Real Estate Crowdfunding: What It Is And How It Works
July 24, 2023 8-minute read
Author: Scott Steinberg
Real estate crowdfunding is an increasingly popular new way to diversify your financial portfolio. It’s popular with investors of all ages and investment interests. Crowdfunding allows you to pool your money online with other investors to purchase property (or a share of property) as a group.
Real estate crowdfunding offers a compelling way to diversify your assets by tapping into real estate investments. It makes it possible to grow or build your wealth and get started in the world of property ownership and rentals with minimal upfront investment.
Learn more about real estate crowdfunding as a form of online investment, learn why it’s a handy way to build or grow your financial holdings and discover some of the best crowdfunding websites to check out on the internet.
What Is Real Estate Crowdfunding?
Crowdfunding asks the general public to contribute money or startup capital to help fund new ventures. Using this form of online fundraising, open calls to potential investors are posted on websites alongside prospective investment opportunities, allowing concepts to be pitched directly to everyday internet users.
Interested investors contribute to a pool of capital that is collectively sourced from other investors. Their pooled money provides financial backing for current or prospective real estate investments. Such opportunities can be 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. Investors may be interested in exploring these types of real estate opportunities because:
- It’s a chance to diversify assets and investment portfolio
- In comparison to traditional real estate investments, low startup capital is required.
- Its shared cost structure enables financiers to invest in larger property holdings than they might have been able to access.
- The risks associated with ownership are split among multiple
- It offers access to new or exclusive
- Investors can hold commercial real estate or real estate portfolio holdings in addition to residential
- It offers exposure to the real estate market without investor involvement in the upkeep and maintenance of a property.
- You don’t need to qualify for a mortgage or make regular payments on a
- It doesn’t require owners to 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. Traditional real estate acquisition often requires prospective property owners to get a mortgage from a loan provider such as a bank or credit union. A mortgage loan typically requires a large, upfront down payment – and requires the buyer to cover routine expenses in the form of recurring bills. Buyers must commit to ongoing upkeep on a property or other investment property holdings, pay for maintenance and utilities and pay annual property taxes.
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 a one-time or ongoing profit.
A few hundred dollars is often all it takes to get started with these internet-powered investment solutions. Money is commonly paid into real estate investment trusts (REITs) and similar financial vehicles that effectively serve as holding companies that own and operate various real estate investments. The properties can be houses, apartments, condos, retail space, malls, hotels, offices and more. Unlike many publicly traded REITs, crowdfunded investments are typically privately held. These REITs also tend to pay out regular earnings to investors as dividends.
Why Is Crowdfunding Real Estate Beneficial For Investors?
Crowdfunding real estate providers can offer investors access to exclusive private market property investments that may otherwise be unavailable to general audiences. Because crowdfunded investments tend to offer higher returns than publicly traded REITs, there is typically a higher degree of risk associated with these investments.
As with any private investment holding you’re considering putting money behind, it’s important to do your research and homework upfront and not overextend yourself financially.
Rather than serve as a primary way to generate wealth, real estate crowdfunding is typically used to expand and diversify financial holdings while maintaining an overall balanced portfolio of financial investments that include stocks, bonds and other equity holdings.
Note that some crowdfunding sites are open to general investors. Others may require that potential investors qualify as accredited investors to contribute. Accredited investors either have an annual income over $200,000, or their net worth is over $1 million.
Pros And Cons Of Real Estate Crowdfunding
Like any real estate investing, real estate crowdfunding has its ups and downs. Before committing funds to a crowdfunded real estate project, consider the advantages and disadvantages associated with crowdfunding sites and investments.
- Typically pays larger dividends than traditional real estate investments
- Allows property owners to diversify and expand their financial portfolio
- Offers access to unique real estate projects and opportunities
- Eliminates many common concerns property owners and landlords often encounter
- Minimal upfront and ongoing investment compared to a traditional real estate venture
- Crowdfunding platforms may charge investors management or advisory fees.
- Your assets can’t be easily sold off or divested quickly.
- Participants must pay taxes on any dividends they
- As a relatively new investment offering, many platforms and projects lack a lengthy track record of
- Some platforms may require their investors to be accredited investors (relatively well-capitalized) before they can participate.
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, dive into user comments and feedback and weigh the pros and cons associated with each online vendor before investing.
