It’s entirely reasonable to be confused about this type of crowdfunding and to wonder whether or not it is an excellent choice for you, which is why we have put together this guide to answer your questions and give you the boost of confidence that you need if you decide to try this type of crowdfunding for yourself.
Table of Contents:
Regardless if you are new to real estate investing or are interested in investing small amounts of money to get started, you can easily own a stake in a piece of property and receive monthly or quarterly dividends. As long as you know what you are doing.
Real estate crowdfunding allows a large number of investors to pool their money together to invest in properties, as well as projects, that are larger and more expensive than they would have been able to afford on their own.
Investors can visit online marketplaces and browse the various investment opportunities listed there to find the ones that are right for them.
By comparing the type of investment, the geography, and the target return, it’s easy to decide what investment best aligns with their goals. All the money that investors contribute is pooled, and then the investors can enjoy passive income–as long as everything goes according to plan, as explained by Nav Athwal at Landlordology.
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 begin 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.
Real estate investing as a whole has become more accessible in recent years. This means there are plenty of options you can enjoy if you want to invest in real estate.
It’s crucial you understand that not all investments are the same and that there are different advantages and disadvantages that you need to consider, no matter what type of real estate investing you are interested in pursuing.
Make sure that you consider a few different factors when comparing crowdfunding to property ownership, traditional direct investing, and even public REITs. I recommend that you examine the ease of diversification, stock market correlation, investor freeloads, liquidity, minimum investment, and day-to-day management duties.
Depending on how hands-on you want to be with your investment or how much you are willing to invest, crowdfunding can be a great choice.
If you have questions about your personal investing and whether or not crowdfunding makes the most sense for you, then I recommend talking to your financial advisor, as they will be able to see your whole financial picture and can point you in the right direction for your needs.
There are two main types of real estate crowdfunding–debt investments and equity investments. Understanding the difference between them will ensure you get the best results from your investments.
Debt investments are when you invest in either a group of mortgages or a single mortgage. By funding these loans, you will receive income in the form of repayments as well as interest from the real estate developer. When you invest in a loan, it will be secured by the property that is being built, and the typical term for investment is between six months and two years.
The exact time of your exit from the investment will be set in an agreement at the beginning of the investment, so you shouldn’t think that you can exit early and take your money with you. At Fit Small Business, you can get more information about debt investments and the difference between syndicated and platform issued debt investments.
Equity investments, on the other hand, offer you passive ownership in a piece of property. They are ideal if you are interested in long-term investments and want to receive your return from the appreciation of the property, as well as rental income. By investing in a portfolio of properties or a single property, you can enjoy shares.
These investments are generally for much more extended periods and can last up to 10 years, as the properties are usually new developments or ones that need a lot of repairs. You can enjoy quarterly distributions, which will allow you to receive passive income without any extra work. Another way to get paid is by getting your money back when the property is sold–hopefully for a higher price than what it was purchased.
There are two types of equity investments to consider: preferred equity and common equity. They have varying risk levels, returns on investment, and what they are secured by, so choosing the right one for you is essential.
Approved investment opportunities will be marketed to interested investors through online websites. The page about the opportunity will include an overview of the project, descriptions of the local market and sponsor, a financial summary, information about potential cash flows, and a review of all fees, risks, and legal structures.
Investors can review the material and complete any further due diligence that they want and then select the investment they want to invest in, sign the necessary documents, have funds debited from their bank account, and then wait until the project is entirely funded and they begin to receive their distribution payments, as long as the project performs as hoped.
It’s important to remember that you are not signing up for a guaranteed return, as investments can underperform for many different reasons. Some of these include the sponsor being unsuccessful in how they market their plan or simply having poor timing with their market.
I recommend you never invest money you can’t afford to lose. This means you need to make sure you’ve paid off all your debt before investing in crowdfunding and that you have other investments set aside as well. This will reduce any problems you face if you lose your investment.
There’s a distinction between the type of investors that crowdfunding sites for real estate will cater to. They will cater to either non-accredited or accredited investors, so you need to know what type of investor you are so that you can choose the right sites for your needs.
It’s up to the Securities & Exchange Commission (SEC) to determine the eligibility of investors.
