If you’re eyeing real estate investment but lack the hefty down payment for your own property, real estate crowdfunding might be the game-changer you’re seeking. Beyond sidestepping the challenges of assessing income potential, covering loan costs, and navigating legal expenditures, crowdfunding opens doors to deals that were once inaccessible.
Understanding Real Estate Crowdfunding
When most people contemplate real estate investment, thoughts typically gravitate towards buying, renovating, and selling or renting out properties. Crowdfunding operates on similar principles but with fundamental distinctions.
Real estate has long been perceived as an alternative investment, with deals traditionally involving minimal investment and exclusive to large institutions or high-net-worth individuals. However, the rise of crowdfunding in recent years has democratized real estate investment, allowing new potential investors to enter the arena with smaller sums, sometimes as low as a thousand dollars.
Getting Started with Real Estate Crowdfunding
Initiating real estate crowdfunding transactions is relatively straightforward. Choose a platform, register, explore available deals, and make your selections. Some platforms may require investors to declare a certain income or net worth level, emphasizing the importance of thorough pre-selection reading.
The four steps to investing in real estate crowdfunding include:
Choose a Platform: Opt for a platform aligning with the type of deals you seek—whether individual residential leases, multi-unit properties, hotels, or other transactions. Research minimum investment requirements and any investor restrictions.
Register: This step may involve disclosing your net worth or investor expertise. Sometimes, you might need to prove your stated net worth, while other times, a simple agreement to indemnify the platform suffices. Conversations with company representatives may be necessary before proceeding to the next step.
Explore and Review Potential Deals: Once on the platform, peruse available deals, narrowing down options based on your preferences or budget. Transaction details such as type, size, location, minimum investment, and expected returns can vary. Use filters to refine searches, and don’t hesitate to reach out for additional information.
Select and Invest: The final step in crowdfunding real estate is making your investment choices. If you find deals you’re interested in, select one or more to invest in. Ensure you check the investment timeframe, expected returns, and confirm the minimum investment amount.
People often say you can’t win the lottery without buying a ticket; the same holds true for real estate investment. To profit from crowdfunding, dedicate time to scout for deals, take the risk of investing funds before reaping profits.
Benefits of Real Estate Crowdfunding
For some investors, traditional real estate investment might seem elusive or excessively risky. If such concerns resonate with you, crowdfunding could be an excellent alternative. Here are some advantages of investing in real estate crowdfunding:
Access Deals Beyond Reach: Crowdfunding allows you to invest in real estate projects typically restricted to institutions and high-net-worth individuals.
Delegate Management to Professionals: Avoid the hassle of handling property or transaction management. Instead, entrust it to professionals while you sit back and reap returns.
Diversify Investments Across Multiple Projects/Properties:Crowdfunding often requires lower minimum investment amounts, enabling participation in various transactions rather than channeling funds into a single property down payment.
Platform Conducts Due Diligence: No need to worry about property inspection or evaluation; simply read and digest materials for the specific transactions that interest you.
While crowdfunding offers numerous advantages, it comes with some downsides:
Income or Net Worth Thresholds: If you don’t meet income or net worth thresholds, participation might be restricted.
Increased Risk: Since you technically don’t own the property you invest in, the risk is higher.
Evolution of Regulations: As detailed in the next section, regulatory frameworks in this field are continually evolving.
The Evolution of Crowdfunding
Some may assume crowdfunding has been around for a while, especially with popular platforms like Kickstarter and Indiegogo. However, in reality, crowdfunding is still relatively new, primarily due to the regulatory hurdles prevalent in the investment industry.
Private Placements and SEC Accredited Investors
Initially, numerous entities attempted to allow small, non-accredited investors to invest small amounts in companies or other transactions. However, securities regulatory bodies like the SEC and FINRA frowned upon this. They insisted every offering should register, such as under Regulation D private placements. Registered offerings permit companies to offer investments to the public but with significant restrictions on the number of investors allowed. They would also be subject to all the Know Your Customer rules and other restrictions most securities firms must adhere to.
As a result, many crowdfunding platforms ceased permitting investors to purchase equity. Instead, individuals or companies raising funds offered small returns to “investors” or simply expressed gratitude.
