Investing in real estate has always been a popular way to build wealth. It has two key benefits: invest in real estate and you gain a passive income, while you also benefit from an appreciating asset. All without the need to take on excessive risks.
However, getting a foothold in the property market is not easy. You need a large deposit and you need to pass mortgage criteria. Even if you’re able to cross those hurdles there’s the huge responsibility of maintaining properties and the risk that your tenant may not pay up. For some, it’s simply too many eggs in one basket. But there’s an easier way.
Real estate crowdfunding allows you to invest in real estate with minimal starting capital, while still enjoying outsize investment returns. You can also more easily diversify your alternative investments in real estate across multiple projects. Let’s take a look.
Understanding Real Estate Crowdfunding
Real estate crowdfunding works a lot like equity crowdfunding – and crowdfunding in the broad. It pools the investment funds from hundreds or thousands of investors to make one large investment. Individual investors could contribute as little as a couple of hundred dollars, while the overall investment project could be worth millions.
Where equity is involved, each investor owns a slice of the investment proportionate to the investment they make. In return, the investor receives a proportion of the profits. Real estate crowdfunding can also be in the shape of a loan: investors act as lenders, receiving fixed interest in return – and are paid back the amount they invested at a later date.
The first real-estate crowdfunding platforms started appearing in 2012. Today, more and more developers are turning to crowdfunding to solicit funds from investors rather than traditional financing options.
What Type of Real Estate Can You Invest In?
One of the exciting aspects of real estate crowdfunding is the ability to invest in a wide range of real estate projects. Traditional real estate investing would usually limit individual investors to residential properties – an apartment for a family to let, for example. The crowdfunding route opens a whole range of real estate investment opportunities to everyone – no matter how much you have to invest.
Depending on the platform you choose, your investment could fund anything from residential property development through to commercial real estate projects and even mix-use properties. It’s an attractive way to diversify your real estate investments, or to take the opportunity to focus on the real estate sector you think is set to perform the best.
Some examples include:
- Buying a stake in multi-family housing where your investment is used to finance the development, purchase or refurbishment of an entire apartment block
- Investing in a share of commercial property that is rented out to companies that need an office, retail space or industrial facilities
- Obtaining a share in a large development project which could be for mixed-use: with space for apartments and separate retail space
- Purchasing a share of a broad fund that invests in a diverse range of real estate projects both residential and commercial
It’s worth thinking about what type of real estate investment suits your investment goals the best. Your investment could be relatively low risk with steady returns on offer, or you could opt for a real estate investment that is high risk in the hope you get outsize returns.
Advantages of Investing in Real Estate Crowdfunding
We’ve hinted at some of the advantages of investing in real estate via the crowdfunding route. Some of these advantages are shared by other forms of arms-length real estate investment, such as a stock exchange-trade property fund. However real estate crowdfunding brings together a unique set of advantages. Let’s take a closer look.
- Unique access. Real estate crowdfunding gives retail investors the opportunity to participate in real estate investment opportunities that they would never be able to access otherwise. Whether it is through a lack of resources, knowledge, or execution capability – ordinary investors get access to opportunities that would otherwise be out of reach.
- High returns. Compared to many investment avenues, real estate crowdfunding can deliver much higher overall returns without necessarily involving outsize risk – provided you carefully choose the platform you invest in and thoroughly vet the investment opportunity.
- Income component. Depending on how your investment is structured you may receive a regular income from your real estate crowdfunding investment. It could be in the shape of interest payments (if your investment acts as a loan) or you may receive a regular dividend.
- Accessible investment minimum. Thought real estate investment is beyond your each? Not so with crowdfunding platforms. Investment minimums can be as little as USD 500 which is not only a fraction of the deposit requirement on a property but also lower than the typical minimums charged by real estate investment trusts.
- Investments may be asset-backed. It depends on which investment opportunity you choose, but in many instances, your investment will be backed by a real, physical asset. It provides a fall-back, reducing the likelihood that your entire investment principal can be wiped out.
- No landlord responsibilities. Acting as a landlord can be a real headache – regulations, maintenance, and bills are time-consuming and expensive to deal with. Tenant management can be just as difficult. However, you don’t need to deal with any of that if you invest via a real estate crowdfunding platform.
