Real Estate Crowdfunding: What It Is And How It Works
Scott Steinberg8-minute read
February 10, 2021
Real estate crowdfunding is one of the hottest new ways to diversify your financial portfolio today. It’s popular with investors of all ages and interests. Crowdfunding allows you to pool your money online with others to purchase property (or a share of property) as a group, and offers a compelling way to diversify your assets by tapping into real estate investments. In essence, real estate crowdfunding makes it possible to grow or build your wealth and get started in the world of property ownership and rental with minimal upfront investment. Here, you’ll learn more about real estate crowdfunding as a form of online investment and handy way to build or grow your financial holdings, as well as several of the best crowdfunding websites on the Internet to check out.
What Is Real Estate Crowdfunding
As seminal book “The Crowdfunding Bible” explains, crowdfunding refers to the process of asking the general public to contribute money or startup capital to help fund new ventures. Using this form of online fundraising, in which open calls to potential investors are posted on websites alongside prospective investment opportunities, concepts can be pitched straight to everyday Internet users. These individuals, who contribute to a pool of capital that is collectively sourced from others with similar interests, can provide a means of financial backing for current or prospective real estate investments. Such opportunities can take the form of residential or commercial holdings, and include either the development of new housing, retail, or office space, or partial ownership in a share of existing holdings.
Reasons that individuals may be interested and exploring in these types of real estate opportunities include:
- Chance to diversify assets and investment portfolio holdings
- Low startup capital required as compared to traditional real estate investments
- Shared cost structure enables financiers to invest in larger property holdings than they’d typically have access to
- Risks associated with ownership are split among multiple stakeholders
- Access to new and/or exclusive opportunities
- Ability to hold commercial real estate or real estate portfolio holdings in addition to residential properties
- Offers exposure to real estate market without the need to personally provide upkeep and maintenance
- No need to individually qualify for, obtain, and make regular payments on a mortgage
- Does not require owners to personally guarantee loans with property and assets
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How Does Crowdfunding Work In Real Estate?
Buying investment property is a common and hugely popular activity among individuals seeking to accumulate or grow their wealth, especially with mortgage rates hovering around record lows. But acquiring real estate often requires prospective property owners to qualify for and obtain a mortgage from a loan provider such as a bank or credit union. This in turn can require these investors to make a large up-front down payment – and requires them to finance routine expenses in the form of regular ongoing bills. Buyers must also regularly upkeep and maintain any investment property holdings, pay for maintenance and utilities, and pay annual property taxes on these assets.
On the flip side, real estate crowdfunding invites investors to pool their money using online financial technology (fintech) or crowdfunding sites to fund real estate investments, with an eye toward making an eventual one-time or ongoing profit. A few hundred dollars is often all it takes to get started with these internet-powered investment solutions. Monies are commonly paid into Real Estate Investment Trusts (REITs) and similar financial vehicles, which effectively serve as holding companies that own and operate various real estate investments. These properties can take the form of houses, apartments, condos, retail space, malls, hotels, offices and more. Unlike many publicly traded REITs though, crowdfunded investments are typically privately held. These REITs also tend to pay regular earnings our to investors in the form of dividends.
Crowdfunded real estate providers can offer investors access to exclusive private market property investments that may otherwise be unavailable to general audiences. Likewise, they tend to offer higher returns than publicly traded REITs, reflecting the higher degree of risk that may be associated with these investments. As with any private investment holding that you’re considering money behind though, it’s important to do your research and homework up-front, and not to overextend yourself financially. Rather than serve as a primary way to generate wealth, real estate crowdfunding is typically used as a way to expand and diversify one’s financial holdings while also maintaining an overall balanced portfolio of financial investments, including stocks, bonds, and other equity holdings.
Note that some crowdfunding sites are open to general investors. Others may require that individuals qualify as accredited investors (have an annual income of over $200,000 or net worth of over $1 million) in order to contribute.
Pros And Cons Of Real Estate Crowdfunding
Real estate crowdfunding has its ups and downs, like any form of real estate investment. Before committing funds to a crowdfunded real estate project, it’s important to consider the following advantages and disadvantages associated with related sites and investments.
- Typically pays larger dividends than traditional real estate investments
- Allows hopefully property owners to diversify and expand their financial portfolio
- Offers access to unique real estate projects and opportunities
- Eliminates many common concerns that property owners and landlords often encounter
- Minimal upfront and ongoing investment when compared to traditional real estate venture
- Investors may be charged management or advisory fees by crowdfunding platforms
- Assets can’t be easily sold off or divested of quickly
- Participants have to pay taxes on any dividends that they receive
- As relatively new offerings, many platforms and projects lack a lengthy track record of success
- Some platforms may require individuals to be accredited investors (relatively well-capitalized) to participate
Best Real Estate Crowdfunding Sites
Given a recent boom and interest and publicity around real estate crowdfunding sites, many firms are now competing for your investment dollars, including many new startups and market entrants. No two platforms are created equal either, with any given individual site offering its own feature set, opportunities, potential return on investment, and suite of tools for maintaining and keeping track of your investments.