Accredited investors have to meet one of three criteria to be able to invest:
- Individual or a joint net worth of at least $1 million, with the primary residence value excluded
- Individual income of at least $200,000, or a joint income of at least $300,000 for two years
- Being a director, general partner, or executive officer for an issuer of nonregulated securities
Non-accredited investors are the people who just don’t meet the criteria and qualifications to be considered an accredited investor. By knowing which one you are, you will be able to quickly determine the sites that you can use to invest in crowdfunding for real estate, as some sites are set up where only accredited investors can invest, while others are open to both types.
To break it down, I’m going to discuss the list of pros of adding crowdfunding real estate to your investment portfolio. I think that this helps a lot of people better understand whether or not this is the right option for them and can help you see clearly if you want to continue down this path.
Crowdfunding has recently made real estate a lot more affordable for people, making it an alternative that people can use to quickly and easily diversify their portfolios without a lot of work. Some of my favorite reasons for investing through real estate crowdfunding include:
- Invest in new areas: By investing in crowdfunding for real estate, you have the opportunity to invest in metropolitan areas that are rapidly growing, even if you don’t live there. You no longer have to travel to an area to research it and make a purchase.
- Passive investments: I love any way that you can make passive income, and unlike being a landlord, you don’t have to be involved in time-intensive responsibilities when you select and invest in real estate through crowdfunding.
- Two diversification levels: Real estate behaves very differently from bonds and stocks, and with crowdfunding, you can diversify even more. This means that you can diversify across property types, geographic location, development strategies, and more.
- Lower minimum to invest: It’s costly to invest directly in real estate without taking advantage of crowdfunding. Minimums and fees are a lot smaller.
- The ability to hand-pick your investments: You can quickly pick investment opportunities that match your goals.
- Enhanced transparency: When you choose the right crowdfunding site that is transparent with tracking the performance of your investment, you can keep up to date on your money.
- Lower fees: I find that many crowdfunding sites offer lower costs than other investment options. Some sites will take a portion of your profits as well as charge a fee, but only after all investors get paid.
- Easy diversification: Crowdfunding makes diversifying your investment portfolio incredibly fast and easy. It’s simple to take your portfolio from “just bonds and stocks” to something a lot more diverse in very little time.
- Invest in large projects: You can invest in a larger real estate project that you wouldn’t have been able to afford otherwise. Apartment complexes and high-rise buildings are no longer out of your budget.
- 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 low 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 control the specific projects you invest in directly. You can even invest in local, single family, fix-and-flip projects.
Of course, there are some cons to real estate crowdfunding that you have to understand and be aware of so that you can make the best decision for your investments and future. I would be remiss if I didn’t list these so that you can make an informed decision.
- Non-guaranteed returns: There is always the potential that your actual returns won’t be as high as you projected.
- Capital Calls: Due to the complexity of real estate projects, an investment may require more capital than initially anticipated. In that situation, the project manager can issue a capital call, which is a request from investors for additional money. You should be aware of this possibility on any investment you make.
- Confusion for non-experts: Not all investors are clear on how the deal is structured, which makes it difficult for investors to understand the agreement altogether.
- 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 primary point. Since real estate investments are complex, you must be a sophisticated investor with high net worth. This will help you understand the risks of the investments, as well as be able to absorb potential losses.
- Lack of due-diligence: It can be challenging to complete necessary due diligence if you do not live in the area where you are investing.
- 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 typically don’t offer a secondary market to sell your investments, either.
- The possibility of total loss: These investments are unsecured, and there is the possibility of losing your investment.
Choosing the right crowdfunding site can be really tricky, as there are a lot of factors that you need to consider, such as Andrew Savikas at Yield Talk discusses. Some of the most critical factors that you need to take into consideration before signing up with a site include:
- The platform’s track record
- What kind of investments are available
- What type of security you will receive
- What kind of return you are able to expect
- The different fees and expenses that you have to pay
- What type of regulations do the investments fall under
As you can see, there are many things that you need to consider before signing up with the first crowdfunding site that you find. I recommend taking some time and really researching available sites to find one that best aligns with your values and your goals.
Here are some of our most recommended real estate crowdfunding sites:
Concentrating on short-term horizons of between one and five years, Fundrise and its investors have pumped tens of millions of dollars into a wide range of real estate projects.
The objective isn’t just to obtain new properties, but also improve existing ones. The company’s goal is to find properties they can buy for a lower dollar amount than it would cost to replace them. The team has more than 75 years of experience, too.
The minimum investment is only $5,000, and the process to get approved is not difficult. Fundrise accepts approximately 5% of all of its received proposals, as well, which means you know they’re picky about what you invest in.
