Crowdfunding Real Estate: Getting Investors For Your Property Empire

Real estate crowdfunding is an increasingly popular way to diversify your financial portfolio. It allows investors to pool their money online to purchase property (or a share of property) as a group. This approach means you can pool resources with others, enabling access to projects that typically require a lot of capital.

Crowdfunding reduces the high barriers to entry, enabling everyday investors to diversify their portfolios. Access to real estate assets can provide stable cash flows and capital appreciation.

However, it's important to note that many real estate crowdfunding platforms are only open to accredited investors – those with an annual income over $200,000 or a net worth of over $1 million.

Understanding the different types of crowdfunding

Crowdfunding is a method of raising capital through customers, family, friends, and investors on crowdfunding sites or platforms. It is a small sum of money gathered from a larger group of individuals. There are several types of crowdfunding, each with its own unique characteristics and requirements. Here is an overview of some of the most common types:

Donation-Based Crowdfunding

Donation-based crowdfunding involves amassing high amounts of donations without providing investors with anything in return. This form of crowdfunding is commonly used for charities, nonprofits, disaster relief efforts, and community-based projects. These campaigns usually last for around 1-3 months and seek contributions of $10,000 or less.

Reward-Based Crowdfunding

Reward-based crowdfunding is commonly used to raise funds for new startups or organizations that offer products or services. In this type of crowdfunding, donors can earn rewards based on the amount they contribute. The rewards are usually related to the product or service offered by the business. This form of crowdfunding works best for companies offering tangible products and can also be beneficial for startups looking for a test market for their product or service.

Equity-Based Crowdfunding

Equity-based crowdfunding, also known as crowd-investing or crowd equity, offers individuals real investments in private companies. Contributors can become part-owners of the business by trading capital for equity shares. This type of crowdfunding is particularly attractive to entrepreneurs and startups seeking an alternative to venture capital. It allows companies to raise a large amount of capital without the hassle of traditional loans. However, it typically requires large fundraising minimums, usually in the thousands of dollars.

Debt-Based Crowdfunding

Debt-based crowdfunding, also known as peer-to-peer lending or crowdlending, is when the campaign organizer borrows money from contributors. Individuals agree to lend money to a company, and the company agrees to repay the lenders, often with interest. This type of crowdfunding is suitable for businesses that need capital but prefer not to give up equity. It can also be used by individuals who need money to pay off loans or other financial obligations.

Real Estate Crowdfunding

Real estate crowdfunding is a newer form of crowdfunding that is gaining popularity. It allows investors to finance real estate projects through online platforms, similar to REITs (Real Estate Investment Trusts). Investors can contribute smaller amounts of money, usually starting at $5,000, and receive quarterly payouts based on the revenue generated by the property. This type of crowdfunding provides an opportunity for investors to get involved in the real estate market without the hassle of traditional loans or the obligation of owning an entire property.

These are just a few of the most common types of crowdfunding. Each type has its own advantages and disadvantages, and the choice depends on the specific needs and goals of the business or individual seeking funding. It is important to carefully consider the requirements, fees, and potential risks associated with each type of crowdfunding before making a decision.

How to become an accredited investor

To become an accredited investor, an individual or entity must meet certain income and net worth guidelines. The Securities and Exchange Commission (SEC) defines an accredited investor as someone with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years, with a reasonable expectation of the same income level in the current year. Alternatively, an accredited investor can be defined as someone with an individual net worth or joint net worth with a spouse that exceeds $1 million, excluding the value of their primary residence.

The requirements to be an accredited investor vary slightly in different countries. For example, in the EU and Norway, there are three tests to determine if an individual is an accredited investor: a qualitative test, a quantitative test, and a written statement from the client. The qualitative test evaluates the individual's expertise, knowledge, and experience to determine their capability to make their own investment decisions. The quantitative test requires the individual to meet two of the following criteria: carrying out transactions of significant size on the relevant market at an average frequency of 10 per quarter over the previous four quarters, having a financial portfolio exceeding EUR 500,000, or working or having worked in the financial sector for at least one year. Lastly, the client must state in writing that they want to be treated as a professional client, and the firm must give notice of any protections they could lose.

It is important to note that there is no formal process or certification to become an accredited investor. Instead, the companies that issue unregistered securities determine a potential investor's status by conducting due diligence before the sale. The burden of proving an individual is an accredited investor falls on the investment vehicle rather than the investor.

Pros and cons of crowdfunding for real estate investment

Pros

Crowdfunding for real estate investment has become an increasingly popular way to diversify your financial portfolio. Here are some of the advantages:

• Portfolio Diversification: By pooling your money with other investors, you can spread your investments across numerous properties or projects, minimising the risk of any single investment failing.
• Geographic Diversification: The real estate market can vary significantly between different locations. Crowdfunding allows you to invest in multiple geographic areas, reducing the risk of a negative ROI due to issues specific to one market.
• Passive Investment: Crowdfunding for real estate is a passive investment, meaning you don't need to spend time and resources on managing the property. Instead, a third-party developer or operator handles the work, freeing you up to focus on other ventures.
• Small Investment Size: Crowdfunding platforms have a much lower barrier to entry than traditional real estate investments, with some platforms allowing investments as low as $500. This makes real estate investment accessible to those who may not have the tens or hundreds of thousands of dollars typically required to purchase a property.
• Wider Access to Investment Opportunities: Crowdfunding gives developers access to a wider pool of potential investors, including colleagues, friends, family, and the general public. It also allows investors to access a broader range of investment opportunities.