As a general rule, noting that real estate crowdfunding also remains a relatively new practice, it pays to do your research here, look at user commentary and feedback, and consider the pros and cons associated with each online vendor before committing to an investment. Following though, you’ll find a list of several of the most popular and/or well-established sites that offer access to real estate crowdfunding opportunities.
Fundrise: Fundrise allows even nonaccredited investors to quickly get started with real estate crowdfunding and start buying into both residential and commercial properties by teaming up with other investors. Any sums that you wish to invest are pooled into REITs, and used to purchase properties, buy land, develop real estate, and otherwise pursue private real estate deals. A simple to use and intuitive website makes the process of online real estate investment approachable. However, be aware that the privately held investments it offers may be highly illiquid and will largely appeal to long-term investors. Noting the speculative nature of these opportunities, any investments should accordingly be subject to due diligence up-front.
RealtyMogul: RealtyMogul offers both nonaccredited and accredited investors access to commercial real estate investments and individual properties, including a variety of REITs that allow financiers to spread their investment dollars across a range of different real estate holdings. At the same time, investment minimums hover around the $5,000 mark, and fees can vary greatly among individual investment vehicles. If you’re looking for high rates of return though, the real estate crowdfunding giant aims to deliver. It also offers accredited investors access to 1031 exchanges (complicated investments that can help you defer capital gains tax from property sales).
CrowdStreet: One of the more well-known real estate crowdfunding sites, CrowdStreet provides accredited investors with access to commercial real estate projects that look to deliver high returns on investment. CrowdStreet also provides some minimal due diligence for investors in the form of conducting background and reference checks on developers wishing to solicit their financial contributions. Nonetheless, whether you’re looking to invest in funds (which hold a variety of different real estate projects within them) or individual properties, many offerings require a minimum investment of $25,000. Likewise, any sums that you choose to invest may remain illiquid and have to sit untouched for a period of years.
YieldStreet: If you’re looking to invest in a variety of different privately structured deals which are backed by assets that help protect your principal (which may provide some small measure of assurance to prospective investors in the event of default), YieldStreet can help. Largely targeted at accredited investors, it offers a way to crowdfund real estate financing vehicles as opposed to owning a part of residential or commercial property holdings. Nonaccredited investors wishing to invest a minimum of $1,000 may find passive income-generating opportunities available as well though. If you’re just looking to dip your toes into real estate crowdfunding, the site also offers investment opportunities that can range in length from as little as 6 months to as long as 5 years.
EquityMultiple: Although it requires a minimum investment of $5,000, EquityMultiple (which aims to make real estate investing simple, transparent, and more accessible to everyday investors) allows you to invest in privately managed commercial holdings. Sample real estate investment opportunities include office spaces, assisted living facilities, hotels, data centers, and more. Open to accredited investors, minimum investments can range from $10,000 to $40,000, and look to range in duration from half a year’s time to upwards of a decade. If you’re a wealthy investor looking to increase your exposure to new opportunities and overall deal flow, it could be a first port of call.
How To Get Started With Crowdfunding In Real Estate
It’s not hard to find real estate crowdfunding platforms online that are ready and willing to accept your contributions. But at the same time, it’s also important to perform significant research and due diligence upfront before making the leap to online property investments. A few points to keep in mind as you get started:
- Compare sites, services, fee structures, terms, and investment opportunities and classes
- Research pros and cons associated with any online real estate crowdfunding solutions
- Consider how much you can comfortably invest without overextending yourself
- Calculate what kind of return on investment you’re looking to receive
- Determine how long that your money may be tied up for and that you can comfortably go without access to funds
- Review what type of real estate and property holding that you’d most prefer to invest in
- Prepare any documentation or tax forms necessary to prove accredited investor status
- Scan and review user feedback and comments to hear what current investors have to say about any given site or service
- Speak with your accountant to determine any potential tax impact of investments
- Evaluate preferred financial vehicles for making crowdfunded real estate investments
The Bottom Line
Real estate crowdfunding offers investors of all backgrounds and levels a unique and exciting opportunity through which to expand their investment portfolio and increase their exposure to residential and commercial property holdings. But as with any form of real estate investment, it is also important to do your research and consider individual opportunities and alternative forms of investment (and compare and contrast individual providers) before committing to any opportunity. To learn more about alternative real estate investment opportunities and forms of financing, be sure to check out more articles at the Rocket Mortgage® Learning Center.
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