Investing in real estate is a great way to diversify your investment portfolio while securing your future source of income. However, not every real estate investor has the finances to invest in real estate. Real estate crowdfunding has opened up a new path for investors allowing them to invest with ease.
What is Real Estate Crowdfunding & How does It Work
Real estate crowdfunding is an easy way for borrowers and investors to pool funds together for different real estate investment projects. Both parties benefit from real estate crowdfunding. Borrowers can quickly raise funds for projects and investors can add real estate to their portfolios.
There are two primary ways to invest in real estate crowdfunding. You can either make equity investments in commercial or residential properties or invest in debt investments. In equity investments, the investor receives an equity stake in the property in exchange for funding the project. The returns are in the form of a share of the rental income that the property generates. Real estate investors usually receive payouts on a quarterly basis.
On the contrary, when you invest in debt, you’re investing in the mortgage loan that is associated with a particular property. The loans are repaid with interest, a percentage of which is then paid to each real estate investor participating in the deal. Investors can receive payments on a monthly or quarterly basis.
Of the two types of investments, equity investments offer a higher return on investment since the profitability of debt investments is limited by the interest rate of the loan. However, equity investments carry more risks, require a longer holding period, and are last to be paid back.
Why Is Crowdfunding Real Estate Beneficial for Investors
Real estate crowdfunding offers various advantages for property investors. Compared to other types of real estate investments like Real Estate Investment Trusts (REIT), real estate crowdfunding has the upper hand when it comes to the following:
Transparency
Real estate crowdfunding has the upper hand in terms of transparency and control over asset selection and location. Other types of real estate investments like REITs give real estate investors limited information about the underlying access. There are numerous real estate crowdfunding websites that give investors the opportunity to review all the details concerning the deal before making a final investment decision.
Availability of low levels of investment
Real estate investors can find multiple offerings with a wide range of amounts needed to participate. Some real estate crowdfunding companies feature deals with a $5,000 minimum buy-in.
Diversification
Every real estate investor understands the importance of diversifying their investments. Having proper diversification is proven to increase your overall long-term return on investment. Real estate crowdfunding allows investors to diversify their portfolios with an array of investments both in commercial and residential properties. Investors have the opportunity to gain exposure to a new asset class with very few barriers to entry.
Tax Benefits
Buying an investment property comes with many benefits on the side such as your ability to deduct depreciation and other associated expenses for the property’s maintenance. Unlike REITs, real estate crowdfunding allows equity investors to obtain the rewards of depreciation deduction and tax benefits without having to actually own the property.
No Work Involved on your Behalf
The real estate crowdfunding company does most of the work. So if you are looking for a hands-on type of investment, then crowdfunding is not for you. The company will also sell real estate on your behalf so you can make money in real estate passively without having to work for it.
Ability to Work with Proven Experts
One of the most appealing aspects of real estate crowdfunding is that investors have the ability to invest in multiple projects over time with proven crowdfunding experts. Real estate crowdfunding gives investors the flexibility to pick and choose the deals that they find most attractive. Additionally, investors can invest in one deal or they can add more than one project to their portfolio.
Pros And Cons Of Real Estate Crowdfunding
Debating the upside and downside of any investment stream should be a constant practice when real estate investing. You will be able to find the best real estate crowdfunding channels to pour cash into.
Pros
- There’s no investment too small or too big.
- Real estate investors can contact the developers and give insights.
- The real estate investor decides what’s best and what development project is the best fit.
- A wide selection of investment opportunities. You will find something to fit your needs.
Cons
- Same amount of risk as any real estate investment venture. Depending on the real estate market, your revenue will fluctuate.
- Higher risk of developers default than peer-to-peer investing.
- Not the most popular stream of investing; can reflect on liquidity.
All things considered, you can begin searching for the best real estate crowdfunding channels to put your money in. Keep in mind the return on investment is all that matters. If a certain project brings you the highest return on investment rate, you should most likely invest in it. Yet, don’t be hasty and study all aspects and opportunities before making up your mind.
Besides that, real estate investors mustn’t treat real estate crowdfunding any different than buying an investment property. It can be a low risk investment and a high risk one as well. So, do your due diligence and take your time to study your options.
Who can Participate in Real Estate Crowdfunding?
Until only recently, only accredited investors were allowed to invest in real estate crowdfunding. An accredited investor is someone who has a minimum net worth of $1 million or an annual income of at least $200,000! This is even more for married investors who are required to have an annual income of $300,000.
However, the regulations concerning real estate crowdfunding have changed over the years and are allowing smaller investors to enter. Non-accredited investors who earn $100,000 annual income are able to put in 10% of their income into real estate crowdfunding investments each year. Real estate investors who earn less than $100,000 are able to put in 5% annually.
How Should You Choose a Real Estate Crowdfunding Platform?
There are over 50 real estate crowdfunding platforms to choose from. Just like traditional real estate investing, real estate investors have to do their research when deciding which real estate crowdfunding platform is for them.
- Research the founders and the management of the real estate crowdfunding platform. Make sure they have the capital that will allow them to be in business for a long time. Check to see if they are reputable and have experience in real estate, investment property financing strategies, and technology to manage real estate crowdfunding.
- Every real estate crowdfunding platform has its own niche and real estate investment strategy. Make sure these match up with your own goals for investing in real estate.
