Crowdfunding Real Estate Debt: A Clear and Simple Guide
December 22, 2022
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While owning property is the traditional way to invest in real estate, acquiring property is often out of reach for people without a lot of money saved for a down payment.
Crowdfunding real estate debt is a popular option for new investors with limited funds or real estate investors who want a hands-off investment offering passive income. By crowdfunding real estate debt, you can more easily invest in real estate projects and potentially earn returns without investing the time, effort, or expense of being a landlord.
While crowdfunding may sound complicated, it doesn’t have to be. This article breaks down the basics of crowdfunding real estate debt and shares 5 of the top sites where both accredited and non-accredited people can invest.
What Is Real Estate Debt Crowdfunding?
Real estate crowdfunding involves pooling funds from multiple investors to finance a loan attached to a commercial or residential property. Investors fund a loan to a borrower in exchange for regular payments and interest. A person can invest through crowdfunding platforms or purchase a real estate note directly.
The difference between crowdfunding for equity and crowdfunding for debt lies in how each generates returns. Equity crowdfunding gives investors an ownership stake in a property, entitling them to periodic net income payments (assuming the property has positive cash flow) and potential capital gains if the property’s value increases.
In contrast, crowdfunding real estate debt provides investors with fixed-income returns from the regular principal and interest payments made by the borrower, plus a return of the principal if the loan gets refinanced or the property gets sold.
According to a Yahoo! Finance report, real estate debt is growing in appeal as an investment opportunity. The report notes, "Investing in real estate debt is a way to feel more secure as home prices correct. With real estate-backed loans, investors are gaining more predictability when it comes to the amount and frequency of returns—in addition to the security of a property-backed investment."
How Does Real Estate Debt Investing Work?
Let’s assume an investor participates in crowdfunding a real estate debt loan of $500,000 to purchase and renovate a residential apartment building. The borrower pays the investor principal and interest payments until the term of the loan is fulfilled.
Upon fulfillment, the principal amount is returned to the investor. This way, investors can diversify their portfolios by investing in crowdfunding debt instead of relying solely on equity crowdfunding opportunities.
While crowdfunding real estate debt can provide investors with promising returns, there are risks. Do your due diligence before making a crowdfunding investment to maximize the possibility of success and minimize the potential for loss on your crowdfunding investments.
5 Sites for Crowdfunding Real Estate Debt
Using a measured approach to crowdfunding, you can take advantage of this growing trend and potentially reap the rewards as a real estate debt investor. Here are 5 crowdfunding sites to consider if you’re interested in real estate debt.
Concreit is a platform where investors can participate in fixed-income first-lien mortgages. You can start investing with any amount using their auto-investment feature and possibly receive weekly payouts.
With Concreit, you can access hundreds of high-yielding, income-focused first-lien mortgages in the United States. The company primarily invests in exclusive short-term private credit notes backed with real estate worth more than the amount invested.
This investment strategy is often used by hedge and private equity funds for only wealthy investors, but with Concreit, it’s accessible to everyone. Over 40,000 members have placed their trust in Concreit’s platform for more than 100,000 investment transactions.
There are several benefits of investing with Concreit:
- Minimize the risk and volatility associated with crypto, individual stocks, and other high-risk equity investments by diversifying your portfolio.
- Strategically invest in hundreds of first-lien mortgages across the United States, which typically offer stable returns.
- Request to cash out your investment at any time—no strings attached.
- Enjoy a more liquid alternative to investing in mortgage notes directly.
- Concreit’s team of experts meticulously analyzes each investment so investors can rest assured their money is in safe hands.
First-position debt may be an attractive choice if you're looking to invest in real estate without the stress of ownership.
EquityMultiple has been providing robust returns at an average of 18.7%. However, the platform is only open to accredited investors and requires a minimum beginning investment of $5,000 or more, depending on the opportunity.
The platform offers various options for commercial real estate investment. You can select one that best suits your risk profile, returns expectations, and commitment length, from short-term senior debt to long-term opportunity funds.
EquityMultiple also offers access to unique tax strategies such as 1031 exchanges and qualified Opportunity Zone investments, giving you more control over how you invest.
