Crowdfunded Real Estate: Your Guide To Investing Wisely

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 a property. This method of investing in real estate has gained traction due to its low startup capital requirements, shared cost structure, and accessibility to new opportunities.

Crowdfunding platforms raise capital from investors to provide debt or mortgages, as well as equity or ownership positions in various commercial real estate ventures. These investments often offer higher returns than comparable REITs but usually come with longer holding periods and less liquidity.

When considering real estate crowdfunding, it is important to distinguish between accredited and non-accredited investors. Accredited investors must meet certain income or net worth requirements, while non-accredited investors do not. This distinction impacts the platforms and investments accessible to each group.

Several crowdfunding platforms cater to both accredited and non-accredited investors, offering a range of investment opportunities with varying minimums, fees, and risks. Examples include Fundrise, RealtyMogul, Yieldstreet, and EquityMultiple.

Before investing, it is essential to conduct thorough research, compare different platforms, and carefully consider your financial goals and risk tolerance.

Understanding the difference between crowdfunding platforms and REITs

Real estate crowdfunding platforms and REITs (real estate investment trusts) are both popular methods for investing in real estate without the traditional hassles of property ownership. However, there are several key differences between the two that investors should understand before deciding which route to take.

One of the main differences is that crowdfunding platforms allow investors to pool their money online to purchase property or a share of property directly. On the other hand, REITs are companies that own, operate, or finance income-generating properties, and investors buy shares in these companies. REITs are typically traded on major stock exchanges, while crowdfunding is done through social media or website-based platforms.

Another distinction is the level of transparency and control offered by each investment type. Crowdfunding platforms allow investors to see exactly where their money is being invested, whereas REITs provide broader exposure to real estate without direct ownership of specific properties. Crowdfunding also tends to offer a wider range of investment types, such as industrial assets or multifamily properties.

When it comes to liquidity, REITs offer good liquidity as they can be bought and sold easily on stock exchanges. In contrast, crowdfunding investments are usually less liquid as they are tied to the lifecycle of specific real estate projects, which can last several years.

In terms of risk, crowdfunding can be considered riskier since investments are often tied to specific projects or developments, making them susceptible to market fluctuations and project-specific risks. REITs, on the other hand, often have stakes in a diverse set of real estate assets, which can help spread and lower the risk.

Additionally, crowdfunding platforms usually have lower investment minimums than REITs, with some platforms allowing investments as low as $500. However, many crowdfunding platforms require investors to be accredited, meeting certain income or asset thresholds, while REITs are open to any type of investor.

Lastly, REITs provide a guaranteed income through dividends, while crowdfunding may not always deliver on its promised returns, and investors could potentially lose their entire investment.

In summary, both crowdfunding platforms and REITs offer benefits and drawbacks, and the right choice for an investor will depend on their individual goals, risk tolerance, and investment preferences.

How to get started with crowdfunding in real estate

Compare platforms

Before you start investing, it's important to compare different crowdfunding platforms to find the one that best suits your needs and budget. Consider factors such as fees, investment opportunities, and services offered.

Research the pros and cons

Each platform will have its own advantages and disadvantages, so be sure to weigh these carefully before making a decision. For example, while crowdfunding can provide access to unique real estate projects and requires minimal upfront investment, you may also have to pay management or advisory fees.

Determine your investment amount

Consider how much you can comfortably invest without overextending yourself financially. Keep in mind that different platforms will have different minimum investment requirements, so choose one that aligns with your budget.

Calculate your expected returns

Before investing, it's important to have a clear idea of the returns you're hoping to achieve. This will help you determine whether a particular investment is worth the risk.

Decide on the type of real estate

Crowdfunding platforms offer a variety of real estate investment options, including residential, commercial, and industrial properties. Choose the type of property that aligns with your investment goals and risk tolerance.

Prepare the necessary documentation

If you are an accredited investor, you may need to provide documentation to prove your status. This typically includes information about your income, net worth, or relevant licenses.

Review user feedback

Before investing, take the time to read through user feedback and reviews to get a sense of other investors' experiences with the platform. This can provide valuable insights into the positives and negatives of a particular platform.

Consult with a financial professional

Speak with your accountant or financial advisor to understand the potential tax implications of your investments and how they fit into your overall financial plan.

