Are you interested in investing in real estate with a small amount of money? If so, real estate crowdfunding might be the perfect option for you. Essentially, it involves pooling money online to fund various real estate projects. This approach allows you to earn passive income and diversify your portfolio by investing in different types of properties. As an example, the USA has seen significant growth in the booming industry of real estate crowdfunding. According to Statista, the transaction value of real estate crowdfunding in the USA is expected to reach US$1.20 billion in 2024. In 2024, the average funding per campaign in the crowdfunding sector will be $8.15k.
If you want to understand the basics of real estate crowdfunding, then feel free to go ahead. In this article, you will learn how real estate crowdfunding works, its advantages and disadvantages, how it differs from traditional real estate investing, and the best sites for real estate crowdfunding.
1. How Real Estate Crowdfunding Works
Real estate crowdfunding allows investors to pool their funds to invest in real estate projects. The concept is straightforward. First, a real estate developer or corporation initiates a project and subsequently lists it on a crowdfunding platform. Then, investors have the opportunity to contribute a small amount of money to support the initiative.
From the perspective of developers, real estate crowdfunding can provide access to capital for real estate development projects. This method can be a viable alternative to traditional methods of obtaining finance, such as bank loans or private equity. Additionally, developers can also benefit from the exposure and feedback of the crowd. Moreover, there is a reduced risk of relying on a single source of funding.
From the perspective of investors, real estate crowdfunding can offer an opportunity to become shareholders of properties that they would never be able to purchase as individuals. Investors can also diversify their portfolios across different types of real estate assets, such as residential, commercial, industrial, or hospitality. Additionally, investors can enjoy the potential returns from rental income and capital appreciation. Moreover, they can benefit from the tax advantages of real estate investing.
There are different types of real estate crowdfunding platforms and projects, such as:
- Firstly, equity crowdfunding involves investors receiving equity shares or ownership stakes in the project or property. They can earn returns from rental income and capital appreciation; however, they also bear the risk of loss if the project fails.
- Secondly, debt crowdfunding entails investors lending money to the project or property and, in return, receiving interest payments and principal repayment. While they can earn fixed returns, it’s important to note that they have lower priority than secured creditors in case of default or foreclosure.
- In addition, there is hybrid crowdfunding, where investors receive a combination of equity and debt in the project or property. This allows them to enjoy the benefits of both equity and debt crowdfunding, but it also means facing the drawbacks of both.
- Lastly, Real Estate Investment Trusts (REITs) offer another avenue. Here, investors buy shares of a company that owns and operates a portfolio of real estate properties. They can earn dividends from the income generated by the properties, along with capital gains from the appreciation of the shares. Notably, REITs are regulated by the Securities and Exchange Board of India (SEBI) and must comply with certain rules, including distributing at least 90% of their income to shareholders.
2. Advantages and Disadvantages of Real Estate Crowdfunding
These are the following pros and cons of real estate crowdfunding:
- Pros:
Diversification: You can invest in a variety of real estate projects across different locations, sectors, and risk-return profiles.
Accessibility: You can access real estate opportunities that are usually reserved for institutional or wealthy investors.
Affordability: You can invest a small amount of money, as low as $10 on some platforms.
Transparency: You can review the details of each project, such as the location, valuation, financial projections, and legal documents.
Passive income: You can earn regular income from rental payments, dividends, or interest, without having to manage the properties yourself.
- Cons:
Illiquidity: You may not be able to sell your shares or withdraw your money easily, as there is no secondary market for most crowdfunded real estate investments.
Risk: You may lose some or all of your investment if the project fails, the market declines, or the platform goes bankrupt.
Complexity: You may need to understand the legal, financial, and tax implications of each investment, as well as the structure and fees of the platform.
Regulation: You may face restrictions or limitations based on your income, net worth, location, or investment amount, depending on the type and jurisdiction of the crowdfunding platform.
Fees: You may have to pay fees to the platform, the project sponsor, or other intermediaries, which can reduce your returns.
- Tips and best practices:
Do your research: Before investing in any project, you should do your due diligence on the platform, the sponsor, and the property. You should also read the terms and conditions carefully and consult a professional if needed.
Diversify your portfolio: To reduce your risk and increase your returns, you should invest in multiple projects with different characteristics, such as location, sector, duration, and strategy.
Align your goals and expectations: You should invest in projects that match your risk appetite, return objectives, and time horizon. You should also be realistic about the potential outcomes and challenges of each investment.
Monitor your performance: You should keep track of your investments and review the updates and reports from the platform and the sponsor. You should also evaluate your results and adjust your strategy accordingly.
3. How Does Real Estate Crowdfunding Differ from Traditional Real Estate Investing?
The following are the differences between real estate crowdfunding and traditional real estate investing:
| Factors | Real Estate Crowdfunding | Traditional Real Estate Investing |
| Ownership | Real estate crowdfunding lets you invest with other investors. Therefore, you can invest small amounts of money. For example, you can invest only $100. | Here, you invest a lot of money when you buy the full property in traditional real estate marketing. |
| Loan | You don’t need to take or repay any loan. Real estate crowdfunding requires less money to invest. | You may need a loan or another property’s mortgage in Traditional Real Estate Investing. |
| Your Role | A management team handles the funds and assets. You are just an investor in real estate crowdfunding. | You manage the properties you buy and invest in. Finding tenants, organizing contracts, maintaining properties, and searching for new investments are your tasks. |
| Responsibility | You only invest in a good property here. Seasoned investors manage the whole process. Importantly, they ensure the property is a good investment before you raise the funds. | Traditional real estate investment is hard. You invest a lot of money and need a profitable asset. Notably, you also need to know the local market well. It’s especially tough for foreign properties. |
| Diversification | You can diversify your investments with real estate crowdfunding. It lets you invest in properties worldwide. You can choose high-growth or stable areas and different industries. Offices, industrial, residential, and student housing are some examples. | Buying a house is risky. Your investment may lose value if the market drops. You may need to invest in more properties or other assets. Bonds, equities, and alternative investments are some examples. |
4. Best Sites for Real Estate Crowdfunding
These are some of the most recommended sites for real estate crowdfunding as of 2024:
FUNDRISE: Best for beginners, low fees, and overall performance. It offers diversified portfolios of debt and a minimum investment of $10-$1000. It also provides quarterly redemption windows and transparent fees. Some examples of projects are multifamily apartments, office buildings, and innovation funds.
EquityMultiple: Best for accredited investors and transparency. It offers access to critically assessed commercial real estate projects with minimum investments of $10,000-$30,000. It also provides detailed information and reports on each investment. Some examples of projects are senior living facilities, industrial warehouses, and opportunity zones.
Yieldstreet: Best for alternative investment selection. It offers exposure to asset classes such as art, marine, legal, and consumer finance, as well as real estate. It has a minimum investment requirement of $10,000. Some examples of projects are art collections, ship deconstruction, and litigation finance.
CROWDSTREET: Best for expert real estate investors. It offers direct access to individual commercial real estate deals with a minimum of $25,000. It also provides educational resources and a dedicated investor relations team. Some examples of projects are hotels, retail centers, and self-storage facilities.
In conclusion, we have summarized all the basic and necessary information one must know regarding real estate crowdfunding. Firstly, we have outlined how real estate crowdfunding works, including its types of platforms and projects. Additionally, we have discussed the pros and cons. Importantly, we have compared it to traditional real estate marketing. Lastly, we have suggested some of the best sites for real estate crowdfunding for you in 2024. We hope you enjoyed reading this article.
Also Read: Brick by Brick to Billions: A Guide to Real Estate Investment Strategies for Millennials
