Real estate crowdfunding 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. Many are now wondering how has real estate crowdfunding performed since its start.
As with any new industry, there's been some starts and stops. Real estate crowdfunding performance depends on how good the platform is that screens the deals, market conditions, and Sponsor track record.
Best Real Estate Crowdfunding Platforms
Since 2012, Fundrise in Washington DC has emerged as the leader in the real estate crowdfunding space for non-accredited investors. They have they have the longest performance track record as well.
I've spoken and met with their team extensively, and I'm bullish on their business prospects over the long term. They've raised the most amount of money in the space and have done a lot of deals.
My favorite real estate crowdfunding platform for accredited investors is CrowdStreet. They were founded in 2014 as well, and have the highest quality deals on the platform. CrowdStreet is focused on real estate opportunities in 18-hour cities where valuations are lower and growth rates are higher.
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 January 2017.
I spent 13 years working in the equities department of Goldman Sachs and Credit Suisse, got my MBA from UC Berkeley focusing on real estate, and have been writing about real estate investing online since 2009. I own more than $6 million in real estate as of 2H2020.
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, both accredited and non-accredited investors have direct access to pre-vetted real estate investments with lower investment minimums (currently as low as $500+). Thus Fundrise for the first time gives investors the true ability to achieve a mixed-asset investment portfolio.
eREITs For Non-Accredited Investors
Fundrise's eREIT option is 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 available eREIT choices from Fundrise. They have more, but they are closed since each fund can only have $50 million in assets under management according to the law.
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.
Fundrise’s five-year average platform portfolio has also done quite well, yielding a 10.79% return versus 7.92% for the Vanguard Total Stock Market ETF and 7.4% for the Vanguard Real Estate ETF. Their massive 14%+ outperformance in 2018 versus the Vanguard Total Stock Market ETF is particularly impressive.
By generating a strong 5-year return, Fundrise has taken a huge step forward in proving out what they have believed for so long: that a model of individuals diversifying into real estate through a direct, low-cost technology platform is a superior investment alternative to owning only publicly traded stocks and bonds.
Below is another way to look at Fundrise's cumulative investment returns over the past six years. 2020 will be interesting given the volatility in the stock market. However, with the diversification of Fundrise's eREITs, I believe Fundrise will continue to perform.
Here's some more statistics from tier 2 real estate crowdfunding platform, Patch of Land. It looks like they've had 11.49% annual returns across all deals since 2013.
Real Estate Crowdfunding Outperformance Should Continue
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 and southern states where valuation is cheaper and yields are much, much higher.
Further, the income growth opportunities in the heartland look to have some of the largest upside in the country as people move away from expensive cities and work in less expensive cities.
With the Fed slashing rates to 0% in 2020, the hunt for yield is strong. Real estate tends to outperform stocks in this type of volatile environment.
If you're looking to diversify your portfolio with real estate, and you don't want to go through the hassle of maintaining a property and managing tenants, then real estate crowdfunding is a good solution. My favorite real estate crowdfunding platform is Fundrise. It's free to sign up and explore.
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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.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1 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.