The pros and cons of crowdfunding in real estate

Pros

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

• Portfolio diversification: By spreading your investment across numerous properties, you can minimise the risk of making a singular investment.
• Geographic diversification: The real estate market can vary significantly between locations. By investing in multiple locations, you can reduce the risk of a negative ROI due to issues specific to one market.
• Passive investment: Crowdfunded real estate investments are managed by a third-party developer or operator, freeing you up to focus on other ventures.
• Low investment size: Crowdfunding allows you to become a real estate investor with a small investment size, typically starting from $500.
• Access to the market: Crowdfunding platforms give you access to the wider real estate market with a small amount of money.
• Vetted investment options: Crowdfunding platforms perform due diligence before allowing investors to participate in an offering.

Cons

There are also some disadvantages and risks associated with crowdfunding in real estate:

• Lower relative returns: Your return will typically be lower than if you directly invested in real estate through ownership, as the developer or operator also needs to make a profit.
• Illiquid investments: Crowdfunded real estate investments are considered illiquid, meaning they cannot be easily or quickly sold for cash.
• Limited control: Once you make the investment, the development of the property will be managed by someone else, and you will have limited control over the management and decision-making processes.
• Fees: Crowdfunding platforms and sponsors may charge various fees, including investment management, acquisition, and disposition fees, which can reduce your returns.
• Short history: As crowdfunding is a relatively new investment offering, many platforms and projects lack a lengthy track record of success.

How to choose the best platform for your needs

When deciding which platform to use for your real estate crowdfunding ventures, there are several factors to consider. Here are some key points to help you choose the best platform for your needs:

Investment Minimums and Fees

Different platforms will have varying minimum investment requirements, so consider how much you can comfortably invest without overextending yourself financially. Some platforms allow you to start with as little as $500, while others may require a minimum of $1,000 or more. Additionally, be mindful of the fees charged by the platform, such as management or advisory fees, as these can impact your overall returns.

Investment Selection and Diversity

Look for a platform that offers a diverse range of investment opportunities, including different types of properties (residential, commercial, multifamily, etc.), and varying levels of risk and return. This will allow you to build a well-rounded portfolio and choose investments that align with your risk tolerance and financial goals.

Accessibility for Investors

Determine whether the platform caters to accredited investors only or if it is also open to non-accredited investors. Accredited investors typically meet certain income and net worth requirements, while non-accredited investors may have more limited options but can still participate in real estate crowdfunding. Choose a platform that aligns with your accreditation status.

Transparency and Track Record

Opt for platforms that provide transparent information about their investment opportunities, fees, and historical performance. A platform with a longer track record of successful investments may inspire more confidence. However, as real estate crowdfunding is a relatively new industry, don't dismiss newer platforms solely based on their shorter history.

User Experience and Support

Consider the user-friendliness of the platform's website or app. Choose a platform with an intuitive interface that makes it easy to navigate and access the information you need. Additionally, look for platforms that offer robust customer support to guide you through the investment process and address any queries or concerns you may have.

Redemption Options and Liquidity

Understand the redemption options and liquidity terms offered by the platform. Some platforms provide quarterly redemption windows or other opportunities to withdraw your investment, while others may have longer lock-up periods. Choose a platform that aligns with your investment horizon and liquidity needs.

Remember to compare multiple platforms, research their pros and cons, and read user reviews to make an informed decision. By considering these factors, you can select the best real estate crowdfunding platform that suits your individual needs and investment strategy.

How to determine your level of accreditation

To determine your level of accreditation, you must refer to the criteria set by the Securities and Exchange Commission (SEC). The SEC defines an accredited investor as an individual with a net worth of at least $1 million, excluding the value of their primary residence. Alternatively, an accredited investor can also be someone with an annual income of $200,000 or more ($300,000 if combined with a spouse or partner), with the expectation that this income level will continue.

Accredited investors are considered to be more sophisticated and able to take on more risk due to their higher net worth and income. They are also deemed capable of bearing potential investment losses without significant damage to their financial standing.

It is important to note that the SEC requirements for accredited investors are subject to change over time, so it is advisable to refer to the latest regulations and consult with a financial professional for the most accurate and up-to-date information.

In addition to individuals, the SEC also recognises the following entities as accredited investors:

• Banks and insurance companies
• Registered investment companies
• Business development companies or small business investment companies
• Employee benefit plans
• Tax-exempt charitable organisations, corporations, or partnerships
• Directors, executive officers, or general partners of the company selling securities
• Enterprises in which all equity owners are accredited investors
• Trusts with assets of at least $5 million

When investing in crowdfunded real estate, it is crucial to understand your accreditation status, as it determines your eligibility for certain investment opportunities. Some crowdfunding platforms and investments are exclusively open to accredited investors, while others cater to both accredited and non-accredited investors.

Frequently asked questions