Crowdfunding Real Estate

Tired of the stock market? Explore a new way to invest in property.

Crowdfunding allows real estate investors to participate in high-end deals with small investments, making the field more accessible. This new and rapidly growing industry helps fund everything from medical bills on GoFundMe to company launches on Indiegogo. Through crowdfunding, individual investors can invest in high-rise apartments or office complexes that were previously out of reach.

How It Works

Crowdfunding pools small amounts of money from many investors to finance property investments. Each investor gets a share of the project as a passive, indirect investment in real estate.

These are long-term investments, requiring a commitment for a minimum period. Be ready for your money to be locked up for some time. Most platforms charge fees between 0.5 and 2 percent, similar to most investment funds, though this can vary.

While these investments can offer high returns (often between 10 and 25 percent), they also come with significant risks. Projects may fail, cash flow projections could be wrong, and investors might end up with nothing. However, if everything goes as planned, you could see much better returns than with traditional investments.

Equity and Debt

Crowdfunded real estate investing can be done in two ways: equity or debt. Although most platforms focus on equity investing, there are many options to invest in real estate debt. Both require time commitments. Equity periods are typically longer than debt periods.

Equity is a way to own a part of a property that’s under development or renovation. Debt investing means you lend money to finance the property. If a project is not successful, debt investors will have priority over equity investors.

Equity Side

Each investor is able to own a portion of the property or portfolio purchased by the fund through an equity crowdfunded platform. Rents are typically the source of income, which is passed on to investors as dividends and gains when a property sells for profit.

Equity investments can be locked in for three to ten year periods. Investors get their money back once the predetermined period has expired. Investors will be paid periodic dividends (usually quarterly), with any outstanding balance being paid at the end. This could include a large gain due to appreciation.

These investments are high-risk because so many things can go wrong. However, the potential for unlimited returns is still attractive to savvy investors who are willing to make that bet.

Debt Side

Crowdfunded real estate investing’s debt side earns from mortgage loan payments. The platform holds a mortgage on a property or group of properties and then passes the interest to investors when payments are collected.

For a few reasons, debt investments in this space are less risky than equity investments:

• A shorter lock-in period is usually between two and three years, which does not tie up your funds for long period of time.
• Secured mortgage debt: If the borrower fails to pay, the platform has the power to foreclose on the property, and then sell it. Investors will get at least some of the money back.
• Based on the mortgage loan’s stated interest rate, predictable income.

These investments usually return between 8 and 12 percent, but not more than the rate of the underlying loan. They may also be paid monthly or quarterly. Crowdfunded debit fees are typically higher than equity and may include additional loan origination fees.

Advantages of Crowdfunding Real Estate Investing

Accessibility

With crowdfunding, real estate investing is now easier to do. Previously, only high-net-worth investors had access to the capital and connections necessary to make these investments. Those are no longer barriers to entry thanks to changes in law and the rise of online crowdfunding platforms. The entry barrier to the real estate investing market is lower than ever.

Minimum Investment Requirements

Traditional property investments have high acquisition costs. These can be in the thousands, millions, or even hundreds of millions. To receive a reasonable interest rate on borrowed capital, even if financing a property via a lender, it is important to put a minimum 20% down payment. Crowdfunded deals allow investors to invest as low as $500. This is significantly less than other types of property investment.

Portfolio Diversification

New real estate investors face the most serious problem of lack of portfolio diversification when purchasing commercial properties. Some of us have small portfolios that are worth a few million dollars, but the majority of us would be risky if we invested a lot of capital in one investment.

Real estate crowdfunding allows for fractional ownership of properties. This gives you the opportunity to enjoy phenomenal growth in the commercial real property markets, while also maintaining a sound long-term investment strategy or retirement strategy.

Geographic Diversification

Every real estate market is different. Real estate crowdfunding allows investors to diversify their risk profiles by investing in more markets than they would otherwise be able to. You can invest $100,000 in 10 markets across the nation.

You can do this with real estate crowdfunding. Alternatively, an investor may choose to focus their attention on a specific market even though they are located halfway around the country. Real estate crowdfunding broadens the horizons for real estate investors.

International Investment

Crowdfunding in real estate is entirely online. You don’t need to be physically present at the property where you are investing. You can profit from the attractiveness and profitability of locations halfway around the globe without ever having to travel there. The platform will handle all local research and administration.

Efficiency and Speed

Completed investment in real estate would have taken months due to the paperwork involved. Because all Real Estate Crowdfunding transactions take place online, this timeframe has been greatly reduced.

The real estate industry was plagued by bureaucracy, paperwork, and other administrative issues. Platforms offer all-inclusive services, so even the transactional part of a property deal can now be done online with minimal input from financial institutions. Real estate investing is now something that can be done in an hour, rather than taking several months.

Risks of CrowdFunding Real Estate

Investing in crowdfunding real estate comes with several important considerations. Market fluctuations can significantly impact real estate values and rental income, causing them to rise or fall depending on current market conditions. Additionally, these investments are typically illiquid, meaning investors should be prepared to commit their money for several years, as they are not easily sold or transferred quickly.

It’s crucial to choose your platform wisely, as the reliability and reputation of the platform can greatly influence the success of your investment. At last, be aware that project delays and increased costs are possible, which can affect the overall returns on your investment.