What is real estate crowdfunding – people ask us frequently? Real estate crowdfunding follows the footsteps of other crowdfunding projects, where a group of investors combines their cash to fund a property in the hopes of earning future profit. Looking closely, you will feel crowdfunding for real estate has been around for centuries where neighbors, brothers & sisters, etc., have jointly bought the property. The same is true for organizations that have collectively purchased a building or land. So, how is real estate crowdfunding different from conventional methods of raising money?
Real Estate Crowdfunding vs. Traditional Means of Financing Investment
Unlike traditional property financing, real estate crowdfunding gives you the liberty to transact online and offers unmatched admittance to deal flow. Crowdfunding real estate investors can now check different investment options, protectively sign legal documents, and transfer money – all done online. They can even get access to their dashboard to see how each of their investments performs.
How Has Real Estate Crowdfunding Grown in Popularity?
The Jumpstart Our Business Startups (JOBS) Act made changes to crowdfunding regulations that came into effect in 2013. Before that, the real investors could only own a property completely or purchase publicly traded Real Estate Investment Trusts (REITs).
The new rules let financiers openly promote properties to a broader audience via social media and other online channels. It gives investors access to additional funding sources for their projects.
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Types of Real Estate Crowdfunding
Now that you know what is real estate crowdfunding, it is time to discuss its types.
So, you have accumulated some cash you want to invest in real estate and earn passive income. Real estate crowdfunding gives you two types of investment options – equity investment and debt investment.
While equity investment is more popular than the other type due to its higher returns, it comes with a hazard. The financiers get an equity share in a housing or commercial estate, essentially making them shareholders.
When you decide to invest in equity, you share cash flows from rents with other investors and pay a little in fees to the crowdfunding platform. This type of investment also entitles you to benefit from property appreciation when it sells.
The crowdfunding platform pays you quarterly and communicates the performance of the property. It also shares tax documents annually.
Pros & Cons Of Equity Investments
Like every financing option, crowdfunding equity investment has its advantages and disadvantages.
- Higher returns: If you opt for this route, you will probably earn an 18 to 25 percent yearly profit or more because this investment doesn’t limit you.
- Fewer charges: In order to retain your shares in the property, you can pay yearly charges rather than disbursing money upfront or monthly.
- Tax subsidy: As you are just a shareholder in the real estate, you have the liberty to subtract expenditures (such as repairs) on it from your yearly income tax.
- Chancier: You are second in line for payouts since you only own the property in shares. In case the property doesn’t appreciate, you get nothing in return for your finances.
- Prolonged hold time: If you seek greater cash flows, this type of investment may not suit you. You need to hold the property for at least five to ten years.
You (investor) place your finances straight into a loan in debt investment. In other words, you are a lender to the property owner. The profit you earn is directly proportional to the interest rate on the loan secured. You get paid monthly or quarterly and you are first in the line of the payout.
Pros and Cons Of Debt Investments
- Consistent profit: The streamlined process of debt investment gives you a complete idea of your earnings. Normally, lenders get around 8 to 12 percent profit every year.
- Lower Risk: It is less risky than the equity investment because all the burden lies on the estate owner. When they are unable to repay the mortgage, you can get your money back through foreclosure.
- Briefer hold period: These kinds of finances are primarily available on development ventures, so the holding time is often from half a year to two years.
- Greater charges: The crowdfunding platform you use for debt investment usually charges a higher amount on the deal than what they demand on equity financing.
- Limited profits: The lower the loan amount, the fewer will be the interest rate, limiting your returns.
Much like the pros and cons of the crowdfunding types, the mechanism itself has its boons and banes. It is crucial you weigh them before opting for real estate crowdfunding.
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How Advantageous is Real Estate Crowdfunding?
When most financers start learning about what is real estate crowdfunding, they read about its benefits.
Crowdfunding gives financers access to the real estate marketplace while lessening some of the natural hazards found in all financings. Although real estate crowdfunding is not ideal for every investor, it comes with various appealing aspects.
The majority of crowdfunded real estate sites operate via REITs that are legally bound to pay 90% of their taxable earnings to financers. It is why most REITs have a long history of offering high dividends to investors.
Perhaps, one of the biggest boons of real estate crowdfunding is portfolio diversification. It lets you effectively reduce the risk associated with a singular investment. With crowdfunding, you can spread your investment on multiple projects. In case one project fails, you do not lose all your money.
For instance, you can invest $200,000 in Project A or four different plans – A, B, C, & D – investing $50,000 each. If you have opted for the first option and that investment fails completely, you have to bear a loss of $200,000. However, if you have invested in four different projects, and one of them flops, you would only waste $50,000.
Low Minimum Investments
Traditionally, we consider real estate investment is only accessible to affluent individuals and big businesses. After all, not everyone has a six-figure income to buy a property in downtown or an elite residential area. Real estate crowdfunding enables you to make an investment even if you have just $500 spare (depending on the platform and its business).
