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Real estate crowdfunding is an excellent alternative to traditional real estate investing.
Why?
Real estate investing is costly and often takes years to master.
On the other hand, real estate crowdfunding allows most investors to invest in large real estate projects for as low as $1,000.
If you are eager to invest in real estate, without the hassle of conventional real estate investing, consider crowdfunding.
First, let’s cover some of the basics.
What Is Real Estate Crowdfunding?
The emergence of the Jumpstart Our Business Startups (JOBS) Act signed into law in 2012 helped legalized raising capital online, resulting in what we now know as crowdfunding.
Crowdfunding comes in many forms, and real estate crowdfunding is one of them.
Real estate crowdfunding is a method of pooling money raised online from different individual investors.
It is a game-changer because it makes investing more accessible for every aspiring investor. It exempts its investors from registration requirements and other requirements.
Although real estate crowdfunding is relatively new, it is the future of the real estate market.
It allows investors to access private-turned-public opportunities and diversify their portfolios.
Where Real Estate Crowdfunding Shines
Ease and accessibility
Investing in real estate crowdfunding is a no-brainer; it is easy and accessible because it is available online.
Unlike conventional real estate investing, crowdfunding allows investors to invest free from the burden of lengthy requirements. You can also save yourself from the hassle of managing a property and save up costs for realtors.
Passive, long-term capital gains
Undoubtedly, real estate crowdfunding is here to stay.
The future of real estate has been gaining more audiences through virtual platforms, which makes this new method even more convenient. With crowdfunding, an investor earns passive, long-term, and low-maintenance capital gains.
Diversified portfolio
This new method of real estate investing also helps you diversify your portfolio.
With different property investments and projects to choose from, you will also have the freedom to build a diversified portfolio.
Affordable and high returns
Investing in property, traditionally speaking, is costly.
However, with crowdfunding, investments have become more affordable. Other than that, it also offers competitive returns.
Transparency
Since real estate crowdfunding is more lenient and accessible than conventional ones, you won’t have to worry about transparency.
Most real estate crowdfunding companies do their due diligence before onboarding real estate projects. However, you should invest in all crowdfunding projects blindly.
However, real estate crowdfunding offers an extra layer of transparency for real estate investors.
Where Real Estate Crowdfunding Falls Short
Higher risk
Real estate crowdfunding is not a foolproof concept; it is also vulnerable to common risks.
Like any investment, if you don’t do enough research, you could end up losing money.
Additionally, if a crowdfunding platform or project falls, you’ll end up losing all your capital.
No ownership and control
As an investor in crowdfunding, you’re one investor out of hundreds of others investing in the same project. Unlike traditional real estate investing, you won’t be the owner of your real estate property.
Low liquidity
In real estate crowdfunding, you cannot quickly sell your shares; hence, its low liquidity.
Plus, your investments may have lock-in periods before you are allowed to sell or transfer shares.
Is Real Estate Crowdfunding a Good Investment?
Real estate crowdfunding is an excellent opportunity for new investors.
However, there are no guaranteed returns in any investment; and it can be risky if you invest without first doing the research.
If you like high-yield investments that diversify your portfolio, crowdfunding may be the right option for you.
As with most investments, real estate crowdfunding has its pros and cons.
How Do I Invest in Real Estate Crowdfunding?
While crowdfunding may seem like an easy investment, you should take many steps before you invest your first dollar.
Since real estate crowdfunding is done through a crowdfunding platform, you must do your due diligence on choosing the best one for your needs.
Here are a few key things you want to look for:
- Company history (i.e., how long has it been in business)
- Company Mission (i.e., about section)
- Founders
- The vetting process for projects they onboard in their platform
Essentially, you want to make sure that the company you invest in has low odds of shutting down. Additionally, you want to invest in a company that has good deals.
It may be appealing to invest with a company with lots of deals, but if they’re bad deals, you’re more likely to lose your money. Plus, in the early stages of your investing career, you will only increase your odds of choosing a suitable investment platform that has a good vetting process.
