What Is Real Estate Crowdfunding and How Does It Work?

First Time Home Buyers, Industry Insights, Loans, Real Estate


When it comes to investing, real estate crowdfunding is the newest kid on the block. Crowdfunding sites are popping up on the web, promising a revolutionary take on making money in real estate. Targeted at new and seasoned investors alike, real estate crowdfunding is a great way to break into a game that’s typically reserved for the wealthy.

The benefit is that individuals without a massive bankroll can take advantage of investment opportunities that were once off-limits. This new method of investing also helps diversify your portfolio and has potentially impressive dividends.

As with all real estate investing, it’s not without its risks. It’s also more likely to end well if you begin your journey well equipped. To find out what you need to know to get into real estate crowdfunding, read on.

How Real Estate Crowdfunding Works

In the simplest terms, a real estate crowdfunding platform lets you pool your money with other people and buy into real estate investments. It’s especially attractive for new investors, but seasoned vets are jumping on board, too.

Crowdfunding makes it easy for every aspiring realty mogul to start their journey with small amounts of cash and take part in funding much larger projects. A real estate crowdfunding platform lets investors collaborate with other investors and property developers while it earns its cut from advising, management and sales fees. 

But it wasn’t always this way. It’s all thanks to the growing popularity of crowdfunding (thanks, Kickstarter!) and some key changes to relevant laws.

A brief history of crowdfunding

Until a decade ago, most real estate investing was reserved for the wealthy. Known as accredited investors, these were people who made either $200,000 per year or had at least $1 million in assets. While crowdfunding was already in full force, opportunities to invest weren’t available for non-accredited investors. 

But in 2012, it all changed with the JOBS Act which eased securities regulations on private funding for small businesses.[1] The new laws made it much easier for people to invest by tearing down the accreditation barrier. 

Basically, if you had some extra cash and wanted to get into real estate investing, you could do so with no arbitrary requirements. But while the JOBS Act opened the door to everyone, investment properties still required hefty down payments.

Enter crowdfunded real estate.

The power of the REIT

In most cases, an investment is placed into a real estate investment trust, otherwise known as a REIT, a holding company that operates real estate investments. They also own and finance investment property. 

A typical REIT is usually publicly traded, while crowdsourced investments are often privately held. These private REITs usually have higher returns than their public cousins. But be aware: Higher returns usually indicate higher risk. 

By pooling your money with other investors, a REIT lets you invest in crowdfunded real estate and make money in ways you couldn’t have before. For example, crowdfunding paves the way for investments in:

  • Housing
  • Apartments, condos and hotels
  • Commercial real estate like retail spaces, malls or office buildings

Even though the JOBS Act changed the laws, crowdfunding platforms are free to set their own requirements. Depending on the platform, you might only need $10 to get started, while others still require accreditation to contribute.

Read The Fine Print

Crowdfunding platforms aren’t real estate investment advisors. Don’t assume the platform has done the work of vetting every deal it offers, so do your homework before investing.

Pros and Cons of Real Estate Crowdfunding

Opening up real estate investing to the rest of us seems like a significant move. And to be sure, crowdfunding has some serious advantages. But investing isn’t only about raking in the cash. You also need to understand the risks and potential pitfalls.

Potentially higher dividends

Regardless of whether they are public or private, REITs are required by law to pay 90% of their income to investors. And because most real estate crowdfunding sites deal in REITs, investors are often rewarded with healthy dividends.

Lower investment minimums

One of the biggest benefits of crowdfunding is the low investment minimums. New investors can break into real estate investing for as low as $10 in some cases. While that amount of cash won’t produce an income you can retire on, keep in mind: Just a few years ago, investment opportunities simply weren’t an option unless you were wealthy.

Diversification

If you’re already established, real estate crowdfunding is an excellent way to diversify your portfolio. However, it also means you don’t need to put all your eggs in one basket. Because some platforms offer much lower minimums, you can spread your cash out over several different investments.

No landlord headaches

If you’re looking for a way to begin your investment journey without playing landlord, crowdfunding is a good option. Managing properties and dealing with tenants can be a real time-sucking pain. With no management responsibilities, you can focus all your attention on maximizing your investments.

An easier investing experience

Because real estate crowdfunding sits squarely in the fintech industry, most platforms focus on optimizing the user experience. In other words, these platforms go to great lengths to make using their websites and apps as pleasant as possible and strive to guide you smoothly along your investing journey. Some of them even have some pretty slick apps.

