What is Real Estate Crowdfunding? Unveiling the Property Revolution
If you're thinking of real estate crowdfunding, here's exactly what it is, how it works and everything else you need to know.
Real estate crowdfunding is about pooling investor money to fund investment opportunities in real estate. Like other types of crowdfunding, there’s only a small minimum needed. There is no down payment, mortgage financing, or other property investment issues.
Crowdfunded real estate investments are expected to grow in market size. This type of crowdfunding is a lot like equity crowdfunding. An investor gets to buy into the property they choose and they become a shareholder. It’s important to remember that the SEC has also imposed some investment limits for nonaccredited investors.
What Is Real Estate Crowdfunding?
This is a different type of real estate investing. The JOBS Act opened the door for crowdfunding platforms to be used for real estate investment. The Securities and Exchange Commission (SEC) then lifted restrictions on nonaccredited investors.
Before these changes, investors had to buy physical property or leverage real estate investment funds (REITs). And they needed to be an accredited investor. That type of investor needs to have a net worth that’s over $ 1 million. And their annual income needs to be above $200,000 to be accredited.
Read on to find out exactly how this type of crowdfunding works.
- READ MORE: How to Make Money in Real Estate
How Commercial Real Estate Crowdfunding Works
Here’s how one of these private real estate investments works.
- The real estate investment is made by a primary investor.
- The individual properties could be raw land, a commercial building, a single dwelling, an apartment complex, or something else.
- The investment gets broken up into thousands of units. That way more people can get involved with different real estate funds.
Potential investors get a crack at passive income through a crowdfunding platform. Some real estate crowdfunding sites require accredited investors. Others don’t.
Check out the crowdfunding apps available from Google Play. Look for the Android Apps by Google LLC.
Why Should You Consider Crowdfunding for Real Estate Investments?
These are great alternative investments for those looking to get into the real estate market. Here are five specific reasons why you should crowdfund for real estate in 2022.
Low Investment
If you’re getting ready to start investing, you might not have a lot of money. Traditional investments in real estate require a lot of wealth. Crowdfunding real estate requires only minimum investments.
Get A Diversified Portfolio
You can have an investment portfolio that includes different types of properties. Some people prefer residential properties. Others are willing to risk more on a new development real estate project.
You Don’t Need To Manage The Property
This investment opportunity allows you to steer clear of property management. That’s usually left up to other investors and the deal sponsors. Another point to remember is prospective investors here don’t need to be landlords.
You Get Investment Advice From Professionals
The best real estate crowdfunding platforms offer tips from financial advisors. RealtyShares is a good example of this type of investment platform. They prescreen the properties.
You Can Invest in Your Community
Even with the minimum investment amount, you can use funds to invest in your community. Residents, community organizations, and individual investors can get involved.
Top Real Estate Crowdfunding Platforms
There are investment opportunities for people who don’t have deep pockets here. Today, investors can use social media and the internet to get involved.
There are many different crowdfunding sites. Following are some top picks that provide real estate investors access online. Remember to look at requirements like account minimums.
1. Crowdstreet Marketplace
Accredited investors can browse deals in different asset classes. A CrowdStreet C-REIT starts with a free account. Due diligence includes viewing financial documents to gauge the future performance of commercial real estate deals.
2. Modiv
This one is geared toward nonaccredited investors. It has an account minimum of $1,000 which is lower than many crowdfunding platforms. Be aware that 3% of the investment goes to other fees.
There are a few red flags such as illiquid investments and limited choices with Modiv.
3. EquityMultiple
Another good alternative to making money on the stock market. Everyday investors can get involved here with a high-yield property that’s professionally managed and easily sold. Investors can gain access and grow wealth starting with 5K. Equity Mulitple provides access to investment advisor experts with experience.
4. Fundrise
This is considered one of the top options for non-accredited investors. One of the big reasons is the fees are listed at 1%. Plus, the account minimum is only $10. Fundrise also has an excellent resource section that includes detailed explanations of things like publicly traded REITS.
5. YieldStreet
YieldStreet reports having over 400 thousand registered users. Investing is made easier with the simulator. Use it to run sample portfolios.
6. DiversyFund
DiversyFund is a good place to start. Invest as little as $500 at first. There are no management fees. But the redemption options are limited. You can’t get your money until the property sells.
7. Origin Investments.
You need a minimum of at least $50,000. But if you invest here, you get a good track record working for you. Origin Investments only accepts accredited investors.
8. RealtyMogul
Sorting through management fees is a big part of knowing where to invest. RealtyMogul charges 1% to 1.25%. There’s a $5,000 account minimum.
Make sure to look for a crowdfunding website that provides you with good information. Try to find some information like this on medical office buildings. These are some of the asset classes that are in big demand.
Top Real Estate Crowdfunding Platforms Comparison Table
Choosing the right platform is crucial when venturing into real estate crowdfunding. Use the comparison table below to quickly gauge top platforms’ key features and offerings, helping you make an informed and profitable decision.