Set Your Budget
Assuming you’re already maxing out your core investments, set an additional budget for real estate crowdfunding.
For example, if you’re only able to budget an additional $100 per month, anticipated 6-12 months before you invest in a real estate crowdfunding platform.
Most crowdfunding platforms require a minimum of $500-$1000 to start investing. To avoid going into debt or negatively affecting your saving goals, don’t invest more than what you’re able to budget for real estate crowdfunding.
Tax Implications
Income
If you are thinking of investing in real estate crowdfunding, how do you file your taxes?
You’ll treat any earned income through your investments like regular income and complete the 1099-INT form when filing your taxes.
Accredited and non-accredited investors are taxed differently. However, it’s more common for new investors to be non-accredited, as you’ll need a net worth of $1 million to qualify.
Check out this tax guide to learn more.
Depreciation
As for most real estate investments, depreciation represents the tax deductions that make up for the refurbishment cost of a property.
Depreciation is calculated over 27.5 years for residential, single-family, and multi-family properties.
For real estate crowdfunding, depreciation deductions are done by the holding company and shared with the investor.
You merely need to provide this information on your tax return.
State Taxes
At the federal level, real estate crowdfunding partnerships are not taxed.
However, by the end of every year, the LLCs will issue a K-1 for each partner. In terms of state taxes, it can get a bit complicated.
In most cases, real estate crowdfunding “partners” must file their respective state income tax returns.
The investors or partners will have to file these in the state where the crowdfunding project is located to avoid double taxation.
How to Evaluate Real Estate Crowdfunding Investments
Evaluate risk
When starting with real estate crowdfunding, understand the property and the LLCs involved. Do your due diligence to ensure the LLCs are trustworthy, effective, and transparent.
Research and extract relevant data regarding the processes, property, and charges inclusive and exclusive of a deal.
In evaluating the risk, consider the state of the market and potential events that could cause instability or volatility.
Attaining comprehensive information on the potential yield, long-term plans, and the property itself will help you assess its overall risk factors.
Know the Investment Type
As an investor, there are different ways to invest in real estate crowdfunding.
You can either invest with:
Equity
Most property deals are equity investments, providing a higher yield than lending-based investments.
Equity-based investments allow you to have a share of the property’s rental incomes and appreciation values.
The risk associated with this is also related to the volatility of the property’s value, which in most cases is unlikely to happen.
For equity investments, you don’t have to worry about caps, so it is possible to have a broader earning potential. The lower fees also help you maximize your tax gains.
Lending
Lending-based or debt investing is the most common investing method for most investors, lasting six months to two years.
This investment allows you to lend money to the property owner and receive a fixed interest from the mortgage loan on top of your invested amount.
Since lending-based investing has fixed rates, it is less risky.
Understand The Debt Project
Even when it has fewer risks than equity investments, lending or debt investments could still encounter particular issues.
Know your rights as a lender, and analyze the debt ratio service.
Testing the financial ratios of a specific project before investing in it is necessary for any real estate investment.
In lending investments, consider the construction costs, which could reduce your overall investment return.
Learning about your rights and protections (aside from the agreement and security documents) ensures your overall safety as a lender.
Before you lend capital, consider the project and the borrower.
Here are some key traits a good borrower should have:
- Compliant with contractual and borrower obligations;
- All their agreements are accurately documented;
- Transparent with the lenders regarding the project details;
- Pay and file taxes on time;
- Coordinates well with lenders and contractors;
Know the sponsor
A sponsor in the realm of crowdfunding is an individual or a group of individuals working with your investment.
Sponsors manage, oversee, and render the project until completion. They are primarily responsible for the following:
- Property negotiation
- Handle, manage, and distribute the returns to the project investors
- Hiring and coordinating with the Contractor or project developer
- Determine the best time when exchanging the property and negotiating asset gains
- Work on the paperwork and due diligence of the property
Sponsors use their investment and real estate management expertise in the deal. They usually invest little in the property but take a more significant portion of the risk (in loans), hence, a more substantial return.
