What is Real Estate Crowdfunding and How it Works?

Real estate crowdfunding is an increasingly popular way to diversify a financial portfolio. It allows you to pool your money online with other investors to purchase property or shares of property as a group. This form of investment offers a compelling way to tap into real estate investments, grow your wealth, and enter the world of property ownership and rentals with minimal upfront investment. By raising money online from a large group of potential investors through internet platforms and social media sites, individuals and businesses can quickly collect the capital needed for real estate acquisitions.  

What is Real Estate Crowdfunding? 

Crowdfunding invites the general public to contribute money or startup capital to fund new ventures. This online fundraising method involves posting open calls to potential investors on websites, where prospective investment opportunities are showcased, allowing concepts to be pitched directly to everyday internet users. 

Interested investors contribute to a collectively sourced pool of capital, providing financial backing for current or prospective real estate investments. These opportunities can be residential or commercial properties, including the development of new housing, retail, or office space, or acquiring partial ownership in existing holdings. Investors are attracted to these real estate opportunities for several reasons: 

• It offers a chance to diversify assets and investment portfolios. 
• Compared to traditional real estate investments, it requires low startup capital. 
• The shared cost structure allows financiers to invest in larger property holdings than they might individually access. 
• Ownership risks are distributed among multiple investors. 
• It provides access to new or exclusive investment opportunities. 
• Investors can hold commercial real estate or portfolio holdings in addition to residential properties. 

• It offers exposure to the real estate market without the need for investor involvement in property upkeep and maintenance. 
• Investors do not need to qualify for a mortgage or make regular loan payments. 
• It does not require owners to guarantee loans with property and assets. 

How Does Crowdfunding Work in Real Estate?  

Purchasing an investment property is a popular strategy for individuals aiming to grow their wealth. Traditional real estate acquisition often necessitates obtaining a mortgage from a bank or credit union, which usually requires a substantial upfront down payment. Additionally, buyers must cover routine expenses, including maintenance, utilities, and annual property taxes, and commit to the ongoing upkeep of the property. 

Conversely, real estate crowdfunding allows investors to pool their money through online financial technology (fintech) or crowdfunding platforms to fund real estate investments, with the goal of generating one-time or ongoing profits. 

Often, just a few hundred dollars is enough to get started with these online investment solutions. Funds are typically invested in real estate investment trusts (REITs) or similar financial vehicles that own and manage various real estate properties such as houses, apartments, condos, retail spaces, malls, hotels, and offices. Crowdfunded investments are usually privately held and tend to pay regular dividends to investors. 

Why is Crowdfunding Real Estate Beneficial for Investors? 

Crowdfunding real estate providers offer investors access to exclusive private market property investments that may not be available to the public. These crowdfunded investments often promise higher returns than publicly traded REITs but come with a higher degree of risk. 

As with any private investment, it is crucial to conduct thorough research and not overextend yourself financially. 

Real estate crowdfunding is typically used to diversify and expand financial holdings rather than serve as a primary wealth generator. It complements a balanced portfolio that includes stocks, bonds, and other equity investments. 

Some crowdfunding sites are open to general investors, while others require investors to qualify as accredited. Accredited investors must have an annual income over $200,000 or a net worth exceeding $1 million. 

Real Estate Crowdfunding Pros and Cons 

Like any other real estate investing, real estate crowdfunding has its pros and cons. Before committing funds to a crowdfunded real estate project, it is essential to understand the benefits and drawbacks associated with crowdfunding platforms and investments: 

Pros: 

1. Generally, it offers larger dividends than traditional real estate investments. 
2. Enables property owners to diversify and expand their financial portfolios. 
3. Provides access to unique real estate projects and opportunities. 
4. Eliminates the common concerns faced by property owners and landlords. 
5. Requires minimal upfront and ongoing investment compared to traditional real estate ventures. 

Cons: 

1. Crowdfunding platforms may charge investors management or advisory fees. 
2. Your assets can’t be easily sold off or divested quickly. 
3. As a relatively new investment offering, many platforms and projects lack a lengthy track record of investments. 
4. Some platforms may require their investors to be accredited investors (relatively well-capitalized) before they can participate. 

How Do Real Estate Crowdfunding Companies Make Money? 

Each site operates differently. 

Some charge the sponsors (the individuals listing the investments) a fee. This fee might be a fixed amount (e.g., $30,000), a servicing charge for each investor who subscribes to the deal, or a back-end “promote” where they take a share of the profits. There are also sponsor-friendly platforms that don’t charge sponsors at all. 

Others charge investors a fee. This could be a fixed amount, an annual servicing charge (like 1%), or no charge at all. 

Some platforms originate their own deals, meaning they act as the sponsor. In these cases, they typically charge additional fees for management, purchasing the property, selling it, etc.