Real Estate Crowdfunding: What it is and How to Invest

Real estate can be a great way to diversify your portfolio and earn passive income. However, traditional real estate often requires high minimum investments, time to spend managing the investments and thorough knowledge of real estate law and regulation. Though it can be a great investment, the capital and time restrictions may be enough to deter investors from participating. 

Real estate investors who can’t afford to spend much time managing their properties or the high minimums associated with the real estate market may want to explore crowdfunding options. Learn how to use crowdfunding to build a diverse real estate portfolio and see whether it can help you achieve your financial goals. 

What Is Crowdfunding in Real Estate?

Crowdfunding is the process of gathering other investors to pitch in on a single investment opportunity. This can be done formally through platforms or informally among family and friends. It’s a great way to invest in a property or other opportunity that an investor couldn’t afford on their own. Crowdfunding can also help create a diverse portfolio of real estate holdings. Instead of investing a large sum into fully owning one property, investors can divide their capital for exposure to several properties that vary in type and market.

In the real estate market, crowdfunding has become a common practice. Many investors use crowdfunding platforms to identify real estate properties that are already vetted by a team of professionals. Investors can view the property details, and the investment time horizon and purchase one or multiple shares of the property. 

There are two common models for real estate crowdfunding: equity crowdfunding and debt-based crowdfunding. In equity crowdfunding, the investors own a piece of the property. They may receive passive income from rent payments and returns as the property appreciates. In debt-based crowdfunding, the investor’s capital is loaned to the property owner, typically to try to buy a property. In this model, the investors are earning passive income from interest payments.

What Else Can Crowdfunding Be Used For?

Crowdfunding also is a popular way to raise equity in other financial markets. It can be used to raise capital for startup businesses, small business financing, art projects and nonprofit causes. Crowdfunding is typically used to raise equity for a business or project or to loan capital to an individual.

Advantages and Disadvantages of Real Estate Crowdfunding

Understanding the advantages and disadvantages of real estate crowdfunding is crucial for investors to make informed decisions when participating in this market.

Advantages

One of the key benefits of real estate crowdfunding is the ability to solicit a large pool of investors. Unlike traditional methods of investing in real estate, which often require significant personal connections or access to exclusive networks, crowdfunding platforms provide a level playing field where investors from various backgrounds can participate. This not only increases the chances of attracting funding for real estate projects but also allows for greater diversification of investments.

Another advantage is the lower capital requirements for investors. In traditional real estate investing, individuals typically need a substantial amount of capital to participate in high-yield real estate projects. Crowdfunding platforms, on the other hand, enable investors to contribute smaller amounts of money, sometimes as little as a few hundred dollars. This accessibility democratizes real estate investing, making it available to a broader range of investors.

Real estate crowdfunding opens up opportunities for non-accredited investors to participate in real estate projects. In the past, regulations limited participation in certain investment opportunities to accredited investors, who are wealthy individuals or institutions that meet certain income or net worth requirements. Real estate crowdfunding platforms, however, have made it possible for non-accredited investors to engage in real estate investing and gain exposure to this asset class.

Disadvantages

There are also several disadvantages that potential investors should consider. Real estate crowdfunding may result in a lack of understanding for everyday investors. Real estate investments can be complex and require extensive knowledge. Without proper understanding, investors may be at risk of making poor investment decisions, potentially leading to financial losses.

Real estate crowdfunding has a limited track record of companies involved in the industry.  Consequently, there may be a lack of historical data and performance track records for investors to assess the credibility and reliability of these platforms.

Investment Limits for Crowdfunding

Investment limits for crowdfunding are put in place to protect both investors and borrowers, ensuring that investments are made responsibly and that the potential risks are mitigated. In the United States, these limits are imposed by the US Securities and Exchange Commission (SEC). These limits specifically apply to non-accredited lenders, who are individuals that do not meet the specified income or net worth requirements.

Less than $124,000

Individuals with an annual income or net worth below $124,000 have the option to invest up to $2,500 or up to 5% of the lesser of their annual income or net worth in a 12-month period.

More than $124,000

Individuals with annual incomes and net worth equal to or greater than $124,000 can invest up to 10% of their income or net worth, whichever is lower, in a 12-month period, with a maximum investment limit of $124,000.

Steps for How to Use Crowdfunding to Invest in Real Estate

Many platforms connect you to crowdfunding opportunities. Here are step-by-step instructions to start building an informed, diverse real estate portfolio. 

Researching and Selecting the Right Crowdfunding Platform

Before you can search for investing opportunities, you’ll want to choose the best crowdfunding platform. There are several on the market, and they may seem similar. However, every platform has unique features and pricing structure.  

