Crowdfunding real estate: What it is and how it works

For many savvy investors, real estate is becoming 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.

Key Takeaways:

• Real estate crowdfunding allows you to pool your money with others to invest in otherwise inaccessible residential and commercial property holdings.
• This strategy can help diversify your portfolio with less effort than traditional real estate investing.
• Online platforms provide unique opportunities for both accredited and nonaccredited investors.

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. In addition, you can purchase shares in existing holdings.

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. You shoulder the burden with other investors.
• 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. Crowdfunding skips the mortgage application and repayment plan.
• No loan guarantee. You won’t have to guarantee a loan in the event of default.

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 investment 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 over $200,000
• Net worth over $1 million

Think of real estate crowdfunding as another tool in your financial toolbox. It’s a great way to balance a portfolio of stocks, bonds, and other equity holdings.

Real estate crowdfunding vs. traditional real estate acquisition

With any new development in investing, it’s important to take a moment and ask what sets it apart from more traditional pathways. What makes crowdfunding such a popular new investment strategy?

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.

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 of only a few hundred dollars. 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 privately traded REITs. 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.

Best real estate crowdfunding sites

Given the recent boom, interest and publicity around 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 suite of tools to maintain and keep track of your investments.

Remember, real estate crowdfunding is a relatively new form of investing. It pays to research and dive into user comments and feedback associated with each online vendor before investing.

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. They 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

To date, Fundrise has distributed over $431 million to its investors. However, with a focus on long-term investments, you may have your money tied up for years before seeing returns. Think about if you’re in a good financial position to commit to such a lengthy investment.

RealtyMogul

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

With over $1.2 billion pooled into 40,000 investments nationwide, 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 providing listings for commercial and residential real estate projects. After their vetting process, only 5% of the deals they review end up on the platform. They have raised over $4.4 billion and currently list over 800 real estate projects for their members to pursue.

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.

Yieldstreet

For investors looking to access a variety of alternative investments not found anywhere else, Yieldstreet offers a wide selection. Along with residential and commercial property holdings, you can find venture capital, art, and cryptocurrency on their user-friendly platform, which has already returned over $3.3 billion to its members.

Not everyone is ready to invest long-term, so Yieldstreet offers shorter investment opportunities that begin at 6 months. While nonaccredited investors can put money toward the Yieldstreet Alternative Income Fund, access to all of Yieldstreet’s offerings is designed for accredited investors only.

EquityMultiple

Generating over $478 million for over 59,000 investors nationwide, EquityMultiple brings to the table a platform of vetted privately managed commercial holdings. On their website, you’ll find investment properties such as:

• Office spaces
• Assisted living facilities
• Hotels
• Data centers

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 help or hinder your investment portfolio.
• Compare platforms to see which offers the best services, fee structures, terms, investment opportunities, and classes.
• Read first-hand member opinions of various crowdfunding websites.
• Calculate what you can safely afford to invest.
• Determine how long you could handle not having access to invested capital.
• Figure out your expectations when it comes to a return on your investment.
• Pick a real estate and property holding that interests you.
• Gather the needed documents to apply as an accredited investor.
• Hold a meeting with an accountant to get a better perspective on tax implications.

FAQ

With all that said, there’s still a lot to discuss about real estate crowdfunding. Let’s go over some common questions to help you choose the next step.

How can I start crowdfunding in real estate?

Begin by researching the different platforms, what they offer to push your portfolio forward, and what fees they add that may set you back. 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?

If you can cover $500 – $1,000 without breaking the bank, several platforms will have options for you to invest. However, many platforms have investment minimums set at $5,000, $10,000, or even higher.

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.

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 or a net worth of over $1 million. They’ll get extra access to real estate opportunities. Nonaccredited investors don’t meet this income benchmark and have limited opportunities.

The bottom line: The basics of crowdfunding 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 is changing the field of real estate, the basic playbook remains the same. You need to research, compare, and prepare for any investment venture. Online opportunities have gotten more exciting and diverse over the years, and it looks like they’ll continue to grow.

Remember, crowdfunding is just one strategy to grow along with the market. Learn more about your options when it comes to real estate investments.