Real estate crowdfunding platforms have opened up real estate investing to the masses.
Real estate investing has always been a game for the big dogs. With high barriers to entry, a history of behind-the-scenes deals and greasy palm trees, many investors will never consider real estate investing as a viable option. Leave that to the big wigs, right?
Not necessarily.
Like many forms of investing, this stigma is beginning to change in the digital age. The rise of real estate crowdfunding has opened up a whole new world for investors looking to get into large commercial developments, residential projects, and more.
So, what is real estate crowdfunding, and how does it work? Read on to find out.
What is real estate crowdfunding?
Real estate crowdfunding is when real estate projects are allowed to be partially or completely financed by individual investors, who have recently obtained the right to invest in this type of project.
Like other forms of crowdfunding, real estate crowdfunding is a relatively new invention. The JOBS Act of 2012 helped pave the way for crowdfunding in real estate, but unfortunately for eager investors, there are rules about who can participate.
You must have a net worth of at least $1 million, not including your primary residence. Don’t have a lot of assets? You have to earn at least $200,000. These high barriers mean that real estate crowdfunding is not something the average investor can access — at least not right away.
However, it gives millions of people access to one of the most secretive aspects of investing. It also allows companies to fund their goals without going through more formal fundraising rounds.
How does it work?
When you invest through a real estate crowdfunding platform, you become a limited partner in the investment, which can vary by project. You really need to look at the project when making a decision. Some projects are debt-based, which means you provide a loan secured by the property. Other projects may be debt-based as well, but you are actually investing in a third-party note tied to the performance of the underlying real estate investment.
Some projects are equity-based, which means you invest in a fund, such as a real estate investment trust, that owns a property or multiple properties and you will receive cash flow as well as some upside in appreciation.
Many companies only require a minimum investment of $500 in the project, so the barrier to entry is relatively low. The companies also charge fees of up to 3%, which may come as a shock to those who are used to investing in low-cost mutual funds and ETFs. You may not see this fee right away, as it is usually paid out of the payout before you are paid.
Related to: How Investment Fees Can Hurt Your Investments (Significantly)
How can you make money?
Making money from real estate crowdfunding, like any type of investing, requires doing a lot of research. $5,000 may not be a lot of money for some people, but small investors who will benefit the most from real estate crowdfunding need to contribute carefully.
As with any type of investment, you can make money in two ways:
- Appreciation of the asset (usually the property you are investing in)
- Income from the asset (such as rents received)
Every investment is different – some guarantee a minimum return, others don’t. You really need to read the fine print before investing.
It is also beneficial to only invest money that you can afford to lose. This is partly why only accredited investors are currently allowed to participate in real estate crowdfunding. Some companies allow investors to put as little as $5,000 into the project. If you are not completely sure about the company’s prospects but still want to invest, investing a small amount may be the best option.
The best companies in real estate crowdfunding
There are a lot of companies involved in this field. Below is a short list of the top contenders.
Fundraising
One of the most popular real estate crowdfunding sites is Fundrise, which has a minimum investment of $10 and charges fees ranging from 0-3%. The site is ruthless about the projects it accepts, with only about 5% of proposals being selected.
Fundrise is another one of our favorite sites simply because of the range of investment properties they have to choose from, but also because you don’t have to be an accredited investor to invest – they’re one of the only platforms that currently allows this.
Check out our Fundrise review here.
RealtyMogul
Investors using RealtyMogul have the flexibility to deposit up to $5,000, but can also participate in large-scale projects – like the Hard Rock Hotel in Palm Springs. People can finance mortgages or buy a share in a property.
They charge 1% to 1.25% annually as management fees.
Check out our RealtyMogul review here.
Roofstock
RoofStock is a company that allows investors to purchase already occupied single-family rentals. In addition to having a great market, they offer a lot of additional services like management that make investing in single family rentals very easy.
Additionally, they now offer RoofstockOne, a real estate investment trust comprised of a portfolio of single-family homes.
Check out our full Roofstock review here.
Multiple stocks
EquityMultiple is a platform where you can invest in pre-screened projects from investors looking to raise money. These investments can be in preferred stock, debt, or common stock.
They offer a variety of different investment options, including direct and fund investments. They also have some of the highest minimums, ranging from $5,000 to $20,000.
Read our full Multi-Stock review here.
FarmTogether
FarmTogether is a platform that allows you to own partial ownership of US farmland. This is a great alternative to traditional real estate as farmland is a slow and steady real estate sector.
Their minimum investment is $15,000, and you become a limited partner in the farm.
Read our full FarmTogether review here.
AcreTrader
AcreTrader is another platform that allows you to invest in American farmland. This has the benefit of collecting rent and increasing land values. Although returns are not high, they have been historically consistent.
This company also has some closely related products, such as investing in timber acreage, and also some debt financing instruments.
Read our full AcreTrader review here.
Final thoughts
If you are an accredited investor looking to get into real estate, P2P real estate investing is something you should consider. It’s very easy to get started – but just like traditional real estate investing, it comes with higher risks for higher returns.
If you’re willing to accept that higher risk, check out these platforms.
Have you had a good experience with any of these real estate crowdfunding sites?
