Real estate has long been an attractive asset class, providing diversification, passive income, and sometimes tax advantages, but until recently it has been out of reach for most investors. Real estate crowdfunding makes real estate a practical investment option for the average retail investor.
What Is Real Estate Crowdfunding?
Real estate crowdfunding is a way to invest in real estate without making a big down payment, without having to manage the property yourself, and without having to negotiate its eventual sale. Meanwhile, you can earn income and diversify your portfolio.
Crowdfunding is a way to raise a pool of money to finance an investment by allowing many investors to each invest a relatively small amount of funds. The idea is as old as stocks or bonds: instead of relying on a few large investors, attract many smaller investors by issuing many shares or bonds at a lower cost for each.
In today’s investment world, crowdfunding usually refers to investing in “alternative investments” that, until recently, had been difficult for individual retail investors to access, such as real estate or venture capital.
Real estate crowdfunding refers specifically to real estate investments. These may be equity or debt investments in specific residential or commercial properties, or in a private real estate investment trust (REIT) or fund.
Why Is Real Estate Crowdfunding Gaining Popularity?
Real estate has always provided diversity and strong income returns to a portfolio, as well as possible tax advantages. For many individuals, it has long been an attractive way to generate passive income.
But because each investment is unique, the time and knowledge required to vet each investment often overwhelmed smaller investors. Once purchased, the property had to be managed: tenants vetted, rents collected, repairs made, etc. And, real estate markets have historically been relatively illiquid, with localized, sometimes opaque, markets and fairly imprecise ways to assess value.
And, of course, a big hurdle has been the large upfront investment, requiring a big commitment of capital. These drawbacks made real estate investing, while attractive, just plain impractical for many investors.
For a while, publicly traded REITs looked like the answer, offering smaller investments in liquid shares, but there was still no way to access riskier–and potentially more lucrative–deals.
Now, crowdfunding platforms have made real estate investing practical and accessible, so its popularity as an investment is growing. The crowdfunding sponsor provides the information gathered from doing its due diligence along with valuation metrics for each investment. It also provides ongoing management of both the property and the investment. And, the platform creates some liquidity, depending on the deal structure.
Since the crowdfunding platform creates increased accessibility and transparency, more investors are able to seriously consider and actually invest in real estate. Due to the passage of the JOBS (Jumpstart Our Business Startups) Act in 2012 and the resulting rules that went into effect in 2016, crowdfunding can be offered to more investors with less regulations and oversight. In other words, crowdfunding can be used to sell securities in private deals, such as equity and debt investments in real estate.
Examples of Real Estate Crowdfunding Sites
Real estate crowdfunding platforms are designed to sell different investments to different investors. Investment choices vary by the type of
capital invested: equity or debt
earnings: rental income, interest, or gains
type of real estate: commercial, residential, and farmland
redemption restrictions (liquidity)
term of investment
All of these factors bear on the expected return. We’ve checked out some of the best real estate crowdfunding platforms for you, with details and comparisons for each.
Can Anyone Invest in Real Estate Crowdfunding?
Real estate crowdfunding is available to both accredited and non-accredited investors. These are two categories of investors, as defined by the U.S. Securities & Exchange Commission (SEC).
Accredited investors are classified by minimum income and/or wealth, or by demonstrated knowledge of investments, proved by having Series 7, 65, or 82 credentials. (Non-accredited investors are everyone else.)
Different kinds of investments will be available for accredited and non-accredited investors, with accredited investors typically having access to higher risk, less liquid investments with greater investment minimums.
Although crowdfunding has made real estate investments accessible to just about any investor, keep in mind that it may not be suitable for every investor. Real estate is a risky investment, with no guarantee of returns, and crowdfunding platforms are pretty new, so most don’t have a long track record of performance for you to study. As with any investment, you should be sure this kind of investment is really suitable for you.
Crowdfunded real estate platforms bring private real estate deals to more investors, offering a range of deal types, investments, income returns, and risks. Real estate has historically been an attractive–but often impractical–asset, and now more investors can take advantage of it through crowdfunded real estate platforms. If you think real estate investing is right for you, a crowdfunded platform may give you a way to jump onboard.
Want to learn more? Check out the best real estate crowdfunding sites.