Did you know that you can actually invest in real estate without actually owning the physical property? Well, now you can with real estate crowdfunding. It allows you to take smaller risk by investing smaller amounts of money into the equity or debt of a real estate project. Learn how it all works along with the best real estate crowdfunding sites that you can get started with.
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Real estate investing is one of the most common ways that investors diversify their portfolios.
Traditionally, this has been in the form of buying or developing residential and commercial properties like a duplex or retail center.
But one of the biggest hurdles to real estate investing has always been the upfront cost to participate.
Buying a multi-family residential home is out of reach for many. So investors who have wanted to add real estate to their portfolio have turned to REITs.
But REITs are a sort of hybrid-real estate investment, acting somewhat like a mutual fund of real estate projects.
You don’t necessarily get to choose what you are investing in - the selection is made for you.
With the JOBS Act of 2012, real estate crowdfunding became a new option for real estate investors.
With real estate crowdfunding, investors now have the ability to invest in all kinds of real estate deals - from hotels to shopping centers to apartment complexes.
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Fundrise is the first investment platform to create a simple, low-cost way for anyone to access real estate's historically consistent, exceptional returns.
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RealtyMogul is a real estate crowdfunding platform that offers opportunities to invest in various types of real estate without requiring that a person buys a property outright.
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CrowdStreet is a provider of online commercial real estate investment offerings, technology, and services in the country. It's platform is giving more than 100,000 investors direct access to a broad range of institutional quality assets to diversify their portfolios.
Real Estate Crowdfunding Basics
Real estate crowdfunding lets you invest small amounts of money into the equity or debt of a real estate project or portfolio.
You are not investing in the project alone, but rather with a large pool of other investors. Hence the “crowdfunding” title.
In real estate - any other form of - crowdfunding, you are literally using a crowd of people to fund a project.
In return for your investment, you own a proportional share in the project. Depending on the type of project, you are paid in the form of dividends or when a sale takes place.
There are two common types of real estate crowdfunding investments to choose from:
Equity crowdfunding: Investors make investments in commercial or residential property, and in exchange, they receive proportional equity in the property. Investors earn income on rental profits and if/when a property is sold.
Debt crowdfunding: Investors purchase a portion of the mortgage or loan that is financing the property. As the loan is paid off, investors receive dividends from the interest generated from the loan.
Generally speaking, equity crowdfunding carries more upside for an investor due to the potential appreciation of the property and rents generated over time.
But it also carries more risk - if the property does not appreciate as planned or remains vacant, no income is generated.
Debt crowdfunding is considered the safer option as the lender (in this case, you) is almost always paid back first.
But the return on a debt-side real estate crowdfunding investment is limited to the interest on the loan.
Benefits of Real Estate Crowdfunding for Investors
First and foremost, real estate crowdfunding offers the benefit of portfolio diversification to an investor.
Diversification is an important part of every investment portfolio regardless of age, wealth, or retirement status. Real estate is one of the most common forms of diversification outside of the standard stock and bond portfolio.
With debt and equity crowdfunding, investors gain the ability to add multiple types of real estate assets to their portfolio.
The tax benefits or advantages of real estate crowdfunding vary by deal type and structure, and debt investments are viewed differently than equity investments because of the way the investor receives income.
You’ll want to consult a tax professional regarding your real estate taxes, but generally speaking, real estate crowdfunding allows investors to take advantage of certain tax breaks, such as depreciation or long-term capital gains, that normally apply when owning an investment property.
Lower Capital Requirements
As previously mentioned, one of the largest hurdles to real estate investments used to be the upfront cost to fund a project or buy a property.
This can (and does) take significant sums of money to undertake. But crowdfunding changed all of that.
With as little as $500 you can invest in crowdfunded real estate properties with a company like Fundrise.
Compare that to a 25% downpayment on $500,000 multi-family home and you can easily see why investors have flocked to crowdfunding in recent years.
Not all real estate crowdfunding platforms offer as low of minimums, with some requiring minimum investments of $15,000 or more.
This seems like a high minimum, but for someone looking to invest $150,000 in real estate, crowdfunding allows them to invest their money across 10 different projects at once.
In addition to general portfolio diversification, real estate crowdfunding allows investors to invest in properties all over the country and the world.
Many times as investors we look to what we know. In the case of real estate, we know the areas we live in or have spent a lot of time in. But just because they are familiar does not always mean they are the best.
With real estate crowdfunding, investors have hundreds of investment opportunities to choose from that are located all across the country.
From big cities to sprawling suburbs, the west coast to the east coast and in between, geographical diversification can help an investor's portfolio reduce the risk of a slow economy in one area and still capture the hot economy that is somewhere else.
Contrary to a REIT, investors have control over what properties and projects that they want to invest in through crowdfunding.
With a REIT you are purchasing shares of a company that then purchases and funds real estate projects. You are essentially providing the funding for that company to invest.
With crowdfunding, you have control of each investment and invest directly into it.
Every crowdfunding platform worth its weight will provide a detailed breakdown of each investment opportunity it provides to investors.