- Find a real estate crowdfunding platform that is transparent with its real estate investors. When buying investment property, real estate investors find out every detail they can before making a decision. Real estate crowdfunding should be no different.
- The real estate crowdfunding platform you choose should have great customer service and open channels of communication. This should apply both before and after fundraising.
Real estate crowdfunding is another type of real estate investing that real estate investors should be aware of. It expands the real estate investment opportunities that real estate investors have and allows them to easily invest online. As long as a real estate investor does the due diligence with each potential real estate investment, real estate crowdfunding deals can turn into successful real estate investments.
Best Real Estate Crowdfunding Sites
Here is a list of some of the best real estate crowdfunding websites for both accredited and non-accredited investors.
1. Fundrise
Fundrise is usually the top of the list for real estate crowdfunding websites. It’s a great website for raising capital and it allows you to invest as little as $500 into an investment deal that you see best fits. With Fundrise, you can enjoy a high return on investment with an annual average dividend of 8%.
2. GroundFloor
GroundFloor is another real estate crowdfunding website for both accredited and non-accredited investors. This website offers you full details for your choice of investment. You are free to choose the loan plan and specific projects that suit you best. The annual average return on investment is 10%.
3. Holdfolio
Holdfolio is one of best real estate crowdfunding websites because they diversify your investment into many investment properties. Their average return on investment is 10% which is considered a very high ROI.
4. Realty Mogul
This real estate crowdfunding website gives investors the opportunity to choose a specific investment property or invest in multiple properties. They have an array of properties from multifamily investment property to commercial real estate investment properties. Realty Mogul accepts a minimum cash investment of $1,000 and fees range from 0.3-0.5%. This real estate crowdfunding website also provides debt and equity financing for borrowers.
5. PeerStreet
PeerStreet is considered to be one of the top real estate crowdfunding sites. Property investors have options that range from residential real estate to a few small multifamily real estate and commercial real estate investment properties. With PeerStreet, real estate investors can either choose a specific investment property or opt for an investment portfolio.
The minimum cash investment is $1,000, as opposed to the traditional 20-30% cash investment for real estate investing. This usually amounts to $50,000 to $100,000. PeerStreet has allowed accredited investors to put down less of a cash investment for lower risk real estate investing.
While the annual fees are 1%, the average return on investment is 6-12%. Anyone with real estate investing experience will tell you this is considered a pretty good return on investment! Property investors receive dividends from PeerStreet monthly.
But what makes PeerStreet one of the best real estate crowdfunding sites? Transparency. PeerStreet allows real estate investors to take a look at the performance of every investment property they’ve handled in the past. While most real estate crowdfunding sites will claim they take investment analysis seriously, PeerStreet actually proves it with the transparency of their investment portfolio and investment properties.
6. CrowdStreet
The second on our list of the best real estate crowdfunding sites for accredited investors is CrowdStreet. This platform offers commercial real estate investment properties like apartments and office buildings (in the form of equity and direct investing).
The minimum cash investment of $10,000, while high, is still lower than a traditional down payment. Crowdstreet has no direct fees, but there are fees when investing in funds. The average return on investment is 10%. Even more impressive is the average return on investment of six of their realized investments: 22.6%.
What puts Crowdstreet in the running for the top real estate crowdfunding site is how many property investors have already trusted this platform with their cash investment: over 35,000. This allows any potential investor to feel at rest walking into a vast community of their peers.
FAQs
How can I start crowdfunding in real estate?
When embarking on a journey to engage in real estate crowdfunding, your first step should involve researching various platforms. Compare these platforms to find the one that best aligns with your financial goals, budget, and investment preferences.
How much money do I need to start crowdfunding real estate?
The amount of money required to begin crowdfunding real estate can vary depending on the platform. Some platforms may permit you to initiate investments with as little as $500 to $1,000. It’s advisable to check the specific minimum investment requirements of the platform you choose.
Is it easy to make money from crowdfunding real estate?
Crowdfunding real estate offers the potential to generate profits, but it’s essential to understand that like any investment, it carries inherent risks. Real estate investments are not guaranteed to yield positive returns, and the exact return on your investment cannot be predicted with certainty.
What’s the difference between accredited and nonaccredited investors?
One distinction between real estate crowdfunding sites is just what kind of real estate investor qualifies to use the online platform. There are two types of real estate investors: accredited and non accredited investors.
To qualify as an accredited investor, you must have:
- An individual income of at least $200,000 or a joint income of at least $300,000 for the past two years.
- Individual or joint net worth of at least $1 million, not including the value of a primary residence.
- You must be a general partner, director, or executive officer for the issuer of non regulated securities.
If these three qualities don’t apply to you, you’re a non accredited investor. Luckily, real estate crowdfunding has come a long way from when it first started. More and more sites are beginning to cater to non accredited investors as well as accredited investors.
If you’re a non accredited investor looking for the best way to increase your income, consider investing with Mashvisor. Find and analyze investment properties for the best return on investment.
The bottom line
Real estate crowdfunding has established itself as a major game changer over the past couple of years. It comes with many advantages for both borrowers and investors. As long as you do your due diligence correctly, you can turn any real estate crowdfunding deal into a successful real estate investment.
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