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Real estate investing may seem entirely out of reach to individual investors — after all, where are you going to get the funds to buy an entire building? Enter a creative approach: crowdfunding.
You’re probably familiar with crowdfunding as a way of raising large sums for charitable causes or people starting a small business via social media outlets. But in the last few years, crowdfunding has been catching on with the investment community and companies seeking investment capital — including real estate ventures.
In doing so, it’s opened up the field of real estate investing — once the province of professionals or highly affluent individuals able to spend millions — to folks only able to invest a few thousands or even hundreds.
Real estate crowdfunding is one option for diversifying your investment portfolio when you can’t necessarily afford to take on or maintain an entire property. By pooling your resources with other investors, you can go in on a share of property without being solely responsible for it.
Here’s how real estate crowdfunding works and the pros and cons of it.
What is real estate crowdfunding?
According to the U.S. Securities and Exchange Commission (SEC), crowdfunding “generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people.” It took off in popularity in the early 2010s, as the internet began connecting groups of investors and federal legislation made it easier for private and/or small companies to solicit capital.
Real estate crowdfunding, as the name implies, specifically raises money for ventures in real property, raw land and other real estate investments — any sort of real estate, from office complexes to hotels to apartment buildings. It’s a form of passive real estate investment — you the individual investor don’t get involved in the management of the property (the company behind the venture does that). But in return for your investment shares, you’ll receive income from rents when the property is up and running, and a share of the profits if and when the property is sold.
Depending on the project, you might be investing in a single new development, or in a firm that manages a whole basket of properties.
How does it work?
Generally, aspiring investors get connected to crowdfunding opportunities via specific real estate sites or platforms. These sites serve as marketplaces/middlemen, linking investors with companies or developers seeking funds — not unlike an investment company that offers mutual funds and ETFs.
Exact procedures vary, depending on the platform. But generally, the crowdfunding investment process goes like this.
- Decide how much you can afford to invest (or realistically, how much you can afford to lose)
- Browse various real estate crowdfunding platforms, their project offerings and their fee structures, as well as their minimum investment thresholds and investor/user reviews
Determining your approach
- Consider what kind of property you would like to invest in (residential or commercial, and region or location)
- Choose a platform and create an account
- Depending on what kind of property you’ve invested in, you may expect to receive regular dividends or profits from an overall increase in property value over the long-term
- Your share may be paid through the platform’s app or by direct deposit
Who can participate?
Anyone can dabble in some form of crowdfunded real estate. Typically (as with most investments), investors must be 18 years old or older; they do not have to be residents of the U.S., though they might need to have a U.S. bank or financial account.
That said, because there are some inherent risks in crowdfunding ventures (more on that later), the SEC does impose an annual limit on investors and investment sums. The magic number is $107,000: If either your annual income or net worth is below this amount, your investment will be capped at either $2,200 or 5 percent of your income/worth (whichever is greater) during any 12-month period. Those making more or worth more than $107,000 annually will be able to invest up to that amount or 10 percent of their annual income (whichever is lesser).
Also, not all real estate crowdfunding opportunities are open to everyone. Some platforms or particular projects remain open to accredited investors only — the traditional “big money” types, who can demonstrate a certain net worth/net income or degree of professional investment expertise, as defined in the Code of Federal Regulations.
Real estate crowdfunding platforms
Real estate crowdfunding platforms are online companies that bring investors together to pool their assets and connect these investors with real estate companies (aka “sponsors”) that need funding. Some are little more than meeting grounds/bulletin boards — they list the firms seeking funds, and that’s it. But others offer a full-fledged array of account services, not unlike an investment company or brokerage. They outline projects to potential investors, handle regulatory issues, collect money from the investors on behalf of the sponsor, and maintain a way for investors to monitor their holdings.
In exchange for facilitating and running the administrative side of things, including your user portal, platforms charge management fees. Here are some of the leading sites.
Fundrise is credited with truly democratizing real estate investment: You can get started with as little as an app download and a $10 investment. From here, users can participate in account tiers (there’s a minimum investment amount at each level) with fees based on their selected investment amount. Compared to other platforms, the advisory fee is especially low, starting at only .15 percent of assets.
Yieldstreet opens doors for investors to crowdfund not only real estate, but also companies (venture capital) and art. This company generally charges a management fee between 1 and 4 percent depending on the type and value of the property. The minimum required to open an account is $2,500.
With investment opportunities not only in properties but in real estate investment trusts (REITs), RealtyMogul plugs investors into multiple approaches for diversification. Fees for Realty Mogul accounts range from 1 to 1.25 percent and involve a minimum investment of $5,000 to get started.
