Real estate is expensive. What about commercial real estate? Forget it.
But in fact, you can invest in high quality real estate projects for as little as $100 and you don’t even have to clean the toilet for your tenants at 2am on a Saturday!
How? Crowdfunding.
Real estate crowdfunding has burst onto the investment scene, giving regular investors access to commercial real estate deals that were previously only available to the rich (and connected).
But what is real estate crowdfunding and how does it work? And what are some of the pros and cons of investing in crowdfunded real estate?
What is Real Estate Crowdfunding?
Real estate crowdfunding allows investors to invest in commercial real estate projects with a (relatively) small minimum investment. The funds pool to invest in larger real estate projects, paying regular dividends to investors.
Source: Giphy.com
The idea of crowdfunding is not new (Kickstarter, anyone?), but until recently it was out of reach for retail investors. But in 2016, the Jumpstart Our Business Startups Act went into effect, allowing “non-accredited” investors to support private companies for the first time.
Prior to this, in order to invest in private companies, investors had to be “accredited”, which means they had to have a net worth of at least $1 million (not including their main residence) or earn at least $200,000 for at least two years.
Most real estate crowdfunding platforms offer a wide variety of deals in their marketplace, user-friendly dashboards, and a simple registration process that allows investors to quickly start investing in commercial real estate deals.
How Real Estate Crowdfunding Works
Real estate crowdfunding is a way to raise capital for commercial real estate projects, which can involve various investments, including;
- Commercial business buildings
- Residential buildings
- Adult care facilities
- apartment buildings
- farmland
- Or other real estate holdings
Generally, there are two types of investments available for crowdfunded real estate:
- Impartiality. You can invest in shares of a real estate project, giving you a percentage of the capital in the investment. Equity investments typically generate quarterly dividends from rents collected or other income-generating activities.
- Duty. Debt investments are usually loans to owners of commercial investment projects that pay interest to investors on a monthly basis in the form of dividends.
Read more: What are dividends?
Real Estate Crowdfunding Sites
Real estate crowdfunding is usually done through a platform that offers investments in commercial real estate deals through its marketplace. Some examples you may have heard of are CrowdStreet. Fundraisingas well as Streetwise.
These real estate crowdfunding sites offer an easy way to view upcoming investment opportunities, as well as showing the details of each project, including minimum investment, deal timeframe, and expected returns.
Read more: Best Real Estate Crowdfunding Sites
Websites typically manage relationships with project owners, also known as “sponsors”, and charge a platform fee on all investments.
The sponsors also receive a share of the income from the project as they manage the project, including improvements, operations and interactions with contractors and property management companies.
Accredited and non-accredited investors
The Securities and Exchange Commission (SEC) defines an accredited investor as someone who earns at least $200,000 per year (or $300,000 with spouse) or has a net worth of $1 million (or more) outside of their core living place.
Even though crowdfunding opens up the market, some crowdfunding sites still require you to be an accredited investor in order to invest in individual deals.
On the other hand, non-accredited investors simply do not qualify for accreditation, and there are some restrictions on crowdfunding investments:
- Investors with less than $124,000 in income or net worth can only invest up to 5% of that number (or $2,500) per year.
- Investors with more than $124,000 in income or net worth can only invest up to 10% of that number, up to $124,000 per year.
Read more: How to become an accredited investor
Pros and Cons of Real Estate Crowdfunding
Real estate is a time-tested investment that can bring great returns, but as with any investment, there are always risks. Crowdfunded real estate has opened up a new asset class to retail investors, but not to everyone.
pros
- High potential return
- Regularly pays dividends (passive income)
- Professionally verified real estate transactions
- Access to commercial real estate for a low minimum investment
- No landlord or property manager headaches
- A way to diversify your investments into another asset class
Minuses
- Illiquid investments as you cannot access your funds for many years
- Due diligence is still required – you need to understand investments before you invest
- Platform fees, sponsor fees, and other fees may reduce earnings.
- Dividend payouts mean you can pay more taxes
- Some platforms still require accreditation to access individual deals.
Is it worth investing in real estate crowdfunding?
Real estate crowdfunding offers an easy way to invest small amounts and generate potentially impressive returns. But it’s important to remember that real estate investments are inherently risky, and crowdfunding is no exception.
Source: Giphy.com
Real estate crowdfunding may not be the kind of investment you can put all your savings into, or even a significant percentage of your assets. But you may want to consider it for a small percentage of your portfolio if you are looking for a high risk, high reward opportunity.
Read more: Is real estate passive income?
As always, it’s important to do your own research to fully understand any investment you add to your portfolio, and in the case of real estate crowdfunding, you’ll need to dive into the details of the deal you want to invest in. statements and study of the market in which the investment is located.
You can consult with a licensed financial professional to find out how real estate can fit into your overall portfolio and help you achieve your short and long term goals.
Read more: How to choose the best financial advisor for you
How to start real estate crowdfunding
To get started, you can register for free on the crowdfunding platform. Most sites require you to fill out an application (such as registering a bank account) and some even require proof of your status as an accredited investor (although most platforms now accept non-accredited investors).
You can then browse the market and find open trades to invest in. You can choose a trade, fill out an application, and then transfer funds to the investment platform. Some platforms offer conference calls with deal sponsors to ask any pertinent questions you may have, and some platforms even offer portfolio management services for investors with large sums invested in the platform.
In addition to investing in individual deals, many platforms offer real estate investment funds (REITs) that invest in multiple projects at the same time, creating a diversified real estate holding in a single investment. Unlike publicly traded REITs, these investments do not have a market for trading and are considered illiquid investments.
Read more: How to invest in REITs
What to consider before investing
So, the idea of crowdfunded real estate is interesting and you are ready to join it. Excellent!
Here are a few things to consider before investing in one of these platforms;
- Compare. Check out a few different sites as fees, minimum amounts, and deal terms vary. Find one that suits your investment requirements.
- Budget. It is important to know how much you can (and are willing to) invest before choosing a trade. Some minimum transaction amounts are high (eg $25,000), so make sure you know how much you can afford to invest before you start.
- Know the Timeline. Most real estate crowdfunding deals have a long time scale and your money is locked up for years. Make sure that any funds you invest will not be required until the investment is mature.
- Review. Most platforms offer access to commercial real estate, but there are many different types. Be sure to review your preferred assets before choosing a platform and investing.
- Consult. Again, it is important to understand how real estate crowdfunding can fit into the larger financial picture of your life. Consulting with a financial professional can help you choose the right investments, avoid tax mistakes, and keep your entire portfolio diversified and focused on your goals.
Read more: Top tips to help you get started investing
bottom line
Crowdfunded real estate is still a fairly new concept for investors, but over the past few years it has grown into a solid asset class. With a growing number of high-quality platforms, more asset types to invest in, and a track record of high returns, this can be a great way to diversify (and grow) your portfolio.
But investing in real estate comes with risks and you can lose real money even through a crowdfunding platform. While rare, some crowdfunded real estate investments have lost all investor funds. This can be mitigated somewhat by investing in a REIT fund that invests in multiple projects, but there is always a risk of loss.
If you want to diversify your portfolio into a long-term, well-performing asset class and don’t mind investing long-term, crowdfunded real estate can be a great option.
Featured Image: wantanddo/Shutterstock.com