Real estate crowdfunding: you may or may not heard of it, but the concept is quickly growing among investors. In a sense, crowdfunding is doing for real estate investing what Lending Club and Prosper are doing for personal loans. They are acting as online peer-to-peer marketplaces that match investors with borrowers, often under better financial terms than what they can get through traditional lending institutions, such as banks.
So, What Is It?
Real estate crowdfunding consists of various online platforms. There, real estate developers come to raise cash – either in the form of equity investments or debt financing – and investors come to invest money in those projects. They function as “peer-to-peer” investment sites, connecting those who need capital with those who have it to offer.
The platforms are primarily used by individual investors. However, they are growing more popular with institutional investors, such as banks and insurance companies.
Because they eliminate the “middleman” (the banker), real estate crowdfunding platforms can offer investors higher rates of return on their money. At the same time, they can charge lower interest rates to real estate developers. This makes it a win-win situation for both sides, and explains the growing appeal of these sites.
Loans and equity can be obtained on projects ranging from single-family homes to large apartment buildings and even retail shopping centers.
The Benefits and Drawbacks of Real Estate Crowdfunding
Real estate crowdfunding offers a number of great benefits. These include:
Investment diversification. If your current portfolio holds mostly stocks, bonds, and funds — all “paper assets” — you could benefit from adding a hard asset like real estate to the mix. Because of the nature of real estate investing, the returns can be higher than what you can get on fixed income investments, while being less volatile than stocks. Meanwhile, real estate is famous for being an excellent inflation hedge.
Invest in different types of real estate. Crowdfunding platforms enable you to diversify your real estate holdings across different types of properties. For example, you can spread your money across retail shopping centers, apartment buildings, or hotels. You can also diversify geographically. Instead of investing in a single real estate project in your hometown, you can invest slices of your money in different cities.
Small initial investment. You can invest on most real estate crowdfunding platforms with as little as $5,000. Since individual investments can be had for as little as $1,000, your initial investment can be spread across several different projects.
More control than what REITs offer. While there are similarities between real estate crowdfunding and real estate investment trusts (REITs), crowdfunding allows you to directly control the specific projects you invest in. You can even invest in local, single family, fix-and-flip projects.
But real estate crowdfunding is not without its drawbacks either. Some of those include:
Capital calls. Due to the complexity of real estate projects, an investment may require more capital than originally anticipated. In that situation, the project manager can issue a capital call, which is a request from investors for additional capital. You should be aware of this possibility on any investment you make.
You must typically be an accredited investor. Accredited investors have certain income and net worth requirements that generally exclude small investors. And that’s the basic point. Since real estate investments are complex, you must be a sophisticated investor with a high net worth. This will help you understand the risks of the investments, as well as be able to absorb potential losses.
Investments aren’t liquid. Real estate investments tend to be long-term in nature, and are not traded on national exchanges. Once you commit money to an investment, you will usually be required to remain invested until it matures. The platforms themselves usually don’t offer a secondary market to sell your investments, either.
Your investment isn’t guaranteed. Though you can make higher investment earnings, you can also lose your initial investment. This makes real estate crowdfunding a high risk investment. It should not be thought of in the same terms as a bank investment.
Now that you’re aware of the benefits and risks of real estate crowdfunding, let’s take a look at some popular platforms.
RealtyShares is an online real estate investment platform that focuses its business on smaller projects. These include things like single-family house fix-and-flips, rather than large projects, such as retail shopping centers or apartment complexes. The platform has been involved in investing over $300 million in more than 550 projects, and lists over 92,000 registered investors on the platform. They have investments in over 220 cities throughout 35 states across the country. However, they generally prefer investment properties located in large metropolitan areas.
Investments are either in the form of equity funding or financing. You can invest in anything from a single family property to a large complex. You can even introduce investments to the platform, to be funded by you and by other investors. You can invest in a slice of a real estate investment, or you can hold the entire position alone.
In order to invest in RealtyShares, you need a minimum initial deposit of $5,000; however, individual investments are available for as little as $1,000. You can also open a self-directed IRA, but the minimum investment is $10,000. Investment terms can run anywhere from six months to 10 years, which is referred to as the holding period.
You can register on the platform for free, and once you do, you are free to browse through any of the real estate investments listed on the site.
If you are participating in an equity investment, RealtyShares charges a 1% annual fee to manage the investment. They may also charge what is known as an over-raise fee, that covers initial legal fees related to the investment or other specific expenses.
If you are participating in debt investments, RealtyShares collects a servicing fee that represents a spread between the interest rate charged to the borrower and the net interest paid to the investors.
You can get more information on the platform at the RealtyShares website.
RealtyMogul is an online real estate capital marketplace. The platform was launched in 2013 and now has more than 100,000 investors holding more than $250 million in real estate, and has paid out $55 million to investors. In addition, the platform claims that it has experienced “$0 Principal Lost by RealtyMogul Investors.” The platform has an A+ rating from the Better Business Bureau.
In order to invest with RealtyMogul, you must make a minimum initial investment of $5,000, but individual investments within the platform can be made with as little as $1,000. The platform is available for investment by both accredited and non-accredited investors. However non-accredited investors are limited to investing in the MogulREIT 1 offering, while accredited investors can invest in private placements on the platform.
Investments can be made either in real estate loans or in equity investments. Loan investments can run from a few months to as long as a few years. The holding period on equity investments ranges from one to ten years.
You are investing in commercial real estate — including office and retail space — self storage facilities, and apartment buildings. You can invest in the platform through an IRA account, as long as your IRA trustee permits you to do so.
Related: How to Hold Real Estate in an IRA
Unlike RealtyShares, RealtyMogul does not have flat investment fees. Instead, the fees depend on the type of investments and on the nature of the transaction. However you will know what the fees are in connection with each investment before you invest any money.
When you invest with RealtyMogul, you don’t actually own the underlying real estate. Instead, you are holding what is known as a platform note, which is secured by real estate.
Once on the platform, you can track the details of each investment from the dashboard. It reveals the details of a particular investment, including current funding, estimated return, type of property, estimated holding period, and the minimum investment requirements for that particular property type.
You can get more information about the platform on the RealtyMogul website.
PeerStreet is open to accredited investors who can invest in high-quality private real estate loans. Those loans are typically secured by first liens on real estate. These are short in term duration – often between six months and 24 months – with loan-to-values usually below 75%. PeerStreet maintains that typical loan investments will earn an average APR of between 6% and 12%.
You can invest in PeerStreet through a regular taxable account, but also through either a traditional or Roth IRA. You can also do a rollover account from a 401(k) plan, 403(b), 457, or other employer-sponsored retirement plan into a PeerStreet IRA.
PeerStreet also has an automated investment feature. They will match you with loans that match your investment criteria. You can set that criteria in advance, and you will be alerted of investment opportunities that fit within those criteria.
PeerStreet can include loans made on single-family residences, either to rent the property, or to do a rehab on it to increase the value. You must have a minimum investment of at least $1,000 in any transaction. You can invest either in whole loans, or in pieces of whole loans, which will enable you to diversify your portfolio across many different loans.
PeerStreet charges a servicing fee on each loan that is offered, which is the spread between the interest rate that is due from the borrower, and the interest that investors will receive from those loans. The servicing fee ranges between 0.25% and 1.00% of each loan.
You can get more information about the platform on the PeerStreet website.
What are your thoughts on, or experiences with, real estate crowdfunding?