and you can easily buy and sell shares. The REIT’s manager handles selecting properties to invest in and manage, and you can choose a REIT that focuses on any type of property, such as residential or commercial.

Crowdfunded real estate offers far more control in that you select exactly which properties to invest in. However, it can be harder to sell your stake in a real estate crowdfunding project, and crowdfunding may be harder for some investors to access due to many crowdfunding sites requiring that you be an accredited investor.

How does real estate crowdfunding work?

Real estate crowdfunding gives investors the opportunity to invest in a property without having to purchase the entire property. Instead, many investors buy a stake in the property, making real estate investment more affordable.

The process for real estate crowdfunding looks roughly like this:

• 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.

Two key things to know when picking a platform are whether it caters to accredited or nonaccredited investors and what its minimums, limits, and holding periods are.

Accredited vs. nonaccredited investors

Some crowdfunding platforms limit access only to accredited investors. According to the Securities and Exchange Commission (SEC), to qualify as an accredited investor, you must meet any of these requirements:

• Have a net worth exceeding $1 million when excluding the value of your primary residence (either single or with a spouse or partner)
• Have an annual income of more than $200,000 alone or more than $300,000 with a spouse or spousal equivalent in each of the past 2 years, with a reasonable expectation of reaching the same level this year
• Be an investment professional in good standing holding a Series 7, Series 65, or Series 82 license
• Be a family client of a family office that qualifies as an accredited investor
• Be a director, general partner, or executive officer of the company selling the securities
• For investment in private funds, be a knowledgeable employee of that fund

Anyone who does not meet one of the above requirements is a nonaccredited investor.

According to the SEC, the idea behind accredited investors is that people who meet at least one of those requirements are generally more “financially sophisticated and … can sustain risk of loss,” so the investments restricted to this group can have fewer protections than other securities.

This means that sites that cater to nonaccredited investors can offer riskier or more unusually structured deals.

Investment minimums, limits, and holding periods

Other key considerations include investment minimums, limits, and holding periods.

There’s little point in choosing a platform that has high minimum investments if you can’t afford or don’t want to put a large amount of money into a single deal. Similarly, if you want to make a larger investment, you should avoid platforms with low limits.

Holding periods refer to how long it takes before you can sell your stake and get your investment back. Choose a platform with a holding period that aligns with your financial goals.

Pros and cons of real estate crowdfunding

Real estate crowdfunding offers opportunities to invest in high-cost real estate deals that many people otherwise wouldn’t be able to invest in, but there are risks and drawbacks to consider.

Benefits of real estate crowdfunding

Some benefits of real estate crowdfunding include:

• Diversification. If you don’t already have exposure to real estate, crowdfunding gives you a chance to add real estate to your portfolio. If you currently only invest in residential real estate, you can start investing in commercial real estate. You can also diversify your investment across multiple deals.
• Less responsibility than buying investment properties. Buying a single investment property means you’re responsible for a lot of things, such as finding tenants, handling maintenance, and more.
• Lower minimum investments. With crowdfunding, you can often invest just a few hundred dollars in a single deal compared to buying individual properties, which can cost hundreds of thousands of dollars.
• Vetted investment opportunities. Crowdfunding sites help do some due diligence on your behalf, so you don’t have to wade through a huge number of bad deals when trying to invest.

Risks of real estate crowdfunding

Some of the risks of real estate crowdfunding include:

• Long holding periods. With crowdfunding, your investment will be illiquid, and you may need to wait years before you can get your capital back.
• Platform risk. If the platform you invest through goes bankrupt or otherwise shuts down, you may face risks such as delaying your chance to sell your investment or losing your investment entirely.
• Management fees. Many crowdfunding sites charge management fees that could eat into your returns.
• Lack of control. Typically, you won’t have significant input into how investments are managed, so crowdfunding isn’t a good fit if you want a hands-on investment option.

Real estate crowdfunding vs. traditional real estate investing

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.

Real estate crowdfunding lets investors put smaller amounts of money into multiple real estate deals. If you have $50,000 to invest, you might opt to put $10,000 into each of 5 different real estate investments. You also don’t have to take an active role in the day-to-day management of the investments. This makes crowdfunding a form of passive real estate investing.