Choosing the right sponsor is the first determining factor in the success of an investment. To avoid foreclosure, bankruptcy, or issues along the way, choose a sponsor who is:
- Experienced and knowledgeable in investments and real estate
- Reliable, trustworthy, and has a competitive investment background
- Outstanding reputation in the business and other professional aspects of career
- Has experience in the area subject for investment
- Knows how to manage your investment and grow the fund
- Good rapport with the investors and contractors altogether
Understand the fees
Depending on the crowdfunding platform you choose, fees are always inevitable.
Fees could range from an annual 1%-2.5% on your managed investments. Other costs include individual fund fees, management, and advisory fees.
Be sure to understand your fees – to avoid future trouble.
Understand your return on investment
Since the market is volatile and you have no complete control over your investments, it might be hard to understand how many returns you are earning.
Monitoring your investment’s updated returns or earnings or even reaching out to the solicitors could help you get a better grasp.
However, you also have to note that there are taxes that will be charged on your returns.
Choose the platform that can provide you with reliable yields, long-term or short-term.
Understand the target holding period
The target-holding period refers to when an asset or investment is not subject to redemption or sale.
It is an estimated period when the investment is expected to appreciate and earn its optimum yield. Frequently these investments could either be big projects or have low liquidity.
In real estate crowdfunding, the target-holding period could last from 6 months-2 to years for lending investments.
Equity investments could last from 2 to 10 years or more. Lending-based investing is more liquid than equity hence, the shorter target holding period.
The prolonged period of equity-based investing doesn’t mean you won’t receive any returns during this period.
You could receive quarterly or monthly payouts depending on your investment’s returns.
Although equity investments have lower liquidity, they carry higher returns and are a better option for long-term investment plans.
Best Real Estate Crowdfunding Sites
The ever-growing crowdfunding platform has also introduced an ever-growing selection of crowdfunding platforms.
To help you choose the best real estate crowdfunding platform, I’ve listed some of the best platforms to invest in below.
Fundrise
Fundrise is a low-cost real estate crowdfunding platform that is best suited for beginners.
It has a well-established underwriting process, making investments less risky for you.
Signing up on this platform is user-friendly for beginners. First, fill out your personal information, select an account type and plan, then build and manage your portfolio.
- Fees: 1%
- Minimum Investment Requirement: $500
- Average Annual Returns: 8.76%-12.42%
- Total Investor Distribution: 9.47%
- Investment Options: Debt, Preferred Equity, Equity
- Investor Type Requirements: No accreditation requires
EquityMultiple
Focused on commercial real estate, EquityMultiple offers professionally managed investments with the required accreditation of its investors.
Despite its high minimum investment requirement, the 9% average annual return will justify the risk.
It also prides itself in its leading underwriting, due diligence, and protection of investors’ interests. It offers solid returns despite its illiquidity and diversifies your portfolio, allowing you to invest from one state to another.
Based on the name itself, EquityMultiple will surely help multiply your invested equity.
- Fees: 0.5%-1.5%
- Minimum Investment Requirement: $5,000-$10,000
- Average Annual Returns: 9%
- Total Investor Distribution: 12%
- Investment Options: Debt, Preferred Equity, Equity
- Investor Type Requirements: Accreditation required
Crowdstreet
Another good platform in commercial real estate, Crowdstreet, provides its investors with direct access to endless investment possibilities.
It offers features such as choosing the best possible investment in the market aligned to its preferences.
Other than this, account creation is also free, making it user-friendly and accessible.
Other than this ease of access service, they also offer trustworthy fund and advisory services.
- Fees: 0.5%-2.5%
- Minimum Investment Requirement: $25,000
- Average Annual Returns: 11.5%-26.4%
- Total Investor Distribution: 17.7%
- Investment Options: Debt, Preferred Equity, Equity, Direct Ownership
- Investor Type Requirements: Accreditation required
RealtyMogul
RealtyMogul is one of the first real estate crowdfunding platforms.
