Real estate crowdfunding is similar to any other type of crowdfunding: a group of people all contribute a relatively small amount of money to go towards a larger cause or investment. In this case, the investment is real estate. Real estate crowdfunding is an alternative to real estate investment trusts (REITs), in that it’s for people who want to invest in real estate but don’t have the ability to buy a property themselves.
How Real Estate Crowdfunding Works
Crowdfunding is when a group of people put their money together to fund a project or investment. Real estate crowdfunding is when that technique is used to invest in real estate.
There are two ways to invest with real estate crowdfunding. First, you can put your money into equity shares in a specific property, such as a multi-family home, an apartment building, an office space or another type of commercial property. As an investor, you ultimately get to claim a share of any cash flow generated by rents or from appreciation if the property ends up getting sold.
The other way to get in on real estate crowdfunding is through debt investments. Basically, you and other investors are backing loans that are secured by a piece of real estate property. As long as the loan is being paid on time, you’ll receive monthly returns from the interest and any of the principal that hasn’t been paid.
Real Estate Crowdfunding Pros and Cons
Real estate crowdfunding is an attractive alternative for investors for a couple of reasons. First, you don’t have to be fabulously rich to do it. With certain private real estate investments you likely need six figures or more to get started, but crowdfunding is open to people who may only have a few thousand dollars to work with.
Another plus is the lack of high fees that are usually associated with other investments, such as REITs. Sales commissions and fees for REITs can run as high as 10%, which can seriously cut into your returns. When you invest in real estate through a crowdfunding platform, the services fees are typically much lower.
Aside from the cost and the lower minimum entry charges, crowdfunding allows you to invest in real estate without having to do any heavy lifting. Your investments are managed for you so you don’t have to play landlord to anyone, which can be time consuming to say the least.
Like anything else, there are some potential downsides to real estate crowdfunding. Since you’re investing in actual properties, you don’t have the ability to liquidate and easily sell your holdings the way you would if you owned shares in a REIT or an individual stock. That could be a problem if you’re not comfortable tying up all of your cash in one place.
You could also hit a snag if you’re investing in debt and the loan goes into default. If that happens, it’s possible to lose everything you’ve put in if the crowdfunding platform you’re using isn’t able to recover what’s still owed on the balance.
Real Estate Crowdfunding Platforms
There are a number of platforms on which you can use to make crowdfunding real estate investments. They include:
- Fundrise: This platform has a minimum investment of just $500, allowing many people access to these investments
Alpha Investing: This platform has a concierge to help investors find the right investments for them.
PeerStreet: This platform has a focus on residential debt
RealCrowd: larger minimums are required here, often at least $25,000
The Bottom Line
Real estate crowdfunding is a relatively new phenomenon which means it doesn’t have a lengthy track record of returns. While the industry as a whole sees it as promising, there’s no guarantee that you’re going to see a huge payoff. One potential alternative is to invest in an REIT exchange-traded fund (ETF), which also offers the opportunity to invest in real estate with low minimums and fees. But if you like the idea of truly getting in on the ground floor of a real estate investment without forking over a six-figure investment, real estate crowdfunding could be worth taking a look at.
Investment Tips
- A financial advisor can help you make all types of investments, including in real estate. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Another way to invest in real estate is simply to buy a property to live in with the hope it appreciates in value. Use our calculator to see how much house you can afford.
- Make sure to diversify your investments. To see what mix of investments you should have based on your age and individual situation, use SmartAsset’s free asset allocation calculator.
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