Real Estate Crowdfunding: Everything You Need To Know
Real estate crowdfunding can be a great option for getting into real estate.
If you want to invest in real estate but don’t have enough for a down payment on a property of your own, real estate crowdfunding may be a great option. Crowdfunding can also help you avoid having to assess your own property income potential, pay out-of-pocket costs for loan fees, inspections, and legal work. It can also help you participate in deals that you wouldn’t otherwise get access to.
What is Real Estate Crowdfunding?
When most people think of real estate investing, they think about buying properties that they can fix up and sell, rent out to tenants, or develop into more valuable assets that they can lease or sell. Crowdfunding is based on the same principles but is radically different.
Real estate has always been considered an alternative investment. In addition to individual deals, for decades there have been real estate deals that were constructed as private offerings involving a small number of investments. These deals weren’t available to the general public - they were just for large institutions (like banks or insurance companies) and some high-net-worth individuals.
In recent years, though, the rise of crowdfunding has led to the democratization of real estate investments. This has opened up access to many new potential investors, who can now participate with much smaller amounts of money - sometimes less than a thousand dollars.
How to Get Started in Real Estate Crowdfunding
Investing in real estate crowdfunding deals is relatively simple. You only need to choose a platform to invest through, sign up, find one or more deals, and make your selections. Some platforms require investors to attest that they have certain levels of income or net worth, so it’s important to read the fine print before you choose.
The 4 steps to invest in real estate crowdfunding are:
- Pick a platform - It’s a good idea to pick a platform that offers the types of deals you want to participate in, whether that’s individual residential rentals, multi-family properties, hotels, or something else. You should also research the minimum investment size and any restrictions on potential investors.
- Register - This step may include making certain disclosures attesting to your net worth or sophistication as an investor. Sometimes you actually have to prove the net worth you provide; other times you just have to agree to indemnify that platform, or hold them harmless. You may have to speak with a representative of the company before moving on from this step.
- Explore and vet potential deals - Once you have access to a platform, you’ll need to look through the deals that are available and identify those that fit your tastes or budget. Deals will vary in type, size, location, minimum investment, expected returns, etc. Use filters to narrow your search and don’t be afraid to reach out if you need more information.
- Pick investments and invest - The last step to investing in real estate crowdfunding is just that: investing. If you want to participate, you’ll need to pick one or more investments that you like. Be sure to check investment time horizons, expected returns, and confirm minimum investment sizes.
They say that you can’t win if you don’t buy a ticket, and investing in real estate is no different. If you want to make money investing with crowdfunding, you have to put in the time to look for deals and then actually put money at risk before you can make a profit.
The Benefits of Real Estate Crowdfunding
For some investors, investing in real estate can seem out of reach or just plain too risky. If you share these concerns, crowdfunding can be a great alternative. Here are just a few of the benefits that you get investing in crowdfunded real estate:
- Get access to deals you couldn’t otherwise participate in - With crowdfunding, you can invest in real estate projects that would normally be restricted to institutions and very high net worth individuals
- Leave management to the professionals - You can avoid having to do any of the property or deal management yourself. Instead, you can just leave it to the managers, sit back, and earn your return
- Diversify across multiple projects/properties - Crowdfunding often has low minimum investment amounts. This gives you the option of participating in several different deals instead of just having a down payment for one property.
- Let the platform do the due diligence - You don’t have to worry about inspecting or appraising properties. All you have to do is read and digest the materials about individual deals that interest you.
While crowdfunding deals offer a lot of benefits to real estate investors, there’s always a downside. Here are a few:
- You may not be able to participate if you don’t meet income or net worth thresholds
- Investments are riskier because you don’t technically own the property you’re investing in
- As detailed in the next section, rules and regulations are still evolving in this area
The Evolution of Crowdfunding
Some people may think that crowdfunding has been around for a while, especially with the popularity of platforms like Kickstarter and Indiegogo. However, in reality, crowdfunding is still relatively new. This is largely due to the amount of regulation present in the investment industry. (As the former Chief Compliance Officer of a securities brokerage firm and member of FINRA’s Small Firm Advisory Board, I’m well aware.)
Private Offerings and SEC-Accredited Investors
When crowdfunding first started, there were lots of groups that tried to allow small, non-accredited investors to invest small amounts of money in companies or other deals. Securities regulators (the SEC and FINRA), however, didn’t like that. These regulators wanted every offering to be registered (as a Regulation D private offering, for example). These registered offerings would allow companies to offer investors to the public on a very small scale, but companies would be greatly limited in the number of investors they could allow into deals. They would also be subject to all sorts of know-your-customer rules and other restrictions that most securities firms have to follow.