Traditional real estate investing is far more hands-on because you’re responsible for finding the properties to invest in and will often take on duties such as maintenance and repairs, finding tenants, and handling the collection of rent. That can be a benefit if you like to be hands-on, but it’s something to keep in mind.

It also can be harder to diversify your investment in traditional real estate because you need to commit more money to a single deal to cover things like a down payment and closing costs. However, you will also get the benefit of leverage, meaning you can borrow money to buy a home, which could let you make larger investments with less capital.

Also keep in mind that traditional real estate investing has more ongoing costs, such as maintenance, paying the mortgage, and taxes. With crowdfunded real estate, you typically don’t have to put in more money to cover these costs as they’re handled by the platform managing the investment; they’re just taken out of your profits when you get your investment back.

Real estate crowdfunding platforms to compare

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 real estate crowdfunding sites at a glance

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

Best for beginners: Fundrise

Fundrise can be a good site for beginners because it offers opportunities to nonaccredited investors and very low minimum investments. You can get started with as little as $10 through a taxable account, or $1,000 for an IRA.

It also offers 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.

Best for experienced investors: CrowdStreet

CrowdStreet may be better for experienced investors due to the higher buy-in of $25,000 and the requirement that you be an accredited investor.

The site’s portal provides listings for commercial and residential real estate projects. Its investment team applies a due diligence process to every sponsor and investment opportunity. CrowdStreet also provides in-depth information for each opportunity, including details on the business plan, financials, return structures, and more.

Other real estate crowdfunding companies to review

Some other platforms to consider include RealtyMogul, which caters to both nonaccredited and accredited investors, Willow Wealth (formerly YieldStreet), which offers real estate crowdfunding, private credit, and private equity to accredited investors, and EquityMultiple, which offers accredited investors access to carefully vetted real estate deals.

How to choose a real estate crowdfunding platform

If you’re trying to decide which crowdfunding platform is right for you, follow these steps.

Compare minimums and fees

First, look at each platform’s minimum investment and fee structure.

There’s little point in choosing a platform where the minimum investment is so high you won’t be able to afford to make an investment, so make sure you choose one with a low enough minimum.

Fees are also key because they reduce your potential profits. It’s generally better to look for a platform with lower fees than higher ones.

Review liquidity and redemption terms

The liquidity and redemption terms offered by each platform are also important. Some platforms make you hold your investment for a minimum period of time, such as 10 years, before you can get the investment back, while others offer more ways to sell your stake early.

Whether your goals for investing are long or short term will impact the platform you choose.

Check investor eligibility and investment types

If you’re not an accredited investor, make sure to choose a site that allows nonaccredited investors to invest in crowdfunding deals. Also consider whether a platform offers equity- or debt-based investments, as your goals and risk tolerance will determine which you want to invest in.

How to get started with real estate crowdfunding

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

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

Is crowdfunding real estate a good idea?

Whether crowdfunding real estate is a good idea varies from person to person. If you want exposure to real estate and can handle the risk and low liquidity, it might be a good fit for you. For others, it may be a poor idea.

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, and performance can vary by market and project.

Which crowdfunding platform is the best for real estate?

There is no single crowdfunding platform that is the best. It all depends on factors such as whether you’re an accredited investor, the money you have to invest, the fees, and your liquidity needs.

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

Minimum investment requirements can vary widely from one platform to another and can range from small amounts to thousands of dollars. Be sure to check each platform’s minimums before signing up.

Can I use retirement accounts to invest in real estate crowdfunding?

Yes, some crowdfunding platforms support using retirement accounts such as IRAs for investing in real estate crowdfunding. Be sure to check with each platform before signing up if you want to use a retirement account to invest.

Are real estate crowdfunding investments insured like bank accounts?

No, real estate crowdfunding investments are not insured like a savings or checking account. When investing, you can face the risk of your investment performing poorly and losing value.

How do taxes work with real estate crowdfunding?

Real estate taxes can be complex, and that is similarly true with crowdfunding. The precise details of how taxes work can vary from deal to deal and platform to platform, so consider hiring a tax professional who can assist you with understanding the tax implications of potential investments. For comparison, owning rental property directly comes with its own tax benefits.

The bottom line

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. You can also browse more real estate investing tips.

If you’d like to invest by purchasing your own property, you can reach out to Rocket Mortgage and get preapproved.