What Is Real Estate Crowdfunding and How Does It Work?

Updated November 30, 2021

Real estate has been a top-performing asset class for decades, and it continues to offer a great way to earn passive income, while diversifying a portfolio and potentially saving money on taxes at the same time. Commercial real estate has also provided generous returns, averaging over 10% over the past 40 years. 

But the barrier to entry for real estate may be high for some investors. It’s generally recommended to make a 20% down payment on houses, which could equate to tens of thousands of dollars. Meanwhile, commercial real estate was virtually inaccessible to retail investors until recently. 

Real estate crowdfunding sites have paved the way to give average investors access to commercial and residential real estate investments, for a fraction of the cost.

What Is Real Estate Crowdfunding?

Real estate crowdfunding is the process of raising capital for real estate projects or products, including residential real estate, commercial properties, and debt instruments, such as mortgage loans. Crowdfunding allows companies to collect smaller amounts of funding from a larger pool of investors, potentially raising more capital than is otherwise available from traditional fundraising avenues.

Real estate crowdfunding became available with the passing of the Jumpstart Our Business Startups (or “JOBS”) act. This bill enabled small and mid-sized businesses to use crowdfunding as a source of capital for business needs. This was originally only available to accredited investors, but the SEC lifted those restrictions in 2016, opening up crowdfunded real estate opportunities to regular investors.

How Does Real Estate Crowdfunding Work?

Real estate crowdfunding platforms offer users the ability to invest online, with money being pooled into a company or investment trust, for the purpose of investing in residential or commercial real estate projects. Investors purchase shares of equity in a real estate project, and in turn, earn a portion of the returns associated with the project.

Besides equity investments, some real estate crowdfunding platforms also offer investing in secured loans for real estate properties, such as mortgages. This allows investors to collect interest payments monthly for a more regular return.

Most crowdfunded investments in real estate require a multi-year lock up period, making the investment illiquid. Publicly-traded real estate investment trusts (REITs) are the exception to this rule, and are available to trade on stock exchanges.

Pros and Cons

While investing in real estate through crowdfunding can be a great way to gain exposure to a new asset class, there are some downsides to it as well. Here are a few of the pros and cons to real estate crowdfunding:

Pros

  • Portfolio diversification
  • Low barrier to entry (as low as $100)
  • Regular dividend payouts
  • Less hassle than being a landlord
  • Invest entirely online

Cons

  • Tax implications (dividends may be taxed at ordinary income rates)
  • Illiquid investment
  • Accredited investor status required on some platforms
  • High fees

Best Crowdfunding Platforms

There are quite a few crowdfunding platforms available today, with new options available each year. Each platform offers something for a specific type of investor, whether you are a beginner or fully accredited. We’ve reviewed several of these companies in our guide of the 10 best crowdfunding sites, but here are some of the best real estate crowdfunding platforms available today.

CrowdStreet

While CrowdStreet is reserved for accredited investors, it is our No. 1 overall pick for crowdfunded real estate investing. It offers an intuitive website to browse for deals, multiple types of investments, and higher-than-average returns compared to other platforms. It focuses on commercial real estate projects with high upside, and only accepts a small portion of the deals they are presented with, keeping the investment standards high.

RELATED: CrowdStreet Review

Fundrise 

Fundrise is one of the original crowdfunded real estate platforms that is ideal for beginner investors. No accredited investor status is required, and investments start as low as $1,000. Fundrise also offers a simple-to-use mobile app for viewing your portfolio and investments on the go, as well as the ability to invest within an IRA for tax efficiency. 

RELATED: Fundrise Review

Arrived Homes

Arrived Homes is a newer crowdfunding site that focuses exclusively on single-family home rentals. With a low ($100) minimum investment, transparent fee structure, and program that allows tenants to be shareholders as well, Arrived is a great option for investors that want access to rental real estate, without the headache of being a landlord.

RELATED: Arrived Homes Review

Can You Lose Money With Real Estate Crowdfunding?

Yes. As with most equity investments, investing in real estate crowdfunding comes with a risk of loss. This includes the possibility of losing your entire investment.

That being said, most crowdfunding real estate platforms don’t own your investing dollars, as you are investing directly into real estate deals. Each investment creates an individual LLC for the project, and those companies are independent of the real estate crowdfunding platform.

How Much Money Can You Make in Real Estate Crowdfunding?

While real estate crowdfunding platforms are relatively young, only becoming available in 2012, investment returns can be strong. CrowdStreet, for instance, boasts an average internal rate of return (IRR) of 17% on completed commercial real estate deals. Fundrise also shares its returns publicly, with annual returns from 7% to 16% over the past four years.

These returns include dividends and equity growth, and are based on deals that have been completed (property sold and investors paid out). And of course, all investors should keep in mind that past performance is not indicative of future results.

Alternatives to Real Estate Crowdfunding

If you want access to investment real estate, but don’t want to invest in individual projects through crowdfunding, you may want to consider investing in a REIT. REITs are investment companies that own assets related to real estate, such as buildings, land, and real estate securities. 

Public REITs can be traded on the stock market, making them a more liquid investment option than crowdfunded real estate deals. There are even REIT exchange-traded funds (ETFs) that follow a real estate index such as the MSCI U.S. REIT Index. Overall, REITs offer low fees and the ability to diversify your portfolio into real estate for little up front cost.

RELATED: The 10 Best Real Estate Crowdfunding Sites

References:

https://www.reit.com/sites/default/files/returns/sum.pdf 
https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm
https://www.crowdstreet.com/marketplace-performance/ 
https://fundrise.com/track-record 
 

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