| Platform | Key Features | Account Minimum | Management Fees | User Base / Additional Notes |
|---|---|---|---|---|
| Crowdstreet Marketplace | Offers various asset classes; Accredited investors; Comprehensive due diligence involving financial document analysis for forecasting future commercial real estate deals | Free Account Start | Not Specified | Ideal for assessing the future performance of deals |
| Modiv | Targeted towards non-accredited investors; Account minimum lower than many platforms; 3% of investment goes to other fees | $1,000 | 3% | Noted for having illiquid investments and limited choices |
| EquityMultiple | Accessible to everyday investors; High-yield, professionally managed properties; Easily sellable properties; Investment advice from experienced advisors | $5,000 | Not Specified | Good for growing wealth with the help of experienced advisors |
| Fundrise | Suitable for non-accredited investors; Offers detailed explanations on topics like publicly traded REITs | $10 | 1% | Regarded as one of the top options for non-accredited investors |
| YieldStreet | Over 400,000 registered users; Includes a simulator for running sample portfolios | Not Specified | Not Specified | Simulator helps in facilitating easier investment decisions |
| DiversyFund | Allows investment from as low as $500; No management fees; Limited redemption options | $500 | 0% | Money retrieval only possible once the property sells |
| Origin Investments | Requires a substantial minimum investment; Exclusively for accredited investors; Boasts a good track record | $50,000 | Not Specified | Best suited for accredited investors seeking proven performance |
| RealtyMogul | Management fees ranging between 1% and 1.25%; Account minimum set at $5,000 | $5,000 | 1% to 1.25% | Efficient management fee structure with a substantial user base |
After absorbing the information here, be sure to check out this video by Salvador Briggman, who explains the difference between real estate crowdfunding and REITs.
Real Estate Crowdfunding: A Closer Look
Before jumping into real estate crowdfunding, it’s crucial to understand the landscape, including the various types of crowdfunding models available.
There are primarily two models: debt crowdfunding, where investors receive monthly interest payments on the loans they offer to property developers, and equity crowdfunding, where investors gain a share of ownership in the property and, subsequently, a proportion of the rental income or sale proceeds.
Each model has its risk and reward profile, and your choice should align with your investment goals and risk tolerance.
Debt Crowdfunding in Real Estate
- Investors lend money to a project developer or property owner.
- Returns come from periodic interest payments plus the return of the principal.
- Similar to a traditional loan but funded by many investors.
- Generally lower risk than equity crowdfunding; debt investors are prioritized in case of default.
- Fixed-term investments with typically lower returns reflecting lower risk.
Equity Crowdfunding in Real Estate
- Investors buy a share of the property’s equity, directly investing in real estate.
- Potential for higher returns from rental income and property appreciation.
- Higher risk, as investors may lose their investment if the property underperforms.
- Investments are illiquid with a longer-term commitment.
- Returns can fluctuate based on factors like occupancy rates and market conditions.
Advantages of Real Estate Crowdfunding over Traditional Real Estate Investment
Real estate crowdfunding offers several advantages over traditional real estate investments. Firstly, it significantly lowers the barrier to entry, allowing investors with limited capital to participate in the real estate market.
Secondly, it offers diversification, enabling investors to spread their investment across multiple properties or projects, thereby reducing risk.
Thirdly, it provides access to commercial and residential properties that might have been inaccessible due to high capital requirements. Understanding these advantages can help investors make informed decisions and leverage real estate crowdfunding effectively.
Key Considerations for Successful Real Estate Crowdfunding Investment
Successful real estate crowdfunding investment requires careful consideration of several factors. Investors should conduct thorough due diligence on the crowdfunding platform, examining its track record, the experience of its management team, and the quality of its investment offerings.
They should also assess the property’s location, potential for appreciation, and the strength of the rental market.
Additionally, understanding the legal and tax implications of crowdfunding investments is crucial.
Finally, investors should consider their investment horizon and liquidity needs, as real estate crowdfunding investments can be illiquid and typically require a longer-term commitment.
Is Real Estate Crowdfunding Risky?
Real Estate Crowdfunding certainly presents an intriguing opportunity for investors, offering a pathway to be part of property ventures they might not otherwise have access to. While it carries its own set of unique benefits, it’s essential to be aware of the associated risks before diving in. Here, we break down some of the potential risk factors:
- Market Fluctuations: While it is somewhat insulated from the stock market, the real estate market itself is prone to fluctuations, which can affect the value of your investment.
- Start-up Vulnerabilities: Many companies venturing into real estate crowdfunding are startups, lacking experience and a proven track record. This could potentially translate to higher risks in terms of project management and investment returns.
- Unsecured Investments: Investors usually make unsecured minimum investments in this venture, meaning they risk losing their principal amount if the project fails.
- Limited Liquidity: These investments often do not offer the same liquidity as stocks. Selling your stake can be difficult, potentially leading to a longer-term commitment than initially anticipated.
- Dependency on Property Management: The success of your investment is largely dependent on the property management team. Inexperienced or inefficient management can adversely affect the project’s success.
- Regulatory Hurdles: The sector is still relatively new and might face regulatory hurdles in the future, which can potentially impact your investment.
Considering these factors, real estate crowdfunding presents a lucrative yet risky venture, especially for newcomers or individuals not fully versed in the real estate sector. It’s advisable to conduct thorough research and possibly consult with a financial advisor before stepping into this investment arena.
How Much Can You Make from Crowdfunding Real Estate?
Investing in property always has different returns. Crowd Street has an average realized return of 18.3%. EquityMultiple reports their average is 17.4%. Commercial deals have good returns based on the market. And the shape the property is in.
Is Crowdfunding for Commercial Real Estate Projects a Good Idea?
Commercial real estate investments are much more accessible using crowdfunding. Investing this way means you can diversify your portfolio. Even make some choices based on past performance in different locations.
READ MORE:
- How to Get a Small Business Loan
- What is Crowdfunding?
- 15 Crowdfunding Examples
- How to Make Money in Real Estate
Images: Depositphotos, Canva
This article, "What is Real Estate Crowdfunding? Unveiling the Property Revolution" was first published on Small Business Trends
