Are you interested in investing in real estate but worried about having to buy your own property?
If so, you’ve come to the right place. I’m going to explain an approach that has helped people all over the world invest in real estate without having to manage their own own assets.
It’s called real estate crowdfunding. And, you can participate in it with little to no real estate experience. To learn more about real estate crowdfunding and how it works, keep reading. The opportunities are endless.
What Is Real Estate Crowdfunding?
Crowdfunding is a fundraising method that uses social media and the internet to reach a large pool of investors.
Real estate crowdfunding is popular because it makes it easy for a large number of people to invest a small amount of money. In total, these contributions can add up to a large amount, positioning the fundraiser to acquire a large property or even a portfolio of properties.
Without this approach, each person would have to invest a large sum to afford a property’s down payment, closing costs, and operational expenses.
Both real estate and other kinds of crowdfunding are popular investment opportunities because they allow normal people access to investments that were traditionally reserved for the wealthy.
In particular, real estate crowdfunding can be a savvy choice for individuals who can’t afford to invest in real estate on their own or who don’t want the hassles of managing real estate on a day-to-day basis.
How Does Real Estate Crowdfunding Work?
Real estate syndicators are businesses or individuals who make crowdfunding opportunities available to the public. As mentioned, a syndicator collects small amounts of money from a large group of people. Then, they are in charge of investing and managing the assets that they acquire using the crowdsourced funds.
Over time, real estate syndicators pay back their investors, typically distributing free cash flow from the properties and profit-sharing with investors when assets are sold or refinanced.
When you invest in real estate crowdfunding, you will typically own equity stakes in the properties that you invest in. In other words, you’ll have fractional (pro rata) ownership based on how much you invest.
With fractional ownership, you can take advantage of all of the best parts of real estate, such as price appreciation, cash flow, and tax advantages. However, you may not be able to use tax loopholes like 1031 exchanges to sell your position.
Real Estate Crowdfunding: Pros and Cons
In order to determine whether real estate crowdfunding is right for you, you will need to consider the advantages and disadvantages of the investment opportunity.
Let’s run through things you need to consider before investing your money into one of these systems.
The Advantages of Real Estate Crowdfunding
The first and most popular advantage of real estate crowdfunding is that it doesn’t involve a lot of money. In fact, most crowdfunding groups will accept investments as little as $1,000. Some groups will accept even smaller amounts, such as $500.
Real estate crowdfunding allows you to invest in real estate without having to worry about all of the intricate details of real estate management. You don’t have to clean the property, rent out the property, or maintain the property in any way.
The Disadvantages of Real Estate Crowdfunding
On the downside, crowdfunding doesn’t give you much control over the specific properties that you’re investing in. If you would like to be able to pick and choose the properties that you’re investing in, this may not be the best choice for you.
If you’re going to participate in real estate crowdfunding, you need to be able to trust the real estate syndicator who’s making the choices and management decisions for you.
Also, many people complain about the fees that come with real estate crowdfunding. There are both starting and recurring fees that come with each and every crowdfunding platform.
Real Estate Crowdfunding Returns
There’s no way to guarantee your returns with crowdfunding. But, the data behind crowdfunding investments looks good.
Fundrise reports that their 2021 returns through the third quarter have come out to 16.11% for all of their clients. Thus far, they’ve never had a negative quarter.
Another popular real estate crowdfunding site is CrowdStreet. CrowdStreet, reports that they have an 18.6% IRR with a 1.48x equity multiple. Those are historically strong returns.
Real Estate Crowdfunding Platforms
There are plenty of crowdfunding platforms to choose from. Here are some of the most popular picks for investors like you:
- CrowdStreet offers direct access to a range of commercial real estate investments
- DiversyFund uses a four-step strategy to help manage your cashflow
- EquityMultiple focuses on diversifying your platform through multiple assets
- Fundrise helps you invest in high-quality real estate for less than its replacement cost
- PeerStreet builds a diversified real estate portfolio for you
- RealtyMogul makes it easy to invest in commercial real estate with their four-step process to create, choose, invest, and track
Of course, you should do your research before you put your money into any of these crowdfunding sites. You’ll want to make sure that you’re making the most of your money, while getting a good risk to reward ratio.
You should also look at the fees that each of these sites charges. The fees they charge are the best way for these sites to make money. So, some of them charge high fees in exchange for their crowdfunding efforts.
Lastly, you should consider diversifying. If one real estate project fails, you’ll want another project (or a few projects) to fall back on. This may mean investing across several different sites. Or, it may involve joining several projects from one site.
In the end, you’ll want to make sure you’re making a smart investment that you’ve thoroughly researched. Don’t rely on crowdfunding sites to do the research for you.
All About Real Estate Crowdfunding
Is real estate crowdfunding the right option for you? Let me know your thoughts in comments below.
If you’re interested in learning more, check out the real estate section of the blog.