As the one with the cash, it’s up to you to decide what to invest in and where to put your money.
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Accredited vs. Non-Accredited Investors
As mandated by the SEC, certain forms of investments are only available to certain investors that are deemed “accredited” by regulators.
Accredited investors gain access to investments that are not registered with authorities. For example, all companies listed on stock exchanges are registered, allowing anyone to invest in them.
Examples of un-registered investments include hedge funds, venture capital, private equity, and real estate crowdfunding.
To be qualified as an accredited investor, a person must have an annual income exceeding $200,000, or $300,000 with joint income, over the last two years with the expectation of earning the same or higher salary over the next year.
Additionally, an investor can gain accreditation status by having a net worth greater than $1 million, excluding the equity of their primary residence.
Your status as an accredited or non-accredited investor matters when determining which real estate crowdfunding platform you are going to use.
Many crowdfunding companies only give access to accredited investors. If you do not meet the requirements, you won’t be able to invest with them.
We cover a list of the top real estate crowdfunding platforms below. Some of these are for accredited investors only while others allow everyone.
Knowing your status will help you decide which of these is right for you.
Equity vs. Debt Crowdfunding
We covered the basics of equity and debt crowdfunding already, but in this section, we will dive deeper into each, explaining the types of investments within each category and how you earn income from them.
As previously mentioned, equity crowdfunding is when you purchase an ownership stake in a commercial or residential property or project.
This could range from a 4-unit apartment building to a 200 room hotel or a brand new shopping center.
With equity investments, you are putting your money into a property with the specific intent outlined in the investment proposition.
By nature, equity investments usually have a time horizon of 3+ years.
A few examples:
Property A is a 10 unit commercial office space downtown. The investment plan is to buy and hold, with the intent to generate rental income. The property may or may not be sold in the future depending on performance and price appreciation.
Property B is a highly sought after piece of vacant land in the Hollywood Hills. The investment plan is to build a multi-million dollar mansion and sell it once completed.
With Property A, you are investing in a commercial office complex with the intent of generating rental income over a longer period of time.
As rents are received, the crowdfunding platform will distribute their net proceeds to the investors in the form of a dividend.
With Property B, you are investing in a new-construction home build with the intent to sell.
A home like this is not cheap to build, but it also sells for millions of dollars. In this case, you would receive your return once the home is completed and sold.
Equity investments inherently carry more risk than debt investments.
If a property does not perform as expected (remains vacant, does not sell, etc.), you run the risk of losing your invested capital or not earning nearly as much as expected.
On the other hand, because you are the owner, equity investments carry more reward than debt investments.
If rents rise in the area and/or a property is sold for a significant margin, then you benefit as the property owner.
Debt crowdfunding is on the other side of the real estate transaction. Instead of buying a property or project, you are helping fund a project in the form of a loan or mortgage.
Many investors seek private funding for projects and wind up using real estate crowdfunding platforms to seek investor support for a loan.
When you make a debt investment, your return on investment is based on the loan’s interest rate.
This is typically paid in the form of dividends on a quarterly, semi-annual, or annual basis.
Because you are lending money, your return is capped at the interest rate. Debt investments are considered less risky - or more secure - because lenders are typically paid before the owners are.
Realty Mogul offers a unique opportunity to invest in real estate that’s less involved than buying a property outright on an individual basis but is much deeper in scope than investing in real estate through a real estate investment trust (REIT).
Who Real Estate Crowdfunding is Right For
Now that we understand the basics of real estate crowdfunding it’s time to answer an important question: who is real estate capital right for?
While every individual’s situation is different, the answer to this question can usually be summarized into a few categories:
Investors without a lot of capital
With minimum investments as low as $500, the barrier to entry is quite low considering the type of investment you are making.
Investors who want real estate exposure outside of the stock market
If you want real estate exposure in your investment portfolio but don’t want to invest in REITs, your two remaining options are to buy a physical property or participate in real estate crowdfunding. Crowdfunding remains a more accessible option, especially if you are interested in owning shares in larger commercial properties or projects.
Investors who want to own property... But not deal with it
Yes, it’s possible to own a property and not have to worry about any sort of property management. Real estate crowdfunding does just that. Sounds nice, doesn’t it?
Investors who want to invest in property outside of the area they live in
Diversification across cities, states, and even countries offer a lot of benefits to the real estate investor. With real estate crowdfunding, you have the ability to invest in places you would never think to look and in projects that wouldn’t work where you live.
Best Real Estate Crowdfunding Platforms for 2020
Fundrise is real estate crowdfunding company that is open to everyone - yes, everyone.
Unlike many real estate crowdfunding companies, Fundrise does not require investors to be accredited.
This unique access means anyone can start investing in private commercial and residential crowdfunded real estate with as little at $500.
However, they also differ from other crowdfunding platforms in that their main investment option is through REITs - or real estate investment trusts - that they have curated for investors.
Unlike publicly-traded REITs, Fundrise’s are private, meaning they cannot be traded at will and your investment is very illiquid.
That said, their funds are transparent and you are able to see every property that they invest in.