It now has a diverse investment choice and supports both accredited and non-accredited investors, making it popular.
It also ventures not just in commercial real estate but even in flipping, project ground-up constructions, housing, etc.
Besides this, RealtyMogul has a solid and trustworthy track record. Being in the market for long enough has also helped them establish trust and existing fund flows that can help them generate continuous yields.
- Fees: 1%-1.25%
- Minimum Investment Requirement: $5,000
- Average Annual Returns: 9.75%
- Total Investor Distribution:
- Investment Options: Debt, Preferred Equity, Equity, Direct Ownership
- Investor Type Requirements: No accreditation is required
Patch of Land
Similar to its competitors, Patch of Land caters to pre-funded real estate deals.
They require a low minimum investment requirement but have a higher average annual return than most. Its niche includes both commercial and residential real estate.
If you are into lending or debt investment platforms, Patch of Land is a smart choice.
- Fees: 0-3%
- Minimum Investment Requirement: $1,000
- Average Annual Returns: 10.65%
- Total Investor Distribution: 12%
- Investment Options: Debt
- Investor Type Requirements: Accreditation required
Real Crowd
A champion for adjusted risk and return management, real crowd, boasts its platform with experts helping you manage, diversify, and maximize your investments.
Like all of the real estate crowdfunding platforms on the list, it is trustworthy and does its due diligence.
Although it doesn’t allow for non-accredited investors, Real Crowd is a superb choice, and it is highly recommended for experienced investors themselves.
- Fees: none
- Minimum Investment Requirement: $5,000
- Average Annual Returns: 11%-15%
- Total Investor Distribution:
- Investment Options: Debt, Equity
- Investor Type Requirements: Accreditation required
Is Real Estate Crowdfunding for Beginners?
Real estate crowdfunding, like most investments, is not for beginners. It requires research, and a minimum amount of investment is involved.
No matter how big or small the investment amount is, crowdfunding is promising, yet some research is still required.
Real estate crowdfunding has a lot to offer and will surely be popular for years to come.
While crowdfunding sites offer solid transparency, directly engaging with the business owner is also a plus.
Understanding the benefits of a crowdfunding platform is a prerequisite for real estate crowdfunding.
Real Estate Crowdfunding Alternatives
Real estate investment trusts (REITs) and Exchange-traded funds (ETFs) are two great alternatives to real estate crowdfunding. These alternatives require less money to start and typically have lower risk since they are diversified investments.
REIT is an investment that has an income-generating fund and pays its required dividends through rental incomes and property appreciation.
ETFs give investors the freedom to diversify in a portfolio. It also allows them to manage potential risks and returns by tracking assets, commodities, and indexes, among many others.
Individual Stocks
Investing in stocks is also an alternative for advanced investors.
Individual stocks aren’t more complex than ETFs but are riskier since they aren’t diversified.
For example, if you invest in Nike stock, your initial investment can grow or dwindle depending on the company’s performance.
It is recommended that you diversify your portfolio with index funds or ETFs that diversify your portfolio by investing in multiple companies.
Traditional real estate
Traditional real estate is still an excellent long-term investment and, for most, still preferred by experienced real estate investors.
Besides having complete control over your investments, traditional real estate is a long-term passive income strategy that you can even pass down to future generations.
If you have the patience to save up money and educate yourself on the different real estate investment strategies, this alternative is for you.
Real Estate Crowdfunding May Be Your Next Investment Strategy
Real estate crowdfunding is an excellent investment if it makes sense to add to your investment portfolio.
Despite some of the risks, you can still earn substantial returns on your investments with real estate crowdfunding if you take the time to educate yourself.
Before you dive into real estate crowdfunding, get to know the platform you’re planning to invest with. Research the company’s history, the company founders, and the types of deals available.
In the end, the more you know, the less risk you’ll carry.
So, is real estate crowdfunding worth adding to your investment portfolio mix?
Only you have the answer.
