What is Real Estate Crowdfunding?
April 9, 2022
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If you're interested in investing in real estate, but the real estate market looks too expensive and/or risky, consider real estate crowdfunding. This investment option that pools funds from investors together to invest in real estate equity and debt can be great for a starter portfolio or seasoned investor.
Here's how it works.
What Is Real Estate Crowdfunding?
Real estate crowdfunding is like any other crowdfunding venture. Investors pool their money to fund real estate projects, such as apartment buildings, malls, warehouses, office buildings, and other commercial real estate projects.
Many real estate crowdfunding platforms offer investors the chance to invest in real estate investment trusts (REITs). Investors buy shares in the trust, which provides the real estate company with funds to purchase and operate commercial real estate.
How Does Real Estate Crowdfunding Work?
To invest in real estate crowdfunding, you can choose between a debt or equity investment opportunities. If you invest in equity, you are part-owner of the property. As a result, you might receive dividends from the monthly rental income, equity buildup, or appreciation, but there's never a guarantee of dividends.
If you invest in debt, you are the 'lender' for the real estate investor. Typically, real estate investors that can't get money from a traditional bank turn to crowdfunding platforms to get financing. You invest your money in a fraction of the loan, along with many other investors. You might earn dividends from the interest earned on the debt, and the real estate serves as the collateral should the investor default.
Whether you choose a debt or equity investment, most crowdfunding platforms have a strong due diligence process in place to reduce the risk of taking on risky investments, but the chance is always there.
Most crowdfunding commercial real estate deals have long timelines regarding how long your money will be tied up, and not all have redemption programs. This means you might not be able to take your money out even in an emergency, so always read the fine print to be sure you understand the requirements.
Popular Crowdfunding Real Estate Apps
Today there are many crowdfunding platforms and apps to choose from, but here are some quick picks that have a good track record and work well for many investors.
CrowdStreet marketplace is for accredited investors only. The minimum investment required is $25,000. CrowdStreet has an open platform that allows builders and developers to apply for funds as they need them. Investors can choose from debt or equity investments and managed funds or individual properties based on the information provided by CrowdStreet and its professional ratings.
DiversyFundinvests in apartment buildings, usually with 100+ units. They buy undervalued apartment buildings, fix them up, and increase the rent charged to provide investors with more income. However, investors don't receive dividend payments throughout the investment because DiversyFund reinvests all profits back into the building to continue improving it until they can sell the building for the value they want.
Realty Moguloffers real estate investment opportunities for accredited and nonaccredited investors. Accredited investors can invest in private market offerings, and nonaccredited investors can invest in one of two non-traded public REITs.
Realty Mogul requires a $5,000 minimum investment and has a 3-year investment timeline for its publicly traded REITs.
Fundrise is one of the real estate crowdfunding platforms for the everyday investors that invests in commercial real estate equity and debt (mortgages), providing many opportunities for commercial real estate investments. They have a minimum investment requirement of just $10, and you don't have to be accredited. However, Fundrise has a 5-year investment requirement, so make sure you're ready to tie up your funds for at least that long before investing.
PeerStreet is one of the crowdfunding sites that focuses on debt investment opportunities. PeerStreet buys loans already funded by private lenders, using funds gathered from investors. The loan options investors have to invest in are short-term, typically one year or less, and are open to accredited investors only.
Accredited vs Non-Accredited Investors
When looking for the right real estate crowdfunding platform, you should know the difference between an accredited and non-accredited investor. Some platforms offer opportunities for both types of investors, and other real estate crowdfunding sites only cater to accredited investors.
An accredited investor is someone with an annual income exceeding $200,000 for the last two years and/or someone who has a net worth exceeding $1 million. Many real estate crowdfunding sites reserve their investments for accredited investors to ensure they can meet the minimum investment requirements and can withstand the risk involved in real estate investments.
A non-accredited investor is anyone that isn't accredited. There are still plenty of opportunities to invest in the real estate market if you aren't accredited, and some even allow investors to invest with investments as low as $10.
Real Estate Crowdfunding Pros
Before you decide if real estate crowdfunding is right for you, it helps to understand the pros and cons of real estate crowdfunding platforms .
