Real estate crowdfunding permits investors to participate in commercial real estate projects with a (relatively) low minimum amount. While it’s an excellent method to increase your diversification, investing in real property is always risky, even with crowdfunding.
Real estate is costly. And commercial real estate? You can forget about it.
In the real world, you can invest in quality real estate properties starting at just $100. You do not even need to clean the toilet of your tenants at 2 am on the weekend!
The crowdfunding market for real estate has opened up the investment scene, providing regular investors with access to deals in commercial real estate that were previously restricted to the wealthy.
What is real estate crowdfunding?
Real estate crowdfunding permits buyers to put their money into commercial real estate ventures with the cost of a (relatively) low minimum amount. These funds pool for investment in more prominent real estate developments and pay investors dividends regularly.
The concept of crowdfunding is familiar (Kickstarter, for instance? ). However, until the last few years, it was not accessible to retail investors. However, when the Jumpstart Our Business Startups Act was implemented in 2016, it permitted “non-accredited” investors to back private businesses for the first time.
Before this, investors had to be “accredited” to invest in private firms, which meant that they had to have a net worth of at least $1 million (not including their primary residential residence) or have earned at least $200,000 in at least two years.
Most crowdfunded real estate platforms provide a broad range of deals on their marketplace, user-friendly dashboards, and a straightforward onboarding process that allows investors to invest immediately in commercial real estate investments.
How real estate crowdfunding works
Real estate crowdfunding is a method to finance commercial real estate projects. These can comprise various investments, such as;
- Commercial buildings for business
- Apartment structures
- Adult care facilities
- Multi-family homes
- or other real estate holdings
There are generally two kinds of investment options for crowdfunded real estate properties:
- Equity. You can purchase shares of real estate properties, giving you a percentage of the equity invested in that investment. Equity investments usually offer quarterly dividends on rents earned or other income-generating activities.
- Debt. Most debt investments are credited to investment owners who pay monthly interest on investors through the method of dividends.
Accredited vs. non-accredited investors
Accredited investors are specified, according to the Securities and Exchange Commission (SEC), as a person who earns at least $200,000 in a year (or $300,000 if they are married) or has a net worth of at least $1 million (or greater) beyond their main home.
While crowdfunding is opening markets, some crowdfunding platforms will require that you be a registered investor before investing in deals that are not individual.
On the other hand, investors who need to be accredited need to meet the requirements for accreditation. There are a few restrictions on crowdfunding investments:
- Investors with a net worth below $124,000 may only invest up to five per cent of that (or $2,500) each year.
- Investors with an income or net worth of more than $124,000 may only invest 10% of the and up to $124,000 annually.
Pros and cons of real estate crowdfunding
The real estate market is a long-standing investment that has the potential to yield high returns. However, as with all investments, it is not without risk. Crowdfunded real estate is an entirely new asset class for retail investors, but it’s only suitable for some investors.
- High-potential returns
- Dividends are paid out regularly (passive income)
- Real estate deals that are professionally vetted
- Commercial real estate with a minimum investment of just a few dollars
- No property management or landlord problems
- A method to diversify your investment portfolio into a different asset class
- Illiquid investments, because you won’t be able to access your funds for many years
- It is still necessary to conduct due diligence is essential to know the risk before you invest
- Sponsor fees, platform fees, and other fees can lower returns.
- Dividends are a way to have to pay more taxes
- Specific platforms require accreditation to be able to access the individual offers
Should you invest in real estate crowdfunding?
Real estate crowdfunding is an opportunity to put money into small amounts and reap possible returns. It’s essential to be aware that real estate investing is inevitably dangerous, and crowdfunding isn’t an exception.
It may not be an investment to put your entire savings or a significant portion in your portfolio. However, consider it a small portion of your portfolio if you seek a high-risk reward, high-reward option.
Like all investments, it is important to conduct your own research to comprehend any investment you decide to add to your portfolio. And when it comes to real estate crowdfunding, you’ll need to know the specifics of the deal that you are considering investing in. This might involve reading financial statements as well as knowing about the market in which the investment is.
It is recommended to speak with a certified financial advisor to determine how real estate could fit within your overall portfolio as well as to assist you with your long-term and short-term goals.
How to get started with real estate crowdfunding
For a start to get started, sign up for an online crowdfunding platform at no cost. A majority of sites require an application (like opening an account with a bank) as well as some require you to verify your status as an accredited investor (though many platforms are now accepting individuals who do not have accreditation).
Then, you can browse the marketplace and locate deals that are available that you can invest your money in. You can pick the deal, then fill out the application, and transfer the money to the platform where you can invest. Certain platforms provide conferences with the deal’s sponsor to answer any pertinent questions you ask, and some platforms even provide portfolio management services to investors who have larger sums invested through the platform.
Alongside investing in deals on an individual basis, a number of platforms also offer REITs (REITs) that invest in several projects simultaneously and create a diverse real estate holding within an investment. In contrast to REITs that are publicly traded, they do not have a trading market and are regarded as an investment that is not liquid.
Things to consider before investing
Okay, so the concept of crowdfunding real estate is thrilling, and you’re eager to get involved. Great!
Here are some things to keep in mind before you put your cash into any of the platforms.
- Compare. Take a look at a variety of sites since the costs, as well as minimums and deal terms, differ. Find one that meets your investment needs.
- Budget. It’s crucial to know how much you’re able (and will) spend before deciding on an offer. Certain minimums for deals are very excessive (like $25,000 high). Make sure you’re aware of how much you’ll be able to spend prior to beginning.
- Be aware of the timeframe. The majority of real estate deals that are crowdfunded are lengthy in their timelines, locking your funds for several years. You must ensure that any investments you make aren’t needed until the property is fully developed.
- Review. A majority of platforms allow accessibility to real estate for commercial use. However, there are a variety of kinds. Check out your top assets prior to choosing the right platform and investing.
- Consult. In conclusion, it’s crucial to comprehend the way that real estate crowdfunding could be incorporated into a bigger financial plan for your life. You should choose the best investments, avoid tax-related mistakes and ensure that your overall portfolio is well-diversified with a focus on objectives with the help of a financial advisor
The bottom line
Crowdfunded real estate is an emerging idea for investors. However, it has become an asset class that has been solid over the last few years. With the advent of top-quality platforms, greater kinds of assets to invest in and a track record of reliable yields, it is an excellent method to diversify (and increase) the portfolio of your investment.
However, real estate investment carry risks, and it is possible to lose money even using crowdfunding platforms. Although it’s not common, however, some crowdfunding-funded investments in real estate have been able to lose the entire investment. It is possible to mitigate this slightly by investing in a REIT fund, which invests in multiple projects. However, there is always a chance of losing.
If you’re trying to diversify your portfolio with an asset that has been around for a long time and is a reliable class, and you’re not afraid of investing for the long run investing in real estate with crowdfunded funds can be a good alternative.