As a result, many crowdfunding platforms stopped allowing investors to purchase equity. Instead, people or companies raising money could offer a small reward to “investors” or a simple thank you.
However, as time has gone on, crowdfunding companies have gotten wise to securities regulations. More and more have found ways to structure their offerings to allow smaller investors to invest smaller sums in more and more deals. Some of these platforms still require investors to prove that they meet the SEC’s definition of accredited investors. Others only require that investors SAY they’re accredited and relieve the platform of any liability.
The Best Real Estate Crowdfunding Platforms
|Platform||What They’re Known For|
|Crowdstreet||Helping investors who are focused on commercial real estate|
|Yieldstreet||Real estate-backed debt or equity investments as well as alternatives like art|
|Fundrise||Seminars and other resources for people looking to learn real estate investing|
|Patch of Land||Turnkey single-family residential rental properties|
If you want to invest in real estate crowdfunding, you first have to choose a platform to invest through. Each platform will have its own process, deal structure, and types of deals that it focuses on. This means that each platform will offer investors particular advantages or disadvantages.
Some of the best crowdfunding sites for real estate include:
Crowdstreet was funded in 2014 and is focused on helping investors invest in commercial real estate deals. In addition to individual projects, investors through Crowdstreet also get access to investments in various funds as well as individual advisory services. Most individual deals have a minimum investment of $25,000.
While most real estate crowdfunding platforms focus on helping investors take equity positions in projects (similar to stock in individual companies), Yieldstreet actually focuses more on debt offerings. Using Yieldstreet, investors can buy into funds that hold mortgages against properties or developments — similar to a bank. Investors can also lend capital against shipping construction projects, art, and other assets.
Fundrise is billed as a real estate crowdfunding platform but in many ways operates more like a REIT. Using Fundrise, investors can invest as little as $500. However, based on our research, it doesn’t appear that investors actually get to select individual deals. Instead, investors choose an investment plan through Fundrise, and Fundrise invests members’ capital in a range of real estate projects across the country. Still, if you want access to lots of private investment deals that you couldn’t otherwise participate in, and you don’t have thousands of dollars to invest, then Fundrise may be for you.
Patch of Land
Patch of Land is a real estate crowdfunding platform that focuses on peer-to-peer lending for real estate projects. Using Patch of Land, you can extend short-term loans to other investors or developers for 10% - 18% returns. You can invest as little as $5,000 per deal.
Crowdfunding vs REITs
Both crowdfunding and REITs (Real Estate Investment Trusts) allow investors to spread their money out over many different properties. The biggest difference is that investors usually invest in crowdfunding deals individually. If investors want to diversify, they have to do it themselves by investing in multiple deals. REITs, on the other hand, invest in multiple properties themselves; so if you invest in a REIT you’re actually investing in many different properties. The types and sizes can vary depending on which REIT you invest in.
REITs are also typically very big. Many are publicly-traded, but investors don’t have to invest in them directly. Many mutual funds and ETFs invest in REITs, so investors can effectively invest in REITs by buying shares in mutual funds or ETFs.
If all of this is confusing, don’t worry. One of the great things about all of these different investments is that you don’t have to choose just one — you can invest in any combination that sounds good to you (just be sure you do your due diligence). One thing to be aware of, though, is that because REITs are larger and have multiple layers of management, they typically have lower returns.
Typically, types of real estate investments will rank like this (from highest potential return to lowest):
- Individually-sourced and -managed single-family residential properties
- Leveraged fix-and-flip properties
- Individual development/redevelopment (single-family construction, commercial renovation)
- Self-managed portfolios of residential, commercial, and multi-family properties
- Crowdfunded real estate deals
- Real estate investment trusts (REITs)
- Real estate-focused mutual funds and exchange-traded funds (ETFs)
The Bottom Line
If you’re a new real estate investor and you don’t have enough saved up for a down payment on a rental property — or even if you just don’t want to deal with the headaches of sourcing your own deals and managing your own properties — real estate crowdfunding may be a great option. Before you get started, you’ll need to decide what type of real estate you want to invest in, pick a platform that’s right for you, and get registered. Once you’re signed up and approved for a platform, you can invest in hundreds of deals from all over the world and make healthy returns with very little work.