What is Crowdfunding Real Estate?


Jeremy BiberdorfBy: Jeremy Biberdorf

March 27, 2023March 27, 2023

Crowdfunding real estate is a relatively new type of real estate investing that’s taken off in recent years. In this type of investing, individual investors pool funds together towards real estate investments, which allows them to fund projects without needing to contribute a large amount of capital on an individual level.

Lowering the barrier to entry for investing in real estate while still offering the potential for higher returns, it’s no surprise that this type of investing is becoming increasingly popular.

Now that you have a general idea of what this type of investing is, let’s dive deeper into the details to learn more about the benefits, risks, and specific methods used in this type of investing.

Prerequisites

Just like with any other type of investment, it’s important for investors to remember that investment opportunity specifics will vary from project to project. Whereas some opportunities may be offered to non-accredited investors, others may be exclusively presented to accredited investors.

The minimum investment will vary between crowdfunding projects, as well as other specifics like the projected return on investment, anticipated annual income, or fees. You’ll want to keep these requirements in mind as you compare various real estate crowdfunding sites & projects.

Types of Crowdfunding Real Estate

Potential investors need to be aware that there are three different main types of crowdfunding real estate: equity-based crowdfunding, debt-based crowdfunding, and donation-based crowdfunding.

Equity Investments

With equity investments, individuals purchase parts of real estate properties called “shares”. Each share represents a portion of the property that the investor owns, which entitled them to profits made from rental income or from the sale of real estate properties they have in their investment portfolio.

Although the investor is entitled to these returns, they aren’t responsible for managing the real estate investments, as these responsibilities fall on the crowdfunding platform.

Debt Investments

For this type of crowdfunding, investors serve as lenders to the borrower (who’s investing in individual properties). Similarly to equity-based crowdfunded projects, investors aren’t responsible for managing the properties: this responsibility falls on the borrower.

Rather than earning money from rental income or similar income streams, debt investors receive regular interest payments for their loaned capital. With most arrangements, the principal is also returned to them once the loan term is over.

However, like the stock market, there’s always a chance that things can take a turn for the worse. If the borrower defaults on the loan, lenders may struggle—or even find it impossible—to recover their funds.

Donation-based Crowdfunding

As the name implies, this type of crowdfunding involves individual investors donating capital to real estate projects without expecting any financial returns from their donation.

Advantages of Crowdfunding Real Estate

Crowdfunding campaigns offer a variety of different benefits to the average investor, with the most notable being the relatively low initial investment requirements.

Whereas traditional investments in the real estate market often require tens of thousands of dollars to be committed upfront, many of these alternative investments allow investors to start enjoying annual returns with investments in the hundreds.

Investors will also have access to a wider range of investment opportunity options, including both residential and commercial properties. As an added bonus, crowdfunded projects also tend to offer greater transparency regarding an investment’s track record and past rate of return.

This type of investment even offers higher levels of control over one’s investment(s) than traditional real estate investments do.

Risks of Crowdfunding Real Estate

Although passive income and a lower minimum investment are certainly compelling arguments, there are a few factors that may dissuade one from trying crowdfunded real estate platforms for themselves.

One such factor is the fees. Advisory fees (often called a management fee) will be an ongoing expense to consider, as well as any project costs you may need to contribute to.

Another factor is the general lack of liquidity these investments tend to have. This could be an issue if you’re not prepared to make a long-term investment.

Platforms for Crowdfunding Real Estate

Now that we’ve gone over the different types of real estate crowdfunding platform setups there are, let’s take a look at some recommended platforms! We highly recommend doing your own research on each real estate crowdfunding platform, not only to see their specific T&C, but also to check on their latest offerings.

RealtyMogul

RealtyMogul

Open to both accredited and non-accredited investors, RealtyMogul presents the opportunity to invest in various commercial properties.

Offering access to both individual properties and REITs (real estate investment trusts), RealtyMogul’s $5,000 minimum investment is fairly low when compared to the competition.

You can learn more about the platform here.
Learn More

CrowdStreet

Crowdstreet

Offering investment opportunities to accredited investors only, CrowdStreet presents investors with a selection of heavily-vetted commercial real estate investment properties. Although it does require a minimum investment of $25,000, CrowdStreet excels when it comes to transparency.

In fact, CrowdStreet provides all of the information you’ll want before making any investment decisions in the form of documentation, webinars, and videos. This enables investors to consider all of the relevant factors of a property before deciding to invest.

Click here to see the latest CrowdStreet offerings!
Learn More

Summary

What is crowdfunding real estate? Well, now you know: the term actually encompasses a lot of different investment opportunities! Whether you decide to invest in a REIT as a non-accredited investor or turn your attention to the farmlands, there’s no doubt that these platforms can offer compelling returns for investors.

If you’re interested in exploring the world of crowdfunding real estate, we recommend researching different platforms and investment opportunities. With careful consideration and due diligence, you can potentially reap the rewards of this exciting investment space. Begin your journey and start enjoying the returns of crowdfunding real estate today!

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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