Real estate crowdfunding has a lot of buzz! Investing in real estate has been one of the greatest wealth-creating investment vehicles ever known, and has surely proven the test of time.
But what is real estate crowdfunding, and how does real estate crowdfunding work? We’ll cover everything you need to know below about this profitable, and exciting, investment option.
Real Estate Crowdfunding Defined
Let’s start with the basics – what is real estate crowdfunding? On a high level, real estate crowdfunding is when numerous investors combine their capital and use that money to fund a real estate project.
Real estate development projects can cost millions of dollars, but that expense becomes a lot easier to overcome when numerous investors contribute a portion of money to the overall pie.
How Does Real Estate Crowdfunding Work?
The mechanics of real estate crowdfunding do not need to be overly complicated. Basically, numerous individuals pool their money together to invest in a large real estate transaction.
Ideally, all the numbers were calculated properly, and the individuals who invested their money receive interest each year as rent is collected. Real estate crowdfunding leverages technology, such as social media and dedicated real estate crowdfunding websites to connect investors with properties they may be interested in investing in.
What Are the Requirements for Crowdfunding Real Estate?
There are various requirements that must be met. Requirements include:
- Crowdfunding is permitted for accredited investors, which is a steep hill to climb.
- Various deals may have a minimum investment requirement
- You may need to hold the deal for a specific period of time
Requirements change by platform and real estate deal. Unfortunately, there is not a one size fits all approach.
How Much Money Can I Invest in Real Estate Crowdfunding?
Each deal may have a certain cap on how much money you can invest. However, you can find numerous deals to invest in, some providing greater upside potential than others.
Likewise, there is also usually an investment minimum attached to each investment opportunity when it comes to real estate crowdfunding.
How Much Money Can You Make With Real Estate Crowdfunding?
If you’re curious how much money you can make with real estate crowdfunding, that answer isn’t as straightforward as you may be wishing for. Each real estate deal has its own upside potential and downside risk that needs to be taken into account.
Like the stock market, there is unlimited upside, but every deal won’t be a major winner. On average though, real estate crowdfunding returns are about 11%-15%.
Can You Lose Money With Real Estate Crowdfunding?
All investments have risk associated with them. There are certainly real estate crowdfunding investments that do not generate profit, and there are certainly deals that actually create a loss for the investor.
This is why it is important for you to do your due diligence of research and to only work with accredited real estate crowdfunding platforms.
What Do Real Estate Crowdfunders Get in Return?
Why invest in real estate crowdfunding? What do real estate crowdfunders get in return?
Not only do real estate crowdfunders add diversification to their investment portfolio, they also receive dividend payments. The predictability of dividends is rather attractive and a great way to earn passive income!
Is Real Estate Crowdfunding Liquid?
Unfortunately, real estate crowdfunding is not nearly as liquid as other investments, such as purchasing stocks, ETFs or mutual funds. Most of these crowdfunding investments you’ll make have longer maturities of one to sometimes up to ten years, meaning your capital will be tied up for long periods of time.
If you want to invest in real estate, but are searching for a more liquid investment, consider REITs.
What to Consider With Crowdfunded Real Estate Investments
There are numerous variables one must consider when thinking about investing in a real estate crowdfunding deal. Of which, these are among the most important.
The annual fees vary by the crowdfunding platform you choose. Be sure to familiarize yourself with the annual fees of a given platform, and factor that into your profit equation.
Fees can quickly erode your profits so be sure to pick a platform who’s fees you are comfortable with. Different platforms offer different fee structures giving you a variety of options to choose what’s best for you.
Risk of the Project
Real estate deals can be risky. You must consider the risk to reward equation when factoring in the deal. Do your own research to consider what could go wrong with a given deal, or why the property may fail.
Debt Investment vs. Preferred Equity
There are a few ways real estate crowdfunding can work. A debt investment is when the crowdfunders functions as a mortgage lender, providing cash to make the deal possible.
Preferred equity typically comes with a guaranteed return, and a performance-based return depending on the success of the deal.
