Real estate crowdfunding is one of the best ways investors can gain access to commercial real estate opportunities around the country. Once the JOBS Act was passed in 2012, real estate crowdfunding took off. I'm a big fan of real estate crowdfunding and have invested $810,000 in various opportunities across the heartland.
Real estate is by far my favorite asset class to build long term wealth. Some of our wealthiest people have made multi-billion fortunes with real estate thanks to leverage, inflation, and savvy investments in growing areas.
The fundamentals of real estate investing are easy for most investors to understand. As a result, there is a high level of reoccurring capital that consistently invests in real estate.
Real estate crowdfunding has enabled more investors to invest in commercial real estate and multifamily properties that were once only available to ultra high net worth individuals and institutional investors. This mid-market level of real estate investing has provided higher returns than average single family real estate investments.
As a result, real estate has gone from being an investment option largely limited to institutional investors and the ultra-affluent, to an alternative investment that can help to diversify portfolios across investor groups.
Main Reasons To Invest In Real Estate Crowdfunding
Two levels of diversification. Real estate is already interesting because it may behave differently from stocks and bonds. With real estate crowdfunding, investors can diversify within the real estate sector, augmenting their portfolio with any number of individual properties. That enables them to diversify across geographic regions, development strategies, and property types—among other factors.
Potential tax benefits. The investment structures of common equity real estate investments typically allow for the “pass-through” of tax benefits, including shares of the project’s depreciation and mortgage expense deductions. These benefits depend on your individual tax situation.
Passive investments. Unlike being a landlord, real estate crowdfunding does not entail time-intensive responsibilities like leasing, building maintenance, and other property management chores. Once you’ve done your due diligence and selected an investment, it is the developer’s responsibility to manage the project. I sold my San Francisco rental home in 2017 after 12 years because I couldn't stand dealing with my problem tenants and constant maintenance issues.
Lower investment minimums. In the past, if you wanted to directly invest in real estate, you had to know a developer and have $100,000. But today, because the cost is shared among many investors, crowdfunding sites can offer fees and investment minimums that are lower. That way, investors can allocate their funds across multiple real estate projects.
More Reasons To Invest In Real Estate Crowdfunding
Enhanced transparency. Some crowdfunding sites actively negotiate investment structures to deliver better terms for investors and align their incentives with sponsors. They also provide clear and succinct offering materials to illuminate those financials. After investments have been placed, these sites offer live dashboards and qualitative reports that allow investors to track the performance of their investments.
Hand-pick investments that align with your goals. Prefer equity to debt? Think Dallas is heating up? Great news. With real estate crowdfunding, you choose the individual projects that most appeal to you. It’s a key difference with REITs and funds, where you invest in a basket of properties selected by someone else.
Lower Fees. Compared with private REITs and certain other investment options, crowdfunding sites may feature lower fees. These often come in the form of an annual asset management fee, typically around 2%. Some sites also take a portion of the project’s profits, but others do so only after investors have been paid. That way, everyone’s interests are aligned.
How Real Estate Crowdfunding Works
Once an investment has been approved, it is typically marketed to investors through an investment page. The investment page includes a project overview; descriptions of the sponsor and the local market; a financial summary with details about the business plan; potential future cash flows; and a review of risks, fees, and legal structures.
Once investors have reviewed the offering materials and done any additional due diligence they want, the actual investment transaction is fairly simple. Of course, you should choose a reputable sponsor that has ideally been around for at least 10 years,
Each real estate crowdfunding platform does their best to carefully vet each real estate opportunity on their platform. Their reputation depends on it. From there, it's up to you to choose the best of the best 5%. Or, you can buy an eREIT like the one offered by Fundrise, a leading platform.
Distribution Of Payments
Once you've found a deal you like, select the investment you like and sign the legal (subscription) document. The funds will be debited from your bank account. Your funds are then pooled with those of other investors.
The investment is closed when enough money has been pooled. You may begin to receive distribution payments as outlined in the investment offering materials, provided that the investment performs as projected.
Of course, as with all investments, returns are not guaranteed. Real estate investments can underperform for any number of reasons; for example, the sponsor could be unsuccessful in implementing their business plan, or they could simply have mistimed the market. As a result, real estate investors have the potential to lose some or all of their invested capital.
Careful consideration of the investment’s risk profile and your own goals is critical. A good rule of thumb for all investing is this: never invest money that you cannot afford to lose.
Invest On The Best Platforms
With real estate crowdfunding, you don’t need to risk $100,000 or more to invest in commercial real estate. Instead, you can invest for much lower amounts such as $1,000 to get access to a variety of commercial real estate deals across the country. The best real estate crowdfunding platforms today are:
1) CrowdStreet, founded in 2014, is my favorite platform for accredited investors. CrowdStreet primarily focuses on 18-hour cities, secondary cities in lower cost areas of the country with higher growth potential. I firmly believe that we should all be looking into the heartland due to demographic shifts and the rise of remote work. They have a direct-to-sponsor model which makes communication more efficient. Further, CrowdStreet charges the sponsor, not the investor a fee.
2) Fundrise, founded in 2012, is my favorite platform for non-accredited investors. I’ve worked with Fundrise since the beginning, and they’ve consistently impressed me with their innovation. They are pioneers of the eREIT product. Fundrise consistently impresses me with their innovation and new product offerings.
Both of these platforms are the best real estate crowdfunding marketplaces today. They have the strongest underwriting of deals and do the most vetting. Investors should carefully consider their own investment objectives when assessing the gamut of real estate opportunities that are available.
About the Author:
Sam has $810,000 invested in real estate crowdfunding to take advantage of lower valuations and higher net rental yields in non-coastal city real estate. He believes there will be a multi-decade migration away from expensive coastal cities due to technology and the emergency of real estate crowdfunding platforms