Have you ever wanted to invest in real estate, but felt like it was out of your reach? Real estate crowdfunding may be the answer for you. Crowdfunding brings you access to large commercial real estate investments — something that you may not be able to invest in otherwise.
Real estate crowdfunding is a relatively new way to invest in the real estate market. Only available since 2012, this method for investing in real estate is rapidly growing in popularity with online platforms like Fundrise, Crowdstreet, and Cadre (to name a few).
This article will explain what real estate crowdfunding is and how you can get started!
What Is Real Estate Crowdfunding?
Real estate crowdfunding gives investors an opportunity to invest in commercial real estate without the burden of taxes and other costs associated with traditional investments. By pooling funds from multiple investors, crowdfunding allows you to access high-value properties far beyond what any single investor could typically afford.
Unlike traditional real estate investments, which require a large down payment, real estate crowdfunding allows you to diversify your real estate portfolio. With the right platform, you can even invest as little as $500.
Crowdfunding platforms will often provide investors with access to exclusive investments they may not have been able to get their hands on otherwise. This is because many commercial properties are only available through private equity funds and other accredited investor programs which require a high net worth or income.
How Does Crowdfunding Work In Real Estate Investing?
Real estate crowdfunding works similarly to other crowdfunding models. Investors can review, research, and decide on individual investments through online platforms like Fundrise or Crowdstreet. Once vetted by the platform, investors can invest in properties based on their risk tolerance, time horizon, and desired return.
The platforms will then pool together the funds from multiple investors and purchase the commercial property. Investors will then receive a share of the profits from rental income, capital appreciation, or both.
In addition to equity investments, many real estate crowdfunding sites provide access to debt investment. Similar to equity investments, debt investments are crowdfunded through a pool of investors.
Real estate crowdfunding platforms such as Fundrise and Crowdstreet offer additional benefits like professional asset management services, access to top-tier institutional commercial real estate, and an opportunity to diversify your investments across different asset classes.
Is Crowdfunding A Good Way To Invest In Real Estate?
Crowdfunding is a great way to invest in real estate if you are looking for an alternative to traditional investments. It allows you to access high-value investments with much lower initial capital than traditional methods and gives you the opportunity to diversify your portfolio across various asset classes.
The process of investing through a crowdfunding platform is relatively simple and can be done online from the comfort of your own home. Additionally, many platforms offer educational resources to help investors make informed decisions about their investments.
Crowdfunding can also provide an opportunity for passive income. By investing in rental properties and commercial real estate projects, you can benefit from regular returns on your investment without having to manage the property yourself.
Before investing in crowdfunding, however, it’s important to understand that there is a risk associated with any form of investment. It’s also important to research each platform you plan on using and make sure they have a good track record of performance. Lastly, be sure to read all of the fine print of the individual investment opportunity before signing anything.
Who Can Invest In Crowdfunded Real Estate?
Most crowdfunding platforms are only open to accredited investors. Accredited investors have a higher net worth or income than non-accredited investors. However, there are some platforms that offer real estate investment opportunities to non-accredited investors.
An accredited investor has either $1,000,000 in net worth (excluding a primary residence) or $200,000 in income for the past 2 years.
While these financial hurdles may be out of reach for many, there are still opportunities to invest with real estate crowdfunding platforms even if you are not accredited.
Keep in mind, however, that the best investments are available to accredited investors because there are fewer requirements that the sponsor of the deal needs to meet.
That shouldn’t keep you from investing though. If you’re consistent with your investments and patient, you can easily reach the requirements to become an accredited investor.
If you’d like to learn more, we have a review of the top real estate crowdfunding platforms including options for the non-accredited investor.
How Popular Is Real Estate Crowdfunding?
Real estate crowdfunding is becoming an increasingly popular way to invest in real estate. According to a report from Polaris Market Research, the global market for real estate crowdfunding is over $10 billion and is expected to reach $250 billion by 2030.
This is a huge market considering this investment model only became available in 2012 in the United States. This shows a large interest from the general public in alternative investments other than the stock market and bonds.
Crowdfunding real estate also allows small investors to access investments that were traditionally only available to larger institutional investors. This has resulted in more capital being invested in smaller projects, increasing the number of new developments and revitalizing certain areas.
When Did Real Estate Crowdfunding Start?
Real estate crowdfunding first started in 2012 when the Jumpstart Our Business Startups (JOBS) Act was passed. This law allowed individual investors to invest in private companies and small businesses through online platforms, including real estate projects.
Since then, many platforms have been developed that make accessing investments easier than ever before.
Real estate crowdfunding has become an increasingly popular way for individuals to invest and diversify their portfolios with alternative investments other than stocks and bonds. With the potential to earn higher returns and easier access to investments, it’s no wonder why this industry is growing so quickly.
Benefits Of Investing In Real Estate Crowdfunding
Real estate crowdfunding offers many potential benefits to investors. The main benefit is the potential for higher returns compared to traditional investments, such as stocks and bonds.
Let’s take a look at some of the other benefits of crowdfunded real estate investments.
Portfolio Diversification
Real estate crowdfunding can be a great way to diversify your investment portfolio. By investing in different projects and asset classes, you can spread out the risk across multiple investments.
This is important because if one of your investments fails, the entire portfolio won’t suffer as much due to the other investments providing a cushion.
Lower Minimum Investment
Real estate crowdfunding also offers a low barrier to entry for new investors. Since the investments are usually smaller than traditional real estate investments, you don’t need as much capital or experience to get started.
This allows non-accredited investors to access investments that were once only available to large institutions and accredited investors. Most real estate crowdfunding sites cater specifically to accredited investors, but many are opening options for non-accredited investors.