Investing with Fundrise may be a good option for individuals looking for long-term returns. The company's Fixed Income strategy strives to generate above-average returns of between 6%–8%. Loans are secured by high-quality real estate located in areas where there is strong demand but limited supply.
The platform accepts accredited and non-accredited investors and requires a $10 minimum to get started. The average investment time commitment is 5 years. However, you can access your capital at any point by paying a 1% early withdrawal fee.
Groundfloor offers opportunities to finance development projects with a minimum investment of just $10. Specifically tailored for flippers, loans featured on the marketplace generally last between 6–12 months, making it an interesting crowdfunding option for those with a short-term investment horizon.
On the Groundfloor platform, you can access information regarding the project, time frame, and anticipated returns. Instead of investing capital into a single pool, you can choose which loans you would like to fund based on your individual investment strategies and objectives.
PeerStreet only works with accredited investors, offering exclusive private financing opportunities for those looking to broaden their debt investment portfolios. Through their platform, individual investors connect with a nationwide network of lenders and brokers specializing in real estate development projects.
With a minimum investment of $1,000 and loan terms ranging from 1–36 months, PeerStreet has successfully facilitated $4 billion in transactions across 44 states. According to the company's website, interest payments to date have totaled over $225 million.
Benefits of Real Estate Debt Crowdfunding
Real estate debt crowdfunding can offer investors numerous benefits. Investors have greater liquidity due to the fractional ownership available on crowdfunding platforms. Instead of committing vast sums to a single property, investors can purchase shares in multiple real estate investments with smaller amounts of capital.
Additionally, real estate debt crowdfunding provides access to potentially attractive yields not typically available through other investment options. Investors may achieve higher returns than traditional bonds or bank deposits since loans secured against property have higher interest rates.
These returns are due to lenders taking on larger risks and, therefore, requiring a higher rate of return for their investment. Crowdfunding also offers a diversified real estate portfolio, which can help spread the risk.
However, when deciding to invest, consider some of the drawbacks of crowdfunding real estate debt.
First, there is no guarantee of a return on investment, and investors could take the property back if a borrower defaults. Second, a lack of liquidity on some platforms is a potential issue since finding buyers for a loan or fractional ownership pool could take a while. Finally, investors may need to pay additional transaction and platform management fees when investing through a crowdfunding platform.
Tips for Using a Crowdfunding Platform to Invest in Real Estate Debt
Crowdfunding investments in real estate debt can be a great way to diversify your investments and gain a higher potential return than traditional methods. However, be sure you're making smart decisions when selecting crowdfunding platforms and following best practices for investing in real estate debt.
Here are 5 tips to keep in mind when considering this type of investment.
Research the Platform
It’s essential to research any platform you’re considering for real estate debt crowdfunding. You want to understand the fees associated with using a platform, read reviews from other investors, and inquire about their track record with successful projects.
Investigate Investor Returns
Returns from real estate debt crowdfunds are typically higher than traditional investments like bank deposits or U.S. Treasury bills. However, there are greater risks involved as well.
You need to understand these risks and weigh them against your own financial goals for the best possible outcome. Researching different platforms can give an investor insight into which ones offer the most competitive risk-adjusted rates of return.
Research the Borrower
Review the borrower’s background, financial history, and track record before investing in their project. If possible, arrange a meeting with the borrower to confirm they are trustworthy and reliable.
Only invest what you can afford to lose, and never put all your eggs in one basket. Try to diversify your investments across different borrowers, projects, and platforms to minimize risk and maximize returns on your investments. Additionally, consider investing in a real estate debt crowdfund that offers auto-investments and the ability to request a withdrawal anytime.
Keep an Eye on Your Investments
Monitor the progress of any projects you invest in to ensure you get the return on investment you anticipated. Keep in mind there is always risk involved with any real estate debt crowdfunding, so stay informed and up to date on your investment.
Following these tips, you can make the best decision on real estate debt crowdfunding and select an appropriate platform for your investment. With proper research and due diligence, real estate debt crowdfunding can be a dependable way to diversify your portfolio and achieve higher returns than traditional investing methods.
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.