It’s still risky

Because crowdfunding is still so new, there’s always the risk that the platform you choose could shut down. While some of these crowdfunding businesses are well-funded, a lot of them aren’t cash-flow positive yet. And while the businesses that operate these platforms don’t have a lien on your investment, it’s still pretty risky.

Extra fees through platforms

Most crowdfunding platforms charge in the neighborhood of 0.5% to 2.5% of your investment in various fees. What each platform calls its fees and what it charges varies, but there’s no getting around paying them. They’re in business to make money, and they need their cuts to keep the lights on.

Assets aren’t liquid

Most REITs on crowdfunding platforms are long-term investments and, as such, it takes longer to profit from your investment. You can’t sell them off at any time like you can with a publicly traded REIT. While less liquid assets are fine for investors who can drop cash on a property and forget about it, real estate crowdfunding might not work for people who need to move assets around more frequently.

Other tax considerations

Earning dividend checks means your taxes will be a bit more complicated. Most platforms give investors tax forms showing what they owe on dividends and return on investment, but each type of investment is taxed at different rates, so it can get a little more challenging when tax season rolls around.

Some platforms aren’t thoroughly tested

On the grand scale, crowdfunding isn’t even old enough to drive yet. Even though some platforms have been around for around a decade, they haven’t experienced riding through long-term ups and downs in the market. This makes it impossible to predict how they’ll fare.

Some platforms still require accreditation

If you’re a new investor without loads of disposable cash sitting around, not every platform is open to you. Even though the JOBS Act changed the rules on real estate investments, some crowdfunding platforms still require accreditation. To be accredited, you need a minimum income of $200,000 per year or at least $1 million in assets.[2]

Top Real Estate Crowdfunding Platforms

If you’re thinking about getting into real estate crowdfunding, we’ve rounded up some of the better-established platforms to help you out. Just a reminder – every real estate crowdfunding site is a business that’s seeking customers. Do your research before you consider any one of them as an investment option.

CrowdStreet

CrowdStreet is a leading platform that was started in 2014. With nearly $600 million paid out to more than 100,000 investors so far, it’s one of the leading crowdfunding platforms for real estate. It charges between 0.50% – 2.5% in fees across the board and imposes other fees depending on the investment type. 

It’s worth mentioning that CrowdStreet is for accredited investors only, with a hefty minimum of $25,000. That said, it’s also one of the most proven in real estate crowdfunding.

Fundrise

Fundrise is another leading platform, developed in 2012. It’s one of the best platforms for a non-accredited investor. With $7 billion in total asset transaction value and over $160 million paid out in dividends, the platform is a great starting point for beginner investors. 

Fundrise has five levels of membership ranging from a $10 minimum investment to $100,000. They charge 1% on all memberships, split between an advisory fee and an asset management fee.

RealtyMogul

RealtyMogul, in business since 2013, is another platform that allows nonaccredited investors, but its initial minimum investment is $5,000. Nonaccredited investors can choose between two different public but nontraded REITs, and accredited investors have access to private investments. Most of their investment fees are between 1% – 1.25%, but charge more fees depending on the investment.

EquityMultiple

The newest on the list, EquityMultiple has been around since 2015. This platform mostly focuses on commercial investments and is another one that requires investors to be accredited. Its minimum investment is $5,000, and they charge between 0.5% – 1.5% in fees. 

EquityMultiple takes a blended approach toward real estate crowdfunding and focuses on high returns. According to its website, the platform has a 17.4% historical net rate of return.

Debt Vs. Equity

Be sure you weigh potential returns against the risk projections for any crowdfunded investment opportunity. This can help determine the type of investment you’re better suited for: debt or equity.

Getting Started With Crowdfunding In Real Estate

Now that you know the benefits and downsides of real estate crowdfunding, you’re ready to start your journey. You’ll want to use a platform that’s proven itself as much as possible. The sites listed above are all established platforms with good track records. 

Be wary of newer platforms. If you decide to use one that’s less established, do your research and make sure it’s well-funded and reliable. 

Keep in mind, given how relatively new and unproven crowdfunding is, it’s best used as a secondary tool for wealth generation. Instead, use crowdfunding as a way to expand and diversify. A balanced approach where you spread your investments over a variety of holdings is your best bet.

A New Way to Bet the House

Whether you’re just getting into the real estate investment game or you’re a real estate veteran, crowdfunding is becoming a great way to diversify your portfolio and rake in some pretty nice returns. 

Just remember: No matter where you place your investment, approach with caution. Do your research on the platform you choose and invest in crowdfunding opportunities with the same care and consideration you would a traditional investment.

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