- Diversification. Take the traditional route to real estate investment and you risk getting stuck with one property and all the risks that entail. With crowdfunding, you can spread your real estate investment over different properties and different sectors. For example, if a specific sector experiences a downturn – say, commercial – you can rely on residential returns to balance your portfolio.
- User-friendly investing. Don’t like investment paperwork? Real estate crowdfunding platforms simplify investment – it could be as easy as filling out a few in-app fields. You should do your due diligence, of course, but crowdfunding platforms can take at least some of the difficulty out of the picture.
For many investors, all or indeed some of these benefits will make a lot of sense. That said, like most investment opportunities, equity crowdfunding carries risks too.
The Risks Involved in Real Estate Crowdfunding
Investors know that outsize returns carry larger risks – it’s a matter of weighing up the risk you take against the possible returns. In the case of real estate crowdfunding potential investors should weigh up the following:
- Platform reputation. The bank that provides your savings account may have been around for decades – not so in the case of crowdfunding platforms. New real estate crowdfunding platforms appear throughout the year. Many of these platforms are untested. Also, in the US, real estate crowdfunding platforms are not required to register with the SEC. So, platform vetting is crucial.
- Liquidity. You can readily convert stocks and mutual funds into cash, but you’re in for the long haul if you invest in real estate via crowdfunding. Real estate crowdfunding investments can be more illiquid than investing in property directly – you can’t simply sell when you want, and even when you can, there may be stiff penalties to pay.
- Fees. Managed investments are never free, and that is the case for real estate crowdfunding too. You’ll be charged a management fee on your investment – it could be as little as 1%, or much higher. It does remove some of the headaches around investing in real estate investment, but other avenues could cost you less.
- Risk. While many real estate crowdfunding projects are backed by real, physical assets there are still many ways in which risk comes into the picture. For one, real estate investments have high execution risk. In other words, can the sponsors of the project successfully execute their real estate project – or will the first unexpected hurdle stop the project?
No investment that has the potential to deliver double-digit returns will be free of risk. Your appetite for risk will determine whether real estate crowdfunding is a sensible investment. Also, as always, real estate crowdfunding only makes sense as part of a broad, diversified investment strategy.
Choosing A Real Estate Crowdfunding Platform
One way to mitigate risk is, of course, to choose your investments wisely. Real estate has a few unique factors. For example, how cyclical is the property you are considering? An economic downturn won’t affect prime commercial real estate as much as it would a hotel, for example.
Also, consider the execution risk. Are we simply talking about refinancing an existing property, or is the real estate project to be built from scratch? You should also consider how much of the investment return will come from a final sale. There is less risk involved if your investment delivers a great income stream from the very beginning.
Finally, the underlying crowdfunding platform also matters. Because so many real estate crowdfunding platforms are relatively new to the market it can be difficult to obtain independent insight into the pros and cons of each platform.
We’ve compiled the following list of established platforms to get you started. In each review, we outline the cost to investors, the potential returns, and what the unique aspects of each platform are. Investor goals differ and it is up to you to decide which platform – and which opportunities – meet your requirements.
Top Real Estate Crowdfunding Platforms
Irrespective of the economic cycle, people will always require a roof over their heads. Multifamily properties, in other words, apartment blocks, can be viewed as a relatively safe investment. DiversyFund focuses on multifamily properties and does so in a unique way: DiversyFund buys existing properties, renovating to increase net rental income.
You need USD 500 to get started and note that you need to commit for at least 5 years. The platform itself doesn’t charge any fees. It’s a simple investment prospect: you don’t get to choose what you invest in, but you get access to a comprehensive dashboard that outlines how your investment is performing. The platform claims returns of 17.6%. DiversyFund is fully SEC qualified, which promises extra oversight for investors.
If you have a long-term outlook and want access to a sophisticated real estate investment platform that covers both residential and commercial properties you might want to look into Fundrise. The platform starts with an investment minimum of USD 500, but also offers sophisticated investors a more powerful product with more features – starting at a USD 10,000 minimum.
Annual service and management fees come to 1%, while early redemption fees can be as high as 3% – but there are no redemption fees if you hold your investment for the full five years. However, real estate investments are complex – do read the full investment circular to get a full cost picture. As for returns: the platform claims it delivered its more than 130,000 investors returns that averaged 8.7 – 12.4%.
