One question I often get asked is whether real estate crowdfunding is a good investment. Real estate crowdfunding only really began in 2012, after the JOBS Act was passed that allowed crowdfunding to be used as a way for private companies and private investment projects to raise money from the public.
Since 2012, Fundrise in Washington DC has emerged as the leader in the real estate crowdfunding space. Fundrise has raised a lot of funds and has done a lot of deals since its founding.
By way of background, I've invested in physical real estate in Honolulu, San Francisco, and Lake Tahoe since the mid-1990s, REITs since the late-1990s, and now real estate crowdfunding since 2016. I spent 13 years working in the equities department of Goldman Sachs and Credit Suisse, got my MBA from UC Berkeley, and have been writing about real estate investing online since 2009.
A real estate crowdfunding platform gives their investors direct access to real estate investments whereas the idea behind a REIT is that you have exposure to real estate without actually owning, directly, the property.
As of 2021, I have personally invested $810,000 in real estate crowdfunding in heartland real estate. I sold my San Francisco rental house for $2,740,000, or roughly 30X annual gross rent in 2017. The net rental yields in non-coastal city real estate is so much higher (~8% – 10% vs. 2% – 3%). So far, real estate crowdfunding has been a good investment.
Real Estate Crowdfunding Changing Investor Access
Until recently, and because of the typical minimum investment thresholds for most private real estate deals ($250,000+), REITs have been the only viable option for investors wanting to diversify their portfolio by investing in real estate.
Now with real estate crowdfunding through a company like Fundrise, investors have direct access to pre-vetted real estate investments with lower investment minimums (currently as low as $1,000+). Thus Fundrise for the first time gives investors the true ability to achieve a mixed-asset investment portfolio.
eREITs For Non-Accredited Investors
Non-accredited investors can look into Fundrise's eREIT option. They are like a hybrid of individual real estate crowdfunding investments and private REITs. The fees are a little higher, but you get to access a more focused real estate region in America.
Here are the current three eREIT choices from Fundrise.
Real Estate Crowdfunding Returns
Real estate has done incredibly well compared to the S&P 500 since 2000. Real estate crowdfunding has done even better than the 10.71% annual return since 2012 due to fragmentation in the space. I'm regularly seeing deals return 12% – 16%, although such drastic outperformance may narrow with more capital flooding to the sector.
Here's a great chart from Fundrise, on one of their income eREITs where non-accredited investors can invest for as little as $1,000.
In addition, check out this latest impressive cumulative performance chart from Fundrise below.
Real estate crowdfunding is going to be a huge opportunity for investors in the coming decade. The technological platform will open up a flood of capital from expensive coastal cities like NYC, SF, LA, and Washington DC, towards inexpensive midland states. Further, the income growth opportunities in the heartland look to have some of the largest upside in the country.
Good investors always think about secular changes, regardless of where they stand on the political spectrum. Thus, I believe heartland real estate should outperform over the next 10 years. I also think real estate crowdfunding will be a good investment for the following reasons:
- There will be a net migration out of Blue states into Red states as more people realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- Now that investing in real estate is more efficient, Red State 10%+ cap rates compared to <4% cap rates in Blue cities are too hard to ignore. The spread should narrow.
- A potential expansion of who can invest in real estate crowdsourcing will lead to an increase in demand and prices.
- The rise of real estate crowdsourcing platforms such as Fundrise increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments.
- New tax policy in 2018 capping SALT deduction to $10,000 and mortgage interest deduction on new mortgages up to $750,000.
I've put my money where my mouth is with real estate crowdfunding and strongly believe institutional investors and the mass market will really start getting behind the industry.
Additional Resources: Looking for more ways to save money and grow your wealth? Check out this review of my favorite top financial products that cover banking and investing, real estate crowdfunding, free wealth management, life insurance and more.
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $260,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.