Debt to Capital Stack
The capital stack simply tells you the financial mechanics of the deal. It shows where the deal is sourcing money from, and who owns the rights to the assets.
The sponsor is the individual or group who is behind the deal. Similar to a mutual fund, you’ll want to track their previous years performance to get an understanding of how well the fund typically performs.
Following the sponsor’s investments and the return they generate can help give you insight into their performance.
The return target is how much the deal plans on making from an internal rate of return standpoint. The return target can fluctuate, but it is used to provide a general sense of how profitable a specific investment could be.
Check your crowdfunding platforms return target to better decide whether that investment is a good fit for your goals.
Advantages of Real Estate Crowdfunding
There are a lot of advantages and benefits to real estate crowdfunding. These benefits include:
- NOT Having Landlord Issues: As a real estate crowdfunding investor, you are NOT the landlord. If the pipe bursts in the middle of the night, if a tenant fights with another tenant, or if someone’s fridge broke, it’s not your issue, nor are you responsible for fixing it. A property manager and/or landlord will still look after the property and will have to deal with all of the landlord issues.
- Lower Minimum Investments: There are plenty of real estate crowdfunding deals that do not require a high minimum investment. You can find real estate crowdfunding investing options for as little as $1,000.
- Portfolio Diversification: Not only does real estate crowdfunding provide a channel to diversify your investment portfolio from the more traditional investment options, such as stocks or bonds, there are also plenty of ways to diversify your real estate crowdfunding portfolio. Some real estate crowdfunding deals have greater upside potential, whereas others are just a great consistent payer – similar to a blue chip dividend stock.
- Higher Dividends: There is the possibility to earn a high dividend through real estate crowdfunding.
Disadvantages of Real Estate Crowdfunding
Although the benefits are exciting, do not forget about the disadvantages. These disadvantages include:
- Needs Accreditation: One of the biggest disadvantages is the fact that real estate crowdfunding is for accredited investors. By no means does every investor fall into this category.
- Assets Are Not Liquid: Unlike a stock that you can sell on the open market at any time, real estate crowdfunding deals are not nearly as liquid. You couldn’t just sell your real estate deal immediately if you needed cash.
- Annual Fees: Each real estate crowdfunding platform will have their own fees associated with it. Some platforms have a fee less than 1%, whereas other platforms have fees that exceed 3%. Be sure to know what fees you’re responsible for before investing with any specific platform.
- Taxes: Real estate crowdfunding is not a tax loophole! You’ll be required to pay tax on the profit you earn. This isn’t a unique disadvantage to real estate crowdfunding, it’s present in stock and bond investing as well, but it’s something to be mindful of.
Real Estate Crowdfunding vs. REIT
Investing in a REIT, or a real estate crowdfunding deal, both provide one with access to diversifying their investment portfolio and investing in real estate. If you’re a REIT investor or a real estate crowdfunding investor, you will never have to deal with landlord issues or the upkeep of the property.
REITS tend to be a more conservative investment approach, and provide liquidity options. Real estate crowdfunding provides greater upside potential, but are not nearly as liquid.
Alternatives to Real Estate Crowdfunding
Real estate crowdfunding is not the only option if you are looking to invest your money. Here are common alternatives.
- Owning real estate: You can own real estate property! You can either rent property to tenants or flip homes to generate a profit through physically owning the real estate asset.
- Stocks: Stocks could be a great investment choice, and provide significant liquidity benefits.
- Mutual funds: If you don’t want to deal with the hassle of owning property, or building your own portfolio, investing in a mutual fund may be the option for you. This provides upside potential, and could even provide a passive income stream.
Get Started Investing in Real Estate With RealtyMogul
With that said, if you are interested in real estate crowdfunding, look no further than RealtyMogul. RealtyMogul is an excellent real estate crowdfunding platform that has a track record of success.
From REITS, to individual properties and even commercial building options, RealtyMogul can be a strategic partner as you look to build your real estate portfolio. Not only can RealtyMogul serve as your investment platform, they have a wealth of educational material that can help you make more informed investment decisions.