Access To Large Commercial Real Estate
Another benefit of real estate crowdfunding is that it allows investors to access large commercial real estate projects. These types of investments usually require a larger capital investment, so they are usually only available to institutional investors or accredited investors with deep pockets.
Crowdfunding platforms allow individual investors to pool their resources together and invest in these projects without having the financial means to do so on their own.
Passive Investment In Real Estate
Real estate crowdfunding can also provide investors with passive income. Many real estate platforms offer opportunities to invest in rental properties, which generate monthly or quarterly income for the investor.
This allows investors to essentially become landlords without having to go through the hassle of managing the property themselves. This type of investment is a great way to diversify your portfolio and start generating income from real estate assets.
Steady Cash Flow
Real estate crowdfunding investments can provide investors with a steady cash flow. Depending on the type of investment, you can receive monthly or quarterly payments in the form of rent or other cash flow from your investments.
The cash flow generated from real estate investing can be significantly higher than the dividends from stock market investments. It’s not uncommon to see a minimum of 6-8% cash returns from commercial real estate investments versus 2% dividend returns.
This allows investors to supplement their income or build a portfolio to provide retirement income. In fact, many real estate investors use this investment class to achieve financial freedom.
Asset Appreciation
One of the biggest benefits of real estate investing is the potential for asset appreciation. Real estate values tend to rise over time, allowing investors to earn a return on their investments through the capital gains from selling their properties at a later date.
This can result in huge returns if you invest wisely and pick properties in growing markets. Combined with the steady cash flow, real estate investments can offer some of the best overall returns.
The housing market doesn’t grow as fast as the stock market, but considering almost all real estate investments are purchased using debt, the power of leverage can multiply the returns to outpace stocks and bonds.
Tax Efficiency
Finally, real estate crowdfunding can provide investors with tax efficiency. Investments in rental properties and other income-producing investments are eligible for a variety of deductions, including mortgage interest and depreciation.
These deductions reduce your taxable income, resulting in an effective lower cost of investment. This makes real estate one of the most tax-efficient investments.
And the business model used in real estate crowdfunding makes you an owner of the business. This passes all of the tax benefits of real estate investing to you.
Risks And Challenges Associated With Real Estate Crowdfunding
The potential rewards from real estate crowdfunding come with some inherent risks and challenges. Some of these are aspects of investing in real estate in general, and others are associated with the business model of crowdfunding.
Let’s take a look at some of these risks and challenges.
Management Fees And Expenses
The fees associated with real estate crowdfunding can be quite high. These fees cover the cost of managing the investment, including taxes and other expenses such as advertising and marketing.
These fees are usually passed to the investor and can significantly reduce your returns over time. It’s important to research the fees associated with each platform before investing to make sure you understand the fees associated with each platform and real estate offering.
Highly Illiquid Investments
Real estate investments are typically illiquid, meaning they can’t be easily converted into cash. That means investors may not be able to access their funds for extended periods of time and could experience a substantial loss if forced to sell during a down market.
Most real estate crowdfunding platforms require investors to commit funds for extended periods of time and may not provide access to the principal until the investment matures. This can be a challenge if you need access to your funds before the investment matures.
Lack Of Control
The business model of real estate crowdfunding allows investors to own a piece of the investment without taking on any of the work. This can be a benefit, but it also means investors don’t have much control over how the investment is managed or what decisions are made regarding the property.
Crowdfunded real estate investments are most often syndications where there is a small group of general partners who make all of the decisions about the investment properties.
When you invest in crowdfunding, you’re going along for a ride with the general partners. So it’s important to get an understanding of these partners’ track records before investing.
Potentially Lower Returns Than Full Ownership
Lastly, investing in a crowdfunded real estate investment could result in lower returns than if you were to purchase the property outright. This is because of the fees associated with crowdfunding along with the general partner’s larger share of equity in the deal.
But, you have to ask yourself if you would be able to achieve the same results as a professional real estate investor and property manager. Certainly, you won’t have access to institutional commercial real estate on your own. Can you achieve the same results with residential properties? Maybe, maybe not.
How To Get Started With Real Estate Crowdfunding
Investing in real estate through crowdfunding is easier than it has ever been. Many real estate crowdfunding sites have popped up over recent years to give you easy access to the commercial real estate market.
Do your research, read reviews, and look for platforms that offer the real estate investments you are looking to invest in. Each platform will have different fees, requirements, and features you should consider before investing.
Once you’ve found a platform that fits your investment goals, take some time to review each of the offerings on the site. Read the investment documents for each offering and understand how your money will be used, what kind of returns you can expect, and on what timeline you can expect your returns.
Best Real Estate Crowdfunding Platforms
Before investing in real estate crowdfunding, it’s important to do your own research and decide which platform is right for you. Here are some of the best real estate crowdfunding platforms out there:
- Fundrise – A leading platform with a wide variety of real estate investments available with options for non-accredited investors.
- CrowdStreet – A real estate crowdfunding platform with a large range of property types.
- RealtyMogul – A platform that provides access to both debt and equity investments in commercial and residential real estate.
- EquityMultiple – A platform that offers investments in commercial real estate with great options for high returns.
If you’re ready to get started investing in real estate through crowdfunding, we’ve got you covered with our review of the best real estate syndication platforms.
Summary
Real estate crowdfunding is a great way to diversify your portfolio and access unique investments which otherwise wouldn’t be available.
By understanding how it works and doing your due diligence, you can take advantage of this innovative investment vehicle and start building long-term wealth through real estate today!