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Real Estate Crowdfunding: What It Is and How It Works

BY GINA SPARROW | 4 min read

Given the popularity of both crowdfunding and real estate investing, it only makes sense that these two investment methods would join forces to create real estate crowdfunding

Real estate crowdfunding is the process of enlisting a group of individuals to invest and become shareholders in a property. This differs from traditional capital raising in that it asks a group of individuals to pool small amounts of money instead of one person or entity for a large sum. New housing developments, office buildings, and retail spaces, among others, are viewed as potentially big money-makers for qualified and astute investors. 

Keep reading to discover how real estate crowdfunding works and if it fits your investment portfolio!

 

How Real Estate Crowdfunding Works 

Real estate crowdfunding begins with a Sponsor (the primary property investor) planning and executing the crowdfunding process via an online platform built for real estate investments. Platforms like Fundrise, Crowdstreet, and RealtyMogul are big players in real estate crowdfunding, offering a relatively low-risk way for investors to expand their investment portfolio. Investors are given a set amount of equity and recurring or one-time payments depending on the deal structure. 

 

Advantages and Disadvantages of Real Estate Crowdfunding

As with any investment opportunity, there are potential risks and rewards. Having as much information about real estate crowdfunding as possible can help determine whether it fits your investment portfolio. 

 

Advantages 

 

1. It’s a great way to diversify your portfolio.

When deciding to invest, spreading the risk associated with different markets is essential. If you invest $50,000 in one market and it fails, you can lose all your money. Spreading the same amount of capital across multiple investments helps lower your overall loss risk. 

 

2. Low buy-in costs.

With real estate crowdfunding, the initial investment is low compared to the hundreds of thousands of dollars it traditionally costs to own property. Crowdfunding your real estate investment gives you the benefits of property ownership without the hassle of buying a property outright. Some crowdfunding platforms like DiversyFund have a minimum buy-in of just $500 USD. 

 

3. It can provide valuable feedback.

If you’re new to real estate crowdfunding, the open forum of a crowdfunding platform is a gold mine for positive and negative feedback. With some industry tips, you can learn valuable insights from potential customers, real estate professionals, and contractors. Once you get the kinks out, your campaign can soar to new heights and have a built-in network. 

 

Always on the lookout for feedback for your organization? Consider a prize challenge to gain customer insights. 

 

Disadvantages

 

1. The fees can add up.

No matter which platform you use, there will be fees incurred. Management fees, processing fees, and other vague titles still add up to the fact that you will pay between 1% and 3% of your assets. It may seem nominal, but those fees can add up quickly.

 

2. Some platforms require accredited investors. 

Many big real estate crowdfunding sites only allow accredited investors to fund investment campaigns. Accredited investors are individuals or legal entities with a net worth of over $1 million or an annual income of $200,000 or more. Some platforms like Fundrise will allow non-accredited investors to participate; however, most require proof of substantial financial worth.

 

3. You won't be in control. 

The management of the property you invest in is in someone else’s hands, and you likely will have little to no say in how it’s being run. The process is essentially hands-off for investors, relying on property management teams to ensure the investment property is well-maintained. 

 

Questions to consider before diving into real estate crowdfunding

  1. Am I a hands-off investor, or do I want to be included in the decision-making? 
  2. Do I meet the requirements to become an accredited investor? 
  3. Is the real estate market viable in the geographical area the investment is located? 

If your answers to the above questions align with the advantages of real estate crowdfunding, go ahead and dip your toes in the investment pond. Otherwise, consider alternative crowdfunding and traditional opportunities to grow your portfolio. 

 

How to Invest in Real Estate Crowdfunding

A plethora of real estate crowdfunding platforms are available, all serving a similar purpose in different ways. Since real estate crowdfunding is relatively new, doing your homework before diving in is essential. Reading reviews of the platforms and checking what types of fees they charge are a couple of primary steps necessary to determine if the platform is reputable and a good fit for your investment dollars. Relying on third-party websites specializing in investments is often the easiest and most effective means of weeding out potentially risky platforms. 

 

Websites like Nerdwallet regularly compare and review real estate crowdfunding platforms to help you determine which produces high returns for investors. Some investors will choose to use multiple platforms to increase profitability and decrease some of the risks. Investing in various properties of differing sizes, locations, and functions is a great way to stretch your investment budget and diversify your portfolio. 

 

Of course, as with any investment, there are some risks and regulations to be aware of before signing on the dotted line. Risks of real estate crowdfunding include:

  1. It’s not considered a secure investment. If the platform used to manage the crowdfunding goes under, the investments would not be inherently protected. 
  2. It’s susceptible to fraud. Real estate crowdfunding opens a lot of opportunities to attract qualified investors; unfortunately, it can also be a haven for fraudulent profiles posing as credible investors. 
  3. The payoff could take years or never come at all. When investing in real estate through crowdfunding, you trust a third party to manage the property and adhere to the business plan, and if they fail to succeed, you could lose your investment.

Conclusion

Real estate crowdfunding is an excellent opportunity for savvy investors to expand their portfolios and enter a historically successful investment market. These projects can be profitable for individuals and, more importantly, open opportunities for social impact in local communities.

Interested in learning more about crowdfunding and crowdsourcing for your organization? Join our email list to get the most up-to-date information, allowing you to expand your portfolio and opportunities for innovation. 

 

 

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