A Simple Process
It's easy to invest in real estate when you work with the right real estate crowdfunding platforms. You don't have to do any legwork locating properties, researching the developers, or doing any other due diligence. Instead, the professionals on the platform do the due diligence for you. All you have to do is read the fine print and decide which investment might be right for you.
No Landlord Duties
Owning real estate, especially a rental property, means you are the landlord. You're on call 24/7 and responsible for all aspects of the residential properties. If something goes wrong, you are responsible for ensuring it's taken care of right away.
Landlords are also responsible for marketing the property, screening tenants, collecting rent, and maintaining the tenant's safety. You don't have to do any of this when you invest in a diversified portfolio with real estate crowdfunding platforms. You are a fractional investor, owning a small portion of the property without any of the landlord duties.
Low Investment Minimums
When you aren't the only person investing in a rental property (residential or commercial real estate), the investment minimums can be low. Some real estate investments can even be made with as little as $10 invested at a time.
It's always wise to have a diversified portfolio that doesn't center around just the stock market or bonds. If you invest all your money in one type of investment, you have a higher risk of a total loss. Adding real estate investments to your investment portfolio can help reduce your risk of a total loss.
While any investment has its risk of loss, there is a lower chance of losing everything when you branch out and include alternative investments such as real estate in your portfolio.
Dividends are always a nice feature in any investment because you can reinvest them into the investment and compound your earnings. Many crowdfunding sites offer dividends from rental income, interest income, equity buildup, and capital gains. Each investment platform has a different strategy or policy regarding dividends, so always read the fine print concerning them if dividends are a priority for your real estate investment strategy.
Real Estate Crowdfunding Cons
Like any investment, there are always cons of real estate crowdfunding too. Understanding the good and the bad can help prospective investors decide if real estate investments are a good choice.
Some Are Only for Accredited Investors
Not all real estate crowdfunding platforms are for non-accredited investors. Check out the minimum investment required of each platform, and you'll get an idea if they work with the 'everyday investor.'
Most platforms clearly state what type of investors they work with too. Since crowdfunding sites are supposed to open up the option to invest in real estate to more people, many sites don't require you to be accredited.
Do your due diligence before you jump in headfirst with any commercial real estate projects. Check out the platform's past performance and what other investors have to say about it. Many platforms have been around for years and have a great track record, and others are just hitting the scene now and may not be tested enough quite yet.
Understanding the tax consequences of a real estate investment is important. For example, if you have capital gains, you'll owe taxes either as a short-term capital gain (higher tax rate) or a long-term capital gain. Therefore, it's important to talk to your investment advisor about the tax implications of any asset classes you're considering, so you aren't unpleasantly surprised at tax time.
Investing in real estate isn't a liquid asset. This means your money could be tied up for years before you can access it again. Some platforms have a redemption program, but it usually costs money to access your money early. Your best bet is to understand the investment opportunity well, including how long before you can access your funds again.
There are fees real estate investors pay to invest in real estate, publicly traded REITs, and alternative investments like any investment platform.
The fees are usually quoted as a percentage of your assets under management, but always read the fine print and make sure you're clear on the total cost of the platform before investing.
Is Real Estate Crowdfunding Profitable?
Like any investment, real estate crowdfunding can be profitable, but you can have a loss too. There's no guarantee that the property will appreciate, tenants will pay their rent on time, or the builder or developer will pay the loan off in full.
It's always best to have a diversified portfolio to ensure that you don't have a total loss and can enjoy the passive income real estate can offer.
Can You Lose Money in Real Estate Crowdfunding?
It's always possible to lose money in any investment, including real estate investments. Most platforms do their due diligence on the developers, builders, and properties, but there's always the chance of a total loss. Therefore, individual investors should always do their research and make sure they are comfortable with the potential loss before investing.
What Is the Best Real Estate Crowdfunding Option?
The best real estate crowdfunding platform for you is the one that you qualify for, and that makes you feel comfortable. It's not a one-size-fits-all approach. Each investor has an amount they can invest or wants to risk, a type of real estate they want to invest in, and a desire for different investment options. Doing your research before you start investing is the key to finding the best option for you.
Real estate crowdfunding is a great way to enjoy the returns real estate offers without becoming a landlord and owning physical real estate yourself. Potential investors can find many opportunities to invest in real estate while understanding that they are inherently risky. A well-diversified portfolio can help offset the risk of loss. Learn more by signing up and visiting our blog.
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