Over time, crowdfunding companies became more astute, shaping their offerings to conform to securities regulations, allowing smaller investors to participate in a growing number of transactions. Some platforms still require investors to prove they meet the SEC’s definition of an accredited investor. Others merely require investors to declare their accredited investor status and absolve the platform of any liability.
Choosing the Right Crowdfunding Platform
If you’re considering real estate crowdfunding, your initial step is selecting an investment platform. Each platform has its process, transaction structures, and focus on specific deal types. This means each platform will provide specific advantages or disadvantages to investors.
Some platforms well-suited for real estate crowdfunding include:
- Established in 2014, it focuses on enabling investors to participate in commercial real estate transactions.
- Through Crowdstreet, investors can engage not only in individual projects but also access opportunities in various funds and individual advisory services.
- Most individual transaction minimum investment amounts start at $25,000.
- While most real estate crowdfunding platforms emphasize equity ownership in projects (similar to stocks in individual companies), Yieldstreet primarily concentrates on debt issuance.
- Investors can purchase funds holding mortgage loans, similar to traditional banking.
- Yieldstreet also allows capital lending to ship construction projects, art ventures, and other asset-backed loans.
- Marketed as a real estate crowdfunding platform, Fundrise operates in many ways more like a real estate investment trust (REIT).
- Investors can start with a minimum investment of $500.
- However, based on our research, it appears investors may not be able to select individual transactions. Instead, they choose an investment plan, and Fundrise allocates members’ capital to various real estate projects nationwide. If you seek exposure to numerous private investment transactions without a substantial investment, Fundrise might suit your needs.
Patch of Land:
- This platform focuses on real estate crowdfunding by providing individual-to-individual loans for real estate projects.
- Through Patch of Land, you can invest in short-term loans with returns ranging from 10% to 18%.
- Minimum investment per transaction is $5,000.
Crowdfunding vs. Real Estate Investment Trusts (REITs)
Whether through crowdfunding or real estate investment trusts (REITs), investors can diversify their funds across various properties. The primary difference lies in the individual nature of crowdfunding investments. Investors usually engage in crowdfunding projects individually, necessitating participation in multiple projects for diversification. On the other hand, REITs invest in multiple properties themselves, allowing investors to effectively invest in many different real estate holdings by purchasing shares of REIT-focused mutual funds or exchange-traded funds (ETFs).
If the distinctions seem overwhelming, don’t fret. One of the benefits of these various investment options is the ability to create a personalized portfolio, avoiding the need to choose just one. You can invest in a combination that appeals to you (after conducting due diligence).
It’s essential to note that, due to REITs’ larger scale and multi-layered management, their returns tend to be lower.
Typical Rankings of Real Estate Investment Types
In general, real estate investment types are ranked in the following order, from potentially highest to lowest returns:
- Individually Acquired and Managed Single-Family Residential Properties
- Leveraged Renovation Properties
- Individual Development/Renovation (Single-Family Construction, Commercial Renovation)
- Self-Managed Residential, Commercial, and Multi-Unit Property Portfolios
- Real Estate Crowdfunding Transactions
- Real Estate Investment Trusts (REITs)
- Real Estate-Focused Mutual Funds and Exchange-Traded Funds (ETFs)
When considering these various investment methods, the key is to choose based on your investment goals and risk tolerance. While individually managed properties may offer higher potential returns, they come with increased management responsibilities. In contrast, REITs provide a more passive investment avenue but generally yield lower returns.
Real estate crowdfunding presents a flexible and affordable option for many investors to engage in investment opportunities that were once out of reach. By choosing the right platform, investors can enter the real estate market with smaller amounts tailored to their preferences and financial goals.
However, investors must remain vigilant, as crowdfunding is not without risks. Market fluctuations, project risks, and regulatory changes can impact investments. Therefore, thorough research of potential transactions, understanding platform regulations, and conducting due diligence based on individual circumstances are crucial before making investment decisions.
Ultimately, understanding the real estate market, defining your investment goals, and selecting an investment method that suits your situation will contribute to achieving better returns. Before any investment decisions, consulting a professional financial advisor is recommended to ensure alignment with your overall financial plan. Wishing you success on the journey of real estate investment!