Therefore, you do not need tens of thousands of dollars to tip your toe in real estate while reducing your downside risk.
Every real estate has its own value and associated risks in different markets. If you live in an area with risky and less profitable real estate, it is hard for you to buy a property in a flourishing vicinity thousands of miles away. With real estate crowdfunding, you can invest in 10 different markets in different states. You have the liberty to focus more on markets performing better than others while you sit on your couch.
No Landlord Disturbances
One significant aspect of real estate crowdfunding is liberating your worries about maintaining a property associated with traditional funding. It is genuinely hassle-free to invest in big assets and never think of handling the frozen pipes or bothersome occupants (however, you can evade this by financing in publicly traded Real Estate Investment Trusts).
Easy Access To Investment
Now there is not one but tens of crowdfunding platforms offering you to invest in real estate, all prioritizing easy access. You can invest through their website or their apps while on the go. Investing in properties has never been that easy, right?
What Are the Negative Aspects of Real Estate Crowdfunding?
Before you make up your mind to join this digital property-buying bandwagon, bear in mind the following drawbacks.
Fees and Lower Relative Returns
Whatever crowdfunding platform you decide to start your investment journey with, you have to pay 1% to 2.5% (or more) management fees. It is true that this advisory fee isn’t high compared to other management charges for the same services, but not many of you would be ready to pay 1%. Therefore, it is wise to read the investment contract thoroughly before committing your investment.
When you are aware of what is real estate crowdfunding, you know it brings lower profits than what you get by investing directly in a conventional property. The reason is that the middle party – developer or operator – also needs to make money. Besides, other factors like types of crowdfunding (debt or equity) and the final accomplishment of your investment also matter. Generally, you can hope to receive 8% to 10% profit in debt investments and 18% to 23% in equity investments.
Unlike liquid assets (stocks, publicly-traded REITs), you cannot sell illiquid properties randomly. Since real estate crowdfunding investments are illiquid, prepare yourself to wait for a long time before you can sell the assets. It is okay if you do not need the money anytime soon, but it could be disconcerting in an emergency.
Investing through crowdfunding will not give you the control over your investment that you get in traditional financing. The reason is that someone else manages the property you have a share in.
If you seek complete control and have some management experience in real estate, a conventional investment would give you a better return.
Top 10 Real Estate Crowdfunding Platforms
Now that we learned what is real estate crowdfunding and have discussed its pros and cons let’s go through the top 10 platforms you can use for asset investment:
- CrowdStreet: This commercial real estate investing platform allows you to invest with a minimum of $25,000 if you are a qualified investor. You can invest in hospitality, industrial, medical, retail, and other related projects. By February 2020, the platform managed to secure over $1 billion in commercial deals.
- DiversyFund: The online platform obtains, builds up, and keeps up a collection of assets. Furthermore, it gathers cash flow and distributes profits among its investors instead of working as a broker that connects financers with projects. Gladly, there is no administration fee, and you can invest with only $500 in the Growth REIT.
- RealtyShares: If you have $5,000 spare to invest in a residential, commercial, or retail project, explore RealtyShares. On the other hand, borrowers can offer their deals to qualified investors here.
- RealtyMogul: This crowdfunding platform for real estate investors offers institutional-like commercial real estate deals for accredited and non-accredited financiers. Investors can start with a $5,000 minimum deposit and invest in office, retail, and apartment buildings, among others.
- iFunding: Those interested in commercial retail and multi-family residential deals with at least $5,000 in their account should give iFunding a try. The pledgers can also get expert help in raising money for a project.
- Patch of Land: The platform works as an intermediary between financers seeking high returns, short-term funds, and pledgers in search of rehabbing funding.
- Fundrise: If you are a new investor interested in private real estate with no accreditation, Fundrise is the best platform, offering a value investing approach. With a 0.15% annual investment advisory fee, you can invest a minimum of $500 with its “Starter Portfolio.” Payouts are quarterly, but dividends aren’t always guaranteed.
- Prodigy Network: Do you want to get involved in commercial properties with a minimum of $10,000 in hand? Check out Prodigy Network and benefit from its six-part examining procedure for your composure.
- PeerStreet: The platform brings investors and lenders together to offer real estate loans. The qualified PeerStreet investors can invest from $1,000 in the property they like. The finances are accessible for retail and institutional investors.
- EquityMultiple: If you are interested in commercial real estate investment with a probability of getting14% returns, turn to Equity Multiple. You can table your money (at least $10,000) for private and efficiently managed properties.
The Bottom Line
After familiarizing yourself what is real estate crowdfunding, its types, pros, cons, and platforms, you might still have questions. Yes, we know most people aren’t sure if they should invest in crowdfunding real estate, and we do not blame them. New technologies always come with their own risks, so you should do extensive research before investing your hard-earned money.
We suggest you start with a $500 investment to diversify your portfolio. However, weigh up the publicly-traded REITs if you are not comfortable investing with an online crowdfunding platform.