They also rate every investment they make within their funds, allowing you to review and understand every property they are investing your money in.
Overall, Fundrise is a top choice for non-accredited investors, allowing anyone to add crowdfunded real estate to their portfolio for the low minimum investment of $500.
RealtyMogul is open to accredited and non-accredited investors alike. For the non-accredited investor, RealtyMogul offers two REIT funds that they call MogulREIT I and MogulREIT II.
Accredited investors who create an account with RealtyMogul have access to a much wider range of investment options.
To get a taste of what RealtyMogul offers, investors can visit their website and review their investment options.
The current options range from a multi-family property in Brooklyn to a commercial office complex in the suburbs of Minneapolis.
With a minimum investment of $1,000, RealtyMogul is more expensive to get started with than Fundrise, but offers a wider array of investment opportunities to accredited investors looking to buy into specific residential or commercial real estate projects.
CrowdStreet is a real estate crowdfunding platform that focuses exclusively on commercial property.
While their primary offering is for accredited investors only, they do offer two REIT funds for non-accredited investors.
This setup is similar to RealtyShares, with the primary difference being the minimum investment. With CrowdStreet, the minimum investment for a REIT fund is $10,000.
Many of the projects that accredited investors have access to have minimum investments ranging from $25,000 - $50,000 each.
While their minimum investment threshold is among the highest, CrowdStreet boats an impressive internal rate of return (IRR) of 25.5% across all fully realized investment since their inception in 2014.
Their investment marketplace, like many other top-tier real estate crowdfunding platforms, offers in-depth detail about each investment.
In addition, CrowdStreet offers access to a team of in-house advisors to help tailor your investments towards your financial objectives.
PeerStreet is a peer-to-peer (P2P) real estate lending platform that connects real estate investors through high-quality real estate loans.
PeerStreet’s focus is on debt financing - otherwise known as debt crowdfunding - and they have created a marketplace that allows accredited investors to fund private real estate loans for top-tier organizations around the United States.
If you are new to P2P platforms, the descriptions and “how it works” sections can be overwhelming. But the process is relatively straightforward:
For a minimum investment of $1,000, PeerStreet allows investors to choose from a hand-selected group of real estate loans and support the funding of those loans.
With PeerStreet, the loans being funding are typically for residential and single-family homes.
Your $1,000 is used to fund the borrower’s loan (the borrower works directly with PeerStreet) and the borrower uses that money to build, rehab, or develop a property.
Since it is debt financing, your return on investment is based on the interest rate of the loan. PeerStreet forecasts a return of 6%-9% over a loan duration of 6-36 months.
PeerStreet differs from other real estate platforms by focusing specifically on debt funding for loans.
Instead of offering a REIT or a wide array of commercial and residential investments, PeerStreet focuses on the relatively safer real estate investments by offering debt crowdfunding only.
Pros & Cons
- Investors gain access to a non-traditional investment asset with a relatively low up-front cost.
- Real estate crowdfunding is a way for investors to diversify their investment portfolios and also gives the investor more control over the real estate purchases versus a REIT.
- Continuous cash flow through dividends generated by rents or interest rates. Cash flow is a key contributor to a successful retirement, and real estate provides great cash flow opportunities to investors.
Overall, real estate crowdfunding gives investors the chance to invest in real estate without all of the hassle associated with buying and managing or developing a property.
Add in potential tax benefits, portfolio diversification, cash flow, and low capital requirements, and you can see why real estate crowdfunding has become so popular in recent years.
- Like any investment, real estate crowdfunding also carries risk. In an equity side investment, the property may not appreciate as expected or it may not sell for as much as anticipated; a building may also remain vacant. From the debt side, the borrower may default, making the chance of you earning your money back slim.
- Just because you are able to create an account on a website and buy real estate doesn’t mean you should. Real estate is unlike any other form of investment and you should educate yourself about real estate investing before getting into any sort of real estate crowdfunding deal.
- Real estate crowdfunding is a relatively new investment option. Because of this, there is no long-term history to look back on in order to project out the future. Investors have been able to earn positive returns through crowdfunding over the years, but a long-term trend has not been established with exception to the real estate market in general.
Overall, the biggest con of investing in crowdfunding remains the risk. All investments carry risk and crowdfunding is no exception.
If you do your research, understand the investment you are making, and understand the risk you are taking, then real estate crowdfunding can remain a viable investment option for you.
Should You Invest in Real Estate Crowdfunding?
Real estate crowdfunding is one of the hottest alternative investments for those looking to diversify their assets and gain exposure to real estate without some of the hassle usually associated with such deals.
The range of options for investors is significant, with minimum investments as low as $500 or as high as $25,000.
These options include access to hand-selected REIT funds to massive apartment complexes and business centers, with each investment bringing its own set of risk and reward.
Accredited investors and investors with significant sums of money to spend will find some of the most unique options to invest in with real estate crowdfunding.
But non-accredited investors are still able to capture some of the biggest benefits of the industry through the crowdfunded REIT funds that some real estate crowdfunding platforms offer to their investors.
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