Here is a list of some popular or well-established sites that offer access to real estate crowdfunding opportunities:
Fundrise allows investors (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. The money you invest is pooled into REITs and used to purchase properties, buy land, develop real estate and pursue private real estate deals.
Its easy-to-use, intuitive website makes the online real estate investment process approachable. But keep in mind, the privately held investments Fundrise offers may be highly illiquid and largely appeal to long-term investors. Considering the speculative nature of these opportunities, it’s crucial to do your due diligence on any investments upfront.
RealtyMogul offers both nonaccredited and accredited investors access to commercial real estate investments and individual properties, including a variety of REITs that allow investors to spread their investment dollars across a range of real estate holdings.
Investment minimums hover around $5,000, and the fees can vary greatly among individual investment vehicles. If you’re looking for high rates of return, the real estate crowdfunding giant aims to deliver. It also offers accredited investors access to 1031 exchanges (investments that help you defer capital gains tax from property sales).
CrowdStreet is one of the more well-known real estate crowdfunding sites. It provides accredited investors with access to commercial real estate projects that aim to deliver high returns on investment. CrowdStreet also provides minimal due diligence for investors by conducting background and reference checks on developers soliciting financial contributions.
Whether you’re looking to invest in funds (which hold a variety of real estate projects) or individual properties, many offerings require a minimum investment of $25,000. Any money you invest may remain illiquid and sit untouched for several years.
If you’re looking to invest in a variety of privately structured deals 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 toward accredited investors, Yieldstreet offers a way to crowdfund real estate financing vehicles rather than own a part of residential or commercial property holdings. Nonaccredited investors who want to invest a minimum of $1,000 may find passive income-generating opportunities on the platform.
If you’re just looking to dip your toes into real estate crowdfunding, the site also offers investment opportunities that range from 6 months to 5 years.
Although a minimum investment of $5,000 is required, 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. Real estate investment opportunities can 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 range from 6 months to 10 years or more. If you’re a wealthy investor looking to increase your exposure to new opportunities and overall deal flow, EquityMultiple could be your first port of call.
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How To Get Started With Crowdfunding In Real Estate
It’s not hard to find online real estate crowdfunding platforms that are ready and willing to accept your contributions. That’s why it’s important to perform significant research and due diligence upfront before making the leap to online property investments. Here are a few points to keep in mind as you get started:
- Compare sites, services, fee structures, terms, investment opportunities and classes.
- Research the pros and cons associated with any online real estate crowdfunding solutions.
- Consider how much you can comfortably invest without overextending yourself financially.
- Calculate what kind of return on investment you’d like.
- Determine how long your money may be tied up and how long you can comfortably go without access to it.
- Decide what type of real estate and property holding you’d most prefer to invest in.
- Prepare any necessary documentation or tax forms to prove you’re an accredited investor.
- Scan and review user feedback and comments to learn what current investors have to say about a site or service.
- Speak with your accountant to determine any potential tax impact of your investments.
- Evaluate preferred financial vehicles for crowdfunded real estate investments.
FAQs About Crowdfunded Real Estate Investing
Trying to decide if crowdfunding is the right real estate investment for you? Check out some frequently asked questions for information that can help you decide.
How can I start crowdfunding in real estate?
To start crowdfunding real estate, the first thing you should do is compare different platforms to figure out which one has the terms, fees and investment opportunities that align with your needs and your budget.
How much money do I need to start crowdfunding real estate?
Different platforms have different required investment minimums. That said, some platforms may allow you to invest with as little as $500 – $1,000.
Is it easy to make money from crowdfunding real estate?
It’s possible to make money from crowdfunding real estate. But as with any investment, you can lose money as well. Real estate investing involves a certain amount of risk. It’s impossible to know what your return on your investment will be.
What’s the difference between accredited and nonaccredited investors?
Accredited investors meet the income and net worth requirements determined by the Securities and Exchange Commission (SEC). Nonaccredited investors don’t meet the income and net worth requirements set by the SEC and may need to invest in different crowdfunding opportunities.
The Bottom Line
Real estate crowdfunding offers investors of all backgrounds and levels a unique and exciting opportunity to expand their investment portfolio and increase their exposure to residential and commercial property holdings.
But you should treat real estate crowdfunding the same as you would any form of real estate investing. It’s important to do your research, consider individual opportunities and alternative forms of investment and compare individual providers before committing to any platform or opportunity.
Not sure if real estate crowdfunding is the right type of investment for you? Explore your options and learn about other types of real estate investments.
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