First, find a platform that has the opportunities you’re interested in. You’ll also want to research the vetting process for the properties it lists. Once you find a few platforms that have the types of real estate you want to invest in, you’ll need to conduct thorough research, considering track records, fees, exit opportunities and minimum investments. Some platforms may only allow accredited investors. You’ll be able to find most of this information on the platform website, but you’ll also want to look at third-party reviews and testimonials of past and current users. 

Creating an Equity Crowdfunding Strategy

Before making your first investment, you must create a strategy that will help you achieve your goals. Consider your goals and risk tolerance. This will help you create a budget for your real estate investments and filter through investments that don’t fit your strategy. 

There are a few types of real estate, the most common being residential, commercial and development. People who invest in residential properties could own shares in single-family homes or apartment/condo complexes. Investors can earn strong returns from rent and property appreciation, but leases are often year-to-year, so they may not be the most stable.

Commercial properties are rented by other businesses and typically have longer leases for added stability. These properties could be rented to retailers, distribution centers, manufacturing facilities or other companies. 

Development real estate is undeveloped land purchased with the intent to build on it and raise the property value. This can be a riskier investment because there’s no guarantee the project will work as intended. However, it can also produce strong returns.

Crowdfunding allows investors to fairly easily purchase shares in multiple properties and projects. Investing across the types of real estate can help investors build a diverse portfolio that will mitigate the risk of market volatility. 

Assessing Investment Opportunities

Many platforms vet the properties they list to ensure they are high-quality, legitimate investments. However, that does not guarantee that they are the best fit for your portfolio. Before investing, review the property’s location and type to identify the target market. You should also view the projected returns and exit strategies. Consider how these factors fit in with your overall strategy.

You should also compare these details to overall market trends. If it’s a single-family home, you’ll want to research average rent prices for that location, property trends and whether it seems like there’s room for growth. Conducting research will help ensure that your portfolio is full of high-quality investments that will serve your goals.

Managing Risks and Mitigating Potential Pitfalls

Real estate investing is risky because of market volatility and constantly changing consumer sentiment. The risk extends to crowdfunding opportunities, and investors should be aware to protect their investments. Lack of control, government regulation, market volatility and unsecured investments are just a few common risks associated with real estate crowdfunding. Though you’ll never be able to create a risk-free portfolio, there are actions you can take to mitigate it.

First, create a diverse portfolio. Changes in the economy will affect each area of real estate differently. For example, residential properties may decrease in value while commercial properties hold steady. Trends will also vary from location to location, so it’s also important to spread your investments geographically. 

Understanding the real estate market is important. Crowdfunding allows investors to be passive in their investments, but that doesn’t mean they should go into it blind. Understanding real estate market trends will inform your investment decisions. Ongoing monitoring will ensure that your investments continue to align with your interests and can help you determine when you may need to rebalance.

Engaging with Crowdfunding Community and Professionals

Investing can seem solitary, but the real estate investing community can provide valuable insights and opportunities. Experienced crowdfunding investors have years of knowledge you can learn from and provide you with a contact that you can reach out to with questions or concerns. 

It’s also important to have contacts in the real estate industry, such as property managers, legal advisers and real estate agents. The professionals can provide a business perspective that can help you identify good opportunities. Plus, you’ll have a network to fall back on in case you ever find yourself in need of one of these professionals.

Connecting with other investors and real estate experts is easier than ever thanks to the rise in social media and the internet. You can join social media groups, follow industry contacts and join online forums. In addition to the online community, in-person industry events are still going strong and are a great way to connect with others.

Monitoring and Exiting Investments

Just like traditional investments, it’s crucial to regularly monitor your crowdfunding real estate investments to ensure they continue to align with your goals. Crowdfunding is often an illiquid, long-term investment and there may not always be the option to exit prematurely. Before investing and choosing a crowdfunding platform, ensure you understand and are comfortable with the exit policy.

Compare Real Estate Crowdfunding Platforms

Finding the best real estate crowdfunding platform is the first step in building your real estate portfolio. Here are some of the top platforms on the market.

Crowdfunding Can Provide Easy Investing Accessibility

The real estate market has many exciting opportunities but has traditionally not been accessible to the majority of investors. Real estate crowdfunding allows investors to gain real estate exposure with lower minimum investment requirements and without the responsibility of managing a property. Conduct research into the top crowdfunding apps and learn how to use crowdfunding to invest in real estate and grow your portfolio.

Frequently Asked Questions