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Real Estate Crowdfunding: Is It the Next Big Thing for Investors?

Real estate crowdfunding is a unique way to diversify your financial portfolio. Crowdfunding allows you to pool your money with others to purchase real estate. The idea is that many people are willing to invest a small amount, adding up to a large sum of money. As such, crowdfunding allows investors to become shareholders in real estate property. If you want to learn how to grow or build your business with real estate crowdfunding, just keep reading.

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What Is Real Estate Crowdfunding?

Real estate crowdfunding works as many other crowdfunding ventures do. Generally, investors ask others to contribute money via online fundraising to help fund a new property. Typically, investing in real estate requires a large down payment. But, modern real estate crowdfunding platforms are working to lower the financial barrier, so you can invest with smaller amounts of capital. 

Individuals that contribute capital can provide a means of financial backing for current or prospective real estate investments. Opportunities may include residential or commercial buildings, new housing development, retail or office space, and more. 

Investors may be interested in exploring real estate crowdfunding for several reasons. Some opportunities may include:

  • Low startup capital compared to traditional real estate investments
  • Access to new or exclusive properties
  • More significant amounts of capital can allow individuals to invest in larger property holdings than usual.
  • It gives investors a chance to diversify assets and portfolios
  • Many shareholders split the risk instead of one investor
  • Offers exposure to the real estate market without personal ties
  • No need to qualify, obtain and pay off a traditional mortgage
  • It doesn’t require owners to guarantee loans with personal assets

Now that we’ve gone over some of the reasons people use real estate crowdfunding let’s discuss how it works.

How Real Estate Crowdfunding Works

In the past, crowdfunding was commonly associated with equity transactions, where companies would use the process to raise money. However, real estate crowdfunding is similar to private real estate funding. In addition, several investors carry the risk, compared to the typical situation of one person loaning 100% of the investment amount. Typically, in a crowdfunding transaction, there’ll be 10-20 people investing between 5% to