Real Estate Crowdfunding: What It Is And How It Works

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.

Learn about real estate crowdfunding as a form of online investment, why it’s a handy way to build or grow your financial holdings and discover some of the best crowdfunding websites to check out.

What Is Real Estate Crowdfunding?

Crowdfunding asks the general public to contribute money or startup capital to help fund new ventures. 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.

Why Do Investors Seek Crowdfunding Opportunities?

Investors may be interested in exploring these types of real estate opportunities because:

• It’s a chance to diversify assets and your 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 individually.
• The risks associated with ownership are split among multiple investors.
• It offers access to new or exclusive opportunities.
• Investors can hold commercial real estate or real estate portfolio holdings in addition to residential properties.
• 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 mortgage.
• It doesn’t require owners to guarantee loans with property and assets.

How Does Crowdfunding Work In Real Estate?

Crowdfunding real estate providers can offer investors access to exclusive private market property investments that may otherwise be unavailable to general audiences.

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.

Real Estate Crowdfunding Vs. Traditional Real Estate Acquisition

Buying investment property is a common and hugely popular activity among individuals seeking to accumulate or grow their wealth.

But what sets real estate crowdfunding apart from the typical route of acquiring real estate? Let’s take a look.

Traditional Real Estate Acquisition

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:

• Upkeeping a property or other investment property holdings
• Paying for maintenance and utilities
• Paying annual property taxes

Real Estate Crowdfunding

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 other buildings. Unlike many publicly traded REITs, crowdfunded investments are typically privately held. These REITs also tend to pay out regular earnings to investors as dividends.