Real estate is expensive. And commercial real estate? Forget about it.
But in reality, you can invest in high-quality real estate projects for as little as $100, and you don’t even have to unclog a toilet for your tenants at 2am on a Saturday!
Real estate crowdfunding has exploded onto the investing scene, giving regular investors access to commercial real estate deals that were previously only available to the wealthy (and well-connected).
But what exactly is real estate crowdfunding, and how does it work? And what are some of the pros and cons of investing in crowdfunded real estate?
What is real estate crowdfunding?
Real estate crowdfunding allows investors to invest in commercial real estate projects for a (relatively) small minimum investment. The funds are pooled together to invest in larger real estate projects, paying investors dividends on a regular basis.
The idea of crowdfunding is not new (Kickstarter, anyone?), but until recently, it was not available to retail investors. But the Jumpstart Our Business Startups Act went into effect in 2016 and, for the very first time, allowed “non-accredited” investors to back private companies.
Before that, to invest in private companies, investors needed to be “accredited,” meaning they needed to have at least $1 million net worth (not including primary residence) or have earned at least $200,000 for at least two years.
Most crowdfunded real estate platforms offer a wide selection of deals in their marketplace, user-friendly dashboards, and a simple onboarding process to allow investors to quickly begin investing in commercial real estate deals.
How real estate crowdfunding works
Real estate crowdfunding is a way to raise capital for commercial real estate projects, which can include a variety of investments, including;
- Commercial business buildings
- Apartment buildings
- Adult care facilities
- Multi-family homes
- Or other real estate holdings
There are typically two types of investments available for crowdfunded real estate:
- Equity. You can invest in shares of a real estate project, giving you a percentage of equity in the investment. Equity investments typically pay quarterly dividends from rents collected or other income-producing activities.
- Debt. Debt investments are typically loans to commercial investment project owners, paying monthly interest to investors in the form of dividends.
Real estate crowdfunding sites
Real estate crowdfunding is typically done through a platform that offers investments in commercial real estate deals through their marketplace. Some examples of the best real estate investment sites you may have heard of are CrowdStreet, Fundrise, and Streitwise.
These real estate crowdfunding sites offer a simple way to browse through upcoming investment opportunities, as well as show the details of each project, including minimum investment, deal timelines, and expected return.
The websites typically manage the relationship with the project owners, also known as “sponsors,” and charge a platform fee on all investments.
Sponsors are also given a cut of the proceeds from a project, as they manage the project, including improvements, operations, and dealing with contractors and property management companies.
Accredited vs. non-accredited investors
Being an accredited investor is defined by the Securities and Exchange Commission (SEC) as someone who makes at least $200,000 per year (or $300,000 combined with spouse) or has a net worth of $1 million (or more) outside of their primary residence.
Despite crowdfunding opening up the market, some crowdfunding sites will still require you to be an accredited investor to invest in individual deals.
Non-accredited investors, on the other hand, simply don’t meet the qualifications for accreditation, and there are some crowdfunding investment limitations:
- Investors with an income or net worth less than $124,000 can only invest up to 5% of that number (or $2,500) per year.
- Investors with an income or net worth greater than $124,000 can only invest up to 10% of that number, up to $124,000 per year.
Pros and cons of real estate crowdfunding
Real estate is a time-tested investment that can provide great returns, but as with any investment, there are always risks involved. Crowdfunded real estate has opened a new asset class for retail investors, but it’s not for everyone.
- High potential returns
- Pays out dividends on a regular basis (passive income)
- Professionally vetted real estate deals
- Access to commercial real estate for a low minimum investment
- No landlord or property management headaches
- A way to diversify your investments into another asset class
- Illiquid investment, as you can’t access your funds for years
- Due diligence still required — you need to understand the investment before investing
- Platform fees, sponsor fees, and other fees can reduce returns
- Dividends payouts mean you may pay more in taxes
- Some platforms still require accreditation to access individual deals
Should you invest in real estate crowdfunding?
Real estate crowdfunding offers an easy way to invest small amounts and get a potentially exciting return. But it’s important to keep in mind that investing in real estate is inherently risky, and crowdfunding is no exception.
Real estate crowdfunding may not be the kind of investment in which to dump your life’s savings — or even a substantial percentage of your assets. But you may consider it for a small percentage of your portfolio if you’re looking for a high-risk, high-reward opportunity.
As always, it’s important to do your own research to fully understand any investment you add to your portfolio, and with real estate crowdfunding, you will need to dive into the details of the deal you are looking to invest in. This may include reading financial statements and learning about the market where the investment is located.
You may want to consult with a licensed financial professional to see how real estate can fit in your overall portfolio, and to help you with your short- and long-term goals.
How to get started with real estate crowdfunding
To get started, you can sign up for a crowdfunding platform for free. Most sites require completing an application (like signing up for a bank account), and some even require confirming your accredited investor status (though most platforms now accommodate non-accredited investors).
You can then browse through the marketplace, and find open deals to invest in. You can choose the deal, complete the application, and then transfer the funds to the platform to invest. Some platforms offer conference calls with the deal sponsors to ask any pertinent questions you may have, and some platforms even offer portfolio management services for investors with larger amounts invested on the platform.
In addition to investing in individual deals, many platforms offer real estate investment trusts (REITs) which invest in multiple projects at a time, creating a diversified real estate holding in a single investment. Contrary to publicly traded REITs, these investments do not have a marketplace to trade, and are considered an illiquid investment.
Things to consider before investing
Ok, so the idea of crowdfunded real estate is exciting and you’re ready to jump in. Great!
Here are a few things to consider before dropping your money into one of these platforms;
- Compare. Check out a few different sites, as the fees, minimums, and deal terms all vary. Find one that fits your investing requirements.
- Budget. It’s important to know how much you can (and are willing to) invest before you choose a deal. Some deal minimums are high (like, $25,000 high), so make sure you know how much you can afford to invest before getting started.
- Know the timeline. Most crowdfunded real estate deals have a long timeline, locking up your money for years at a time. Make sure any funds you invest are not needed until the investment matures.
- Review. Most platforms offer access to commercial real estate, but there are many different types. Make sure to review your preferred assets before picking a platform and investing.
- Consult. To reiterate, it’s important to understand how real estate crowdfunding can fit into a larger financial picture for your life. Consulting with a financial professional can help you pick the right investments, avoid tax mistakes, and keep your total portfolio diversified and focused on your goals.
Crowdfunded real estate is still a fairly new concept for investors, but it has grown into a solid asset class over the past few years. With a growing number of high-quality platforms, more types of assets to invest in, and a track record of solid returns, it can be a great way to diversify (and boost) your portfolio.
But real estate investing carries risk, and you can lose real money, even through a crowdfunding platform. Though it is rare, some crowdfunded real estate investments have lost all the investors’ funds. This can be mitigated, somewhat, by investing in an REIT fund that invests in several projects, but there is always a risk of loss.
If you are looking to diversify your portfolio into a long-standing, well-performing asset class, and don’t mind investing for the long-term, crowdfunded real estate can be a great option.