CrowdStreet offers its investors access to institution-quality commercial real estate investment opportunities. You have a choice of investing in a specific project, or you can diversify your investment by choosing one of CrowdStreet’s funds. Every project has a detailed webinar so you can evaluate whether a project is a good fit for your investment strategy.
Fees are 0.50% to 2.5% though this can vary for individual development projects. As for performance, the company claims an IRR of 26.3% across the USD 1.15bn it’s raised. Note that you need to meet guidelines for an accredited investor to invest with CrowdStreet. Also note the high investment minimum – USD 25,000.
Looking for a straightforward real estate investment with easy to understand fundamentals and cash flow that’s stable through economic cycles? Rich Uncles is a good place to start. The platform allows you to buy a share in a real estate investment trust (REIT). As the platform’s commercial tenants pay their rent you get a share of the of rental income.
Costs run to 3% and investors can sell their shares through the platform’s share repurchase program, subject to fees and charges but there are no penalties after 3 years. The platform does not indicate what the potential returns are but promises monthly disbursements. Rich Uncles has a low investment minimum – just USD 500.
RealtyMogul’s claim to fame is its rigorous underwriting process – the platform states that only one out of every thousand deals it considers is approved. So, in theory, investors should get access to the best opportunities. Access, however, comes at a price – with a USD 5,000 investment minimum. Fees vary depending on the underlying investment but are in the 1% to 1.5% range.
Like all real estate investment platforms, RealtyMogul investments are for the long haul, but the platform offers a buyback program – you can get 100% of your funds back if you’ve held your investment for 3 years or more, but you can’t sell if you’ve invested for less than a year. There is a mix of funds on offer, all with diverse underlying real estate assets. Returns are claimed to be 4.5% or 8% – depending on the fund you choose.
Looking to get into the United Kingdom property market using a low investment minimum? You can participate in a CrowdLords funding round with as little as GBP 1,000. The platform lists a wide range of real estate projects – from residential lettings to commercial property.
Most fees are paid by the project sponsor, but there is a handling fee of 1% for dividends and a 10% charge to any net asset growth. Returns on CrowdLords can be very attractive, with projected returns on currently listed projects ranging from 18% to 35%. UK residents can also enjoy a tax saving via the platform’s innovative finance ISA facility.
The House Crowd
House Crowd offers investors an interesting blend of opportunities to suit different investment goals and for this reason may be the only platform you need if you want the ability to easily adjust your risk, return parameters.
Investors can choose from both P2P loans and development investing. It includes a straightforward option, an auto-invest facility starting from GBP 1,000 and which delivers 5% p.a., with a 12-month minimum term and 30-day notice period. Investors with higher return aims and more risk tolerance can opt for one of the development projects where returns can be up to 10%. No fees and taxes are deducted from returns.
Homegrown has delivered an average return 13.4% p.a. across the 10 projects funded on the platform. It features mainly residential development in London, with the current listings promising annualised returns of 15% and up. Investments start at GBP 500 while the platform aims to achieve investment exit within 24 months.
The platform states that it secures investments against a charge over the underlying property while any funds held in the Homegrown e-wallet are protected by the FSCS. All-in-all the platform promises solid returns, a relatively quick exit, and low investment minimums.
With by far the lowest minimum investment amount in our list, Bulkestate allows investors to participate in residential real estate projects across Latvia from as little as EUR 50. What’s more, investors pay no fees for joining the platform and investing – or for withdrawing investments.
Returns are generally above 10%, with some projects promising up to 15%. Note that you can’t withdraw your investment before the repayment date, which is typically a year or two from the initial investment. Bulkestate has a long history of completed projects and is a member of the European Crowdfunding Network.
Another platform with low investment minimums, Crowdestate offers investors the opportunity to participate in projects across – interestingly – Italy, Latvia, and Estonia. There are no investment fees – unless your investment exceeds target rates, in which case Crowdestate takes a 20% cut of the excess returns.
The platform has a wide range of residential projects listed with terms around a year or less, while the expected rate of return is typically around 10% to 13% p.a. Uniquely, Crowdestate offers a secondary market for investors so you can exit your investment – or indeed jump in on existing investments.