Cons

Despite its advantages, there are also several drawbacks to crowdfunding for real estate investment:

• Lower Relative Returns: In crowdfunding, your returns will typically be lower than if you had directly invested in the property through ownership. This is because the developer or operator also needs to make a profit.
• Illiquid Investments: Crowdfunded real estate investments are considered illiquid, meaning they cannot be easily sold for cash if needed. Finding a buyer can take a significant amount of time, and the property's value may drop during this period.
• Lack of Control: Once you make a crowdfunded investment, the development of the property is managed by someone else. Traditional forms of investment give investors more control over the project, making it easier to get the desired returns.
• Fees: Crowdfunding platforms may charge investors management or advisory fees, which can eat into your investment returns.
• Taxes: Participants must pay taxes on any dividends they receive from crowdfunded real estate investments.
• Limited Track Record: As a relatively new investment offering, many crowdfunding platforms and projects lack a lengthy track record of success.
• Accredited Investor Requirements: Some platforms require investors to be accredited, meaning they meet certain income or net worth requirements.

While crowdfunding for real estate investment offers benefits such as portfolio diversification, passive investment, and wider access to opportunities, it's important to carefully consider the potential drawbacks before committing any funds.

How to choose the best real estate crowdfunding platform

When choosing a real estate crowdfunding platform, it's important to consider your investment goals, risk tolerance, and the features of the platform. Here are some key factors to help you select the best platform for your needs:

• Accreditation Requirements: Real estate crowdfunding platforms may be open to all investors or restricted to accredited investors only. Accredited investors typically have a higher income or net worth and can access more advanced investments. If you're not an accredited investor, look for platforms that cater to non-accredited investors.
• Investment Options: Consider the type of real estate investments offered by the platform. Some platforms focus on residential, commercial, or multifamily real estate, while others offer a diverse range of options, including REITs, private placements, and alternative investments. Choose a platform that aligns with your interests and investment strategy.
• Minimum Investment: Each platform will have minimum investment requirements, which can range from a few hundred to tens of thousands of dollars. Choose a platform that fits your budget and investment plans.
• Fees: Different platforms charge different fees, and these can impact your overall returns. Look for transparent fee structures and consider the impact of fees on your investment.
• Liquidity: Private real estate investments can be illiquid, making it difficult to sell quickly at market value. If liquidity is important to you, consider platforms that offer more liquid investment options, such as publicly traded REITs or those with redemption options.
• Performance and Track Record: Look for platforms with a strong track record of generating positive returns. Check the historical performance of similar investments on the platform and consider the overall realized internal rate of return (IRR) for investors.
• User Experience and Support: Choose a platform with a user-friendly interface that makes it easy to navigate and manage your investments. Also, consider the level of customer support provided and whether you can easily access assistance when needed.
• Transparency: Opt for platforms that provide clear and detailed information about their investment offerings, fees, and risks. Transparency helps you make informed decisions and understand the potential rewards and risks of your investments.
• Regulation and Security: Ensure the platform is registered with the Securities and Exchange Commission (SEC) and complies with relevant regulations. This provides an additional layer of security and protection for your investments.

By carefully considering these factors and conducting thorough research, you can select a real estate crowdfunding platform that aligns with your investment goals, risk tolerance, and preferences. Remember that investing carries risks, and it's important to diversify your portfolio to manage those risks effectively.

How to get started with crowdfunding for real estate investment

Crowdfunding for real estate investment is an increasingly popular way to diversify your financial portfolio. It allows you to pool your money with other investors to purchase property (or a share of a property) online. Here are the steps to get started:

Understand the Basics

Before diving into crowdfunding, it's important to understand the basics of this investment strategy. Real estate crowdfunding involves pooling money from multiple investors to fund real estate projects or acquisitions. This approach enables individuals to invest in real estate with lower capital requirements and shared risk.

Choose a Platform

Select a reputable crowdfunding platform that suits your needs. Some popular platforms include Fundrise, RealtyMogul, CrowdStreet, and Yieldstreet. Compare fees, investment opportunities, and the types of properties they offer (residential, commercial, etc.).

Evaluate Your Financial Situation

Determine how much you can comfortably invest without overextending yourself. Consider your risk tolerance and financial goals. Real estate crowdfunding can be risky, so ensure you understand the potential downsides and are prepared for potential losses.

Conduct Due Diligence

Research the properties or projects available for investment. Look into the developers or companies behind the projects, their track record, and the specifics of each investment opportunity. Understand the risks involved and the potential for returns.

Create an Account and Invest

Once you've selected a platform and done your research, create an account and link your bank account. Choose the investment opportunities that align with your goals and risk tolerance, keeping in mind that your money may be tied up for a while.

Monitor and Diversify

Regularly review the performance of your investments and consider diversifying your portfolio across different properties, locations, and types of real estate projects to spread the risk. Remember that real estate crowdfunding is a long-term investment strategy.

Consult Professionals

Consider consulting a financial advisor or attorney specializing in real estate to review your investment ideas and understand the legal and tax implications of your investments. This can help ensure you make informed decisions and are aware of any complexities or risks involved.

Frequently asked questions