You could definitely sign up for Fundrise if you’re a non-accredited investor, but you may not have accessibility to all of their features.
Read the full Fundrise Review
Roofstock–established in 2014–is very proud to state they’re the most notable online marketplace for folks who want to invest in single-family rentals.
Although they’re still a new business, they’ve already facilitated more than a billion dollars in completed deals.
The company realized how difficult investing in real estate could be, so they developed a company around an online platform that makes the process significantly more straightforward.
In this way, even individuals who are a novice to real estate investing can be successful.
So, Roofstock has established it’s a prosperous alternative for individuals who would like to invest in real estate, all across the nation.
Read the full Roofstock Review
EquityMultiple enables those people who are accredited to invest in both real estate debt and equity through their online platform. To make certain they don’t deal with defaults, EquityMultiple approves just 10% of its loan requests. To check out types of solutions you might have for investing, you can check out both closed and open listings so you can get a sense of what’s available on the platform.
The property types you can invest in include things like:
- Self-storing establishments
- Student housing
- Commercial properties
- Office buildings
- Multi-family apartments
To provide you with a sense of what you’ll find, we recently noticed a multiple-residence residential development in Hawaii. The specific proposal highlighted a 10% income rate spanning a twelve-month term. The proposal showcased not merely facts about the borrower and lender, but also renderings of a number of the homes that’d be built in the development.
Read the full EquityMultiple Review
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. The platform has an A+ rating from the Better Business Bureau.
To invest with RealtyMogul, you must make a minimum initial investment of $5,000, but individual investments within the platform can be created 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.
Read the full RealtyMogul Review
Related: How to Hold Real Estate in an IRA
Unlike RealtyShares, RealtyMogul does not have flat investment fees. Instead, the costs depend on the type of investments and on the nature of the transaction. However, you will know what the charges 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, expected holding period, and the minimum investment requirements for that specific property type.
CrowdStreet is a lot like RealtyMogul in that it’s geared toward those with a high net worth. As such, CrowdStreet is only available to accredited investors who have a net worth of $1 million or an annual income of $200,000 for the past two years.
You’ll invest in commercial real estate projects with a wide variety of locations, types, and risk levels. I personally like CrowdStreet saying some of their projects expect a rate of return as high as 22%. You can’t get 22% anywhere these days–so CrowdStreet is worth considering.
On the downside, CrowdStreet has a high barrier to entry and extremely low liquidity. The minimum investment is $50,000 and some of your investments will be locked in for as long as 10 years–you may be able to pay a fee to get out though (but that doesn’t make a ton of sense). So be prepared to invest large sums for a long time.
Check out our complete review of CrowdStreet for more information.
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 plans 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 those 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.
Read the full PeerStreet Review
Streitwise departs from the other platforms because it’s not a real estate crowdfunding platform. Instead, it’s a public, non-traded real estate investment trust (REIT). That’s something very much like a mutual fund, except that it invests in real property instead of stocks. And in the case of Streitwise, those investments are in income-generating commercial real estate.
One of the big advantages with Streitwise is that you don’t need to be an accredited investor to participate–unless you invest more than 10% of either your net worth or your income in the trust. But otherwise, you can invest with as little as $1,000. That investment is currently paying between 8% and 9% per year in dividends, net of investor fees. You’ll also have the potential to participate in capital appreciation as the properties held in the trust are sold in the future.
Streitwise investments can be held in self-directed IRAs and 401(k) plans, in addition to regular taxable investment accounts. And unlike real estate crowdfunding platforms, Streitwise gives you an opportunity to redeem at least 90% of your investment after just one year (and up to 100% after five years).
As a REIT, at least 90% of the trust’s income must be paid out to shareholders every year. And the REIT status also comes with important tax benefits. Those include depreciation expense–which is a “paper expense” that reduces taxable income without lowering cash flow–as well as a 20% pass-through deduction. And as capital gains are paid out, they’re subject to reduced long-term capital gains tax rates.
Read our full Streitwise Review
If you are looking for a way to diversify your investment portfolio, then crowdfunding real estate projects may be an excellent option for you. You have to be prepared to do your due diligence and not to invest more than you can afford to lose.
Have you ever had success with this type of investment? I’d love to hear about it and to get any tips or tricks that you have to offer to others who are just getting started and looking for success.