If you have been looking for new and creative ways to diversify your investment portfolio, you may have heard of real estate crowdfunding. This kind of investing is one of the latest ways investors get in on big projects and profits without leaving the comfort of their homes.
You can crowdfund virtually anything, and real estate is no different. Real estate crowdfunding allows investors to pool their money with other investors to invest in projects they otherwise wouldn’t be able to get in on. You don’t have to be a multi-million dollar investor to take part in real estate crowdfunding, and you get ample flexibility to choose your projects. There are a variety of crowdfunding platforms that serve different demographics of investors, so if you are new to the space, you can find a home, and if you are a seasoned pro with a ton of cash, you can find your place as well.
So, before starting your first real estate investment, what should you know about real estate crowdfunding?
What Is Real Estate Crowdfunding?
Real estate crowdfunding works the same way all crowdfunding works: many people pool their money to fund a project hoping to benefit upon its completion. For real estate, many individual investors contribute money towards a more extensive project for a small cut of the profits.
For example, a developer wants to build a new apartment complex but does not have the capital to start. They could crowdfund the project and get funding through smaller contributions from individual investors.
When the project is done and begins to generate profit, each investor receives a piece based on the amount they contributed up front.
Unlike many other forms of real estate investing, you do not have to go out and buy anything yourself. There is no flipping, bargaining, or listing. You are simply a financial backer for a project that is happening elsewhere.
How Can Real Estate Crowdfunding Be Beneficial?
Like any form of investment, real estate crowdfunding has pros and cons. When deciding whether or not you want to invest your money this way, make sure you are educated on both sides to make sure you are making an informed decision.
The barrier to entry for real estate crowdfunding is lower than most other forms of investing, and you can access exclusive private investment opportunities. Firstly, you don’t have to have a lot of cash at any given time, nor do you need the connections to get invited in. Investors can make contributions as low as a couple of hundred dollars if they want. This makes real estate crowdfunding accessible to many more investors, especially those who are getting started building their portfolios.
Unique Array Of Projects
If you want to invest in large-scale commercial or residential projects far from your typical farm area, you can do it with real estate crowdfunding. Your location or expertise does not bind you. Crowdfunding provides investors with some genuinely unique projects to get in on. Just make sure you do your due diligence before you go all in!
A Great Way To Diversify
An investor wants to develop a diverse financial portfolio to minimize overall risk. Adding real estate crowdfunding to that portfolio is a great way to do it. By making many smaller investments reduces the chance of losing your money.
If you invest $500,000 in one project and it goes belly up, you are out $500,000. But if you invested $100,000 in five different projects, you will likely see success in at least one of those, ensuring you don’t lose all of your money in one fell swoop. Crowdfunding is great for this kind of diversification because you don’t have to make considerable investments to contribute – you can spread your money out.
One of the significant drivers for real estate investors is getting to a place where your investment properties produce actual passive income. Crowdfunding is inherently passive because you are nothing more than a financial contributor. You don’t have to hire contractors, collect rent checks, or negotiate prices. You just have to contribute and sit back and wait for your check.
Now, of course, you can’t just drop money anywhere.
You still have to ensure that you are investing in something with potential with developers you can trust. But in the end, staying updated on a project you are not working on is much less time-consuming than working on something yourself.
What Are Some Of The Downsides?
While real estate crowdfunding may seem like a no-brainer, it has its downsides. Before you get involved make sure you are aware of all the risks!
In other areas of real estate investing, you have total control over what you do. You pick the properties, the contractors, the real estate agents, and so on. You do not have that influence when you are contributing to someone else's project. This can be difficult for some investors who follow projects and see mistakes made or developers making decisions you disagree with. You have very little influence over the outcome. This is why you should always invest in projects you believe in with developers you trust.
Assets Are Slower To Offload
Unlike other kinds of investing, crowdfunding does not allow you to sell off your investment quickly. These investments are considered illiquid. The only way to get out of an asset is to have a buyer lined up to take it. Many investors find it nearly impossible to cash out once they are in. Once you invest, you will likely have to wait a period before seeing any return, sometimes years. If you put your money into a project, know it might be a while before you see it again.
Returns Aren’t As Profitable
You will not likely make as much money through crowdfunding as you would if you directly invested in a property or project. It also depends on what kind of investment you made toward the project. Equity investments often see significantly higher returns than debt investments.
You will also be required to pay taxes on any dividends you receive from real estate crowdfunding and could see some platform fees depending on which crowdfunding platform you use. This is why it is vital to research the individual platforms before you commit.
The Most Popular Crowdfunding Platforms
If you are interested in real estate crowdfunding, you first have to figure out which platform you will use. Each crowdfunding platform has its own rules, regulations, and quirks. Some may specialize in a specific project, and others may have a minimum investment amount. You want to make sure whichever one you choose has everything you are looking for and that you are familiar with how it works.
Fundrise is one of the most popular crowdfunding platforms and a name you have probably heard of before. Funrise is a popular platform for real estate crowdfunding because it contains various project types for investors. It also allows nonaccredited investors to get in on projects with minimum investment on most projects.
Fundrise is easy to learn and user-friendly, so even someone new to crowdfunding can find what they are looking for. You can find a variety of commercial and residential opportunities as well as private deals.
Another well-known platform is CrowdStreet. Unlike Fundrise, this platform only serves accredited investors with commercial real estate projects with the potential for higher returns. If you are an accredited investor, you may notice that the minimum investment is a little on the higher side for many projects. CrowdStreet also runs reference and background checks on the developers that list projects on its platform to ensure that they only include legitimate projects with a higher chance of success.
If you are looking for a platform that allows nonaccredited investors the opportunity to take part, RealtyMogul is another excellent choice. This platform enables accredited and nonaccredited investors to contribute to several projects, from individual to commercial. The minimum investment amount varies from project to project. If you want to get started on RealtyMogul, take a look at some of the projects you would be interested in and the associated fees first.
If you are an accredited investor with some cash on hand, you will find yourself at home on EquityMultiple. This site caters specifically to investors interested in private commercial projects. Though the platform-wide minimum contribution is $5,000, many projects ask for significantly higher sums to invest. This is an excellent platform if you are a seasoned investor with lots of cash. Projects on EquityMultiple can be long-term investments, but they can also result in much higher returns.
Real estate crowdfunding can be a great way to get started in the real estate investing space or diversify your financial portfolio. But just because it is easy doesn’t mean you shouldn't do your research!
Before making any investment, you want to compare each platform, so choose the one most aligned with your interests. From there, you want to look at how much you can invest and how long you are comfortable having no access to those funds. It also helps to talk to other investors about their experience with specific platforms. Once you establish a baseline, you can look through projects with a good idea of what will work best for you. Happy investing!