Real estate crowdfunding is an attractive investment that's gaining popularity. It has emerged as one of the hottest investment sectors since the JOBS Act of 2012 passed. The JOBS Act enables individual investors to partake in larger investments traditionally reserved for wealthier investors.
The whole idea of investing in real estate crowdfunding is to take advantage of faster growing markets with higher cap rates (net rental yields), while NOT having to fly around the country and come up with massive amount of capital.
After selling my SF rental house in 2017 for 30X annual gross rent, I proceeded to reinvest $500,000 of my proceeds in properties around the Midwest trading at 10X annual gross rent with 8% – 12% net rental yields.
Here are some reasons why real estate crowdfunding may be an attractive investment for you.
Why Real Estate Crowdfunding Is An Attractive Investment
1) REITs Are Too Diverse
When you invest in a real estate investment trust (REIT), you get exposed to everything they invest in. You can't pick and choose. There are dozens of properties in a REIT, many of which are not in areas you care to invest in.
Meanwhile, a REIT fund invests in other REITs, which makes your real estate investment exposure even more diverse. Diversity is fine. But if you are specifically investing in real estate, you want to invest in the highest growth markets with the most upside potential.
The top 10 largest REITs by market cap are:
- Prologis
- American Tower Corp.
- Boston Properties
- Equinix Inc.
- Crown Castle
- Public Storage
- First Industrial Realty Trust
- Realty Income
- Simon Property Group Inc.
- Welltower Inc.
REC Investing Offers Choices
With crowdfunding real estate sites, you have options. You can invest in individual properties or you can pick very tightly focused eREITs with a firm like Fundrise. Fundrise is one of the oldest real estate crowdfunding platforms with $3.2+ billion in assets under management, $7+ billion in total asset transactional value, and over 387,000 accredited and non-accredited active investors.
The publicly traded REITs are massive. They have huge geographic footprints, so you can't find inefficiencies and take advantage of them.
If you like to invest in individual real estate opportunities in 18-hour cities, check out CrowdStreet. They also have a fantastic platform you can explore for free. I've met with about 10 of the people there when they came to San Francisco.
2) Much Smaller Capital Outlay
To buy a single family home, you need to come up with a 20% downpayment. That's $300,000+ if you want to buy a median home in San Francisco or NYC.
If you want to buy a multi-unit rental property, you have to come up with a 25% – 30% downpayment. Such larger properties cost even more.
Crowdfunded real estate will let you invest as little as $10 – $10,000 dollars in a variety of projects. Real estate crowdfunding is an attractive investment for its diversification. You can diversify your risk across borrower, asset types, geographic location, and project type.
Whether you want an NNN (triple net) retail lease or a single family investment, you'll find it on a crowdfunded real estate platforms.
3) More Selection For Non-Accredited Investors
If you are an accredited investor, you have a net worth excluding your primary residence of at least $1 million. Or you earn at least $200,000. Many private investments are only for accredited investors.
However, if you are not an accredited investor, you can still invest in real estate crowdfunding. How? Through eREITs invented by Fundrise. Fundrise is one of the leaders in the non-accredited real estate investing space. The minimum investment is only $10 to invest in their Starter level account. Fundrise has multiple eREITs focused on regions, income, and grown.
They also have “ePlans” where you pick whether you want income or appreciation and your level of risk. Then they put you in a fund that finds properties that meet your needs. These are typically residential properties and a mixture of debt and equity deals.
Here's a detailed Fundrise review post I wrote for more information.
4) Completely Passive Investing
One of the main reasons why I sold my San Francisco rental house in 2017 was because of maintenance. I didn't want to fix the leaks or replace the pipes. Neither did I want to deal with painful tenants who didn't pay their rent on time. With a new baby, time was too precious for me to deal with all the hassle.
When you invest in crowdfunding real estate, you have zero work after the investment closes. However, you still have all the up front work. You need to analyze the REC investment and see if it's a good fit for your overall plan. But, you should be doing that anytime you invest.
After the funds are transferred, real estate crowdfunding is an attractive investment because it's managed just like a REIT.
As a real estate crowdfunding investor, you simply log onto your dashboard and collect your payouts electronically.
5) Let Each Platform Pick The Best Investments For You
Only 5% of the deals Fundrise screens make it onto their platform for investors to potentially invest in. This careful curation of the best deals helps save you a lot of leg work. They do all the research for you on the market, the sponsor, and the economics. The incentives are aligned because if they start putting bad deals on their platform, investors will run away.
6) Geographic Arbitrage Is Your Friend
With crowdfunding real estate platforms, you can invest anywhere. Coastal city real estate is trading at all-time highs. As a result, I find it much more prudent to invest in the heartland of America.
No longer do you need to pay $4,000+ a month for a two bedroom apartment on the coasts. Technology allows you to live everywhere!
Benefits Of Investing In Non-Coastal City Real Estate
Here are some of the reasons why you should invest in non-coastal city real estate:
- There will be a net migration out of Blue states into Red states. More people will 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.
- Trump’s tax plan, the Tax Cuts and Jobs Act of 2017, introduced the $10,000 SALT cap on state, local, and property tax deductions. This hit California, New York and New Jersey the hardest. But it benefits cheaper states with no state income taxes to deduct, e.g. Texas.
- 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 increases the supply of capital. Thereby this increases the demand and prices of previously hard to tap investments.
7) Shorter Duration Investing Periods
The best duration to hold real estate is forever. However, if you have liquidity needs or want to diversify your liquidity needs, real estate crowdfunding will allow you to invest in projects with typically 1 – 5 year time horizons.
If you look on various crowdfunding platforms you'll find equity deals with 7, 5, and 3 year time frames. The maturity on the debt deals are 24-months, 12-months, and 12-months.
If you go with a company that offers eREITs, your holding period can be as short as you want because you can sell whenever you want.
There are sometimes rules about redeeming / cashing out shares because real estate is meant for a longer hold period. For example, Fundrise allows you to redeem shares but makes you wait for 60-days.
Real Estate Crowdfunding Is Here To Stay
Real estate is currently my favorite investment class to build wealth. It is amazing to be able to live in a world-class city like New York, Los Angeles, Boston, or San Francisco while also investing in cities around the country that have potentially higher returns. You no longer have to live in Des Moines, Iowa in order to invest in Des Moines, Iowa!
If you can invest in a proven asset class over the long term without having to deal with all the hassles of owning property, that's a big win in my book.
If you are a non-accredited investor, take a look at Fundrise. They were founded in 2012 and are the pioneer in eREITs. It is my favorite real estate crowdfunding platform today.
Fundrise recently launched its Starter Portfolio, which enables new investors to invest as little as $10.
If you are an accredited investor check out CrowdStreet. They also have a fantastic platform you can explore for free. I've personally invested $810,000 in 18 different real estate crowdfunding projects.
About the Author: Sam worked in finance for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $300,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.
Sam started Financial Samurai in 2009. It has grown to be one of the largest independently owned personal finance sites in the world. You can sign up for his free private newsletter here.