Crowdstreet is one of the more sophisticated sites: It’s open only to accredited investors and there’s a minimum investment of $25,000. It lets users choose to invest in certain areas of the country, or in specific kinds of property. While there is no charge to open an account, administrative fees range from .5 to 2.5 percent of the amount invested.
Pros and cons of real estate crowdfunding
Like any investment, real estate crowdfunding has its advantages and disadvantages – some inherent in real estate itself, some characteristic to the crowdfunding method.
- Can invest relatively small amounts
- Offers a way of diversifying one’s investment portfolio
- Provides access to private deals/investment opportunities
- Platform maintains accounts, tracking of performance
- Limits on how much you can invest annually
- Many companies and platforms are startups or young with little track record
- Lack of transparency/due diligence on private firms
- Illiquidity: Funds can be hard to divest, fast returns unlikely
Alternative ways to invest in real estate
Crowdfunding is not the only way to invest in real estate. Here are some other forms of passive investing.
Real estate investment trusts (REITs)
REITs are companies that own, manage, or operate real estate properties for income. Investing in one positions your funds in a basket of properties, rather than in a single brick-and-mortar property. REITS can be private, but many are public, trading on exchanges just like stocks, so they can be very liquid.
Real estate limited partnerships (RELPs)
RELPs are private investment companies, structured as partnerships, that invest in real estate. Some crowdfunding ventures are inherently similar to RELPs, though RELPs often require a higher minimum investment (buy-ins beginning around $2,000 per share and often are six figures). They tend to be long-term investments, taking years before properties are developed and sold.
Real estate stocks
You may consider investing your assets in mortgage-lending companies or construction manufacturers as a way of buying into the business of real estate without purchasing – or keeping up with – a property.
Master limited partnerships (MLPs)
MLPs are business ventures organized as limited partnerships, like RELPs, that trade on public stock exchanges, like REITs. They are usually reliable generators of income, though their financial structure can make tax-reporting tricky.
Hard money lending
Hard money loans, sometimes called “bridge loans,” help short-term real estate investors to cover expenses (for instance, a house-flipping team that needs a new roof fast for the fixer-upper they bought). Unlike bank-funded loans, these are often quick to process because they are backed by individuals, small groups or companies.
Virtual real estate
Not all real estate consists of brick-and-mortar buildings. Virtual real estate, while still a new market, is growing fast, and offers yet another investing opportunity. You’ll need to set up a digital wallet to hold your assets, which you buy with cryptocurrency.
Frequently Asked Questions
Yes, many of the companies are geared toward non-accredited investors. Be advised, though, that some of their offerings may be in the form of public REITs that you could buy on your own, anyway. And of course,the smaller your initial investment, the smaller you can expect your overall returns to be.
Crowdfunding can be a risky way of investing in the real estate market. Many of the projects are being done by young, untried companies, and you can’t count on the platform offering them to have done much due diligence. Also, because they are private ventures (not traded publicly), these are often extremely illiquid investments: Once you purchase a stake, it may be difficult (if not impossible) to sell it. These risks are the reason the SEC limits how much you can invest via crowdfunding in any year.
Both are passive forms of real estate investing. REITs manage a pool of properties and distribute a percentage of rental income earned to their investors. Crowdfunding brings individuals together to invest in the construction and/or purchase of a property for income and/or appreciation. REITs typically have a higher minimum investment threshold ($1,000 to $25,000 to start, according to the National Association of Real Estate Investment Trusts), whereas crowdsourced real estate investors can get started with as little as $10. Some of the projects offered through crowdfunding platforms may in fact be REITS.
Being a landlord is, for better or worse, an all-or-nothing approach to real estate investment: All your eggs are in the basket of the property you select. With crowdfunding, depending on the platform and the project you choose, your investment may involve a group of properties rather than one specifically. Crowdfunding is not necessarily a safer or more secure investment than becoming a landlord, but it is definitely a more hands-off approach — no direct management involved. And because crowdfunding allows you to buy into a share of a property rather than securing the whole thing, you can get started with a far smaller initial investment. If the deal goes south, your loss will likely be far less catastrophic.
Final word on real estate crowdfunding
For people interested in real estate investing who may not be able to fund an entire property purchase, crowdfunding can bring many of the same benefits. Together with other investors, individuals can invest small amounts of money – or larger sums – and go in on a property, complex or development as a group.
While the risk is shared, you’ll still want to be confident about the property and market you select. On the speculative scale, crowdfunding investments rank pretty high. And since outside information is often scarce on projects, researching your platform — and the degree of vetting it does of listings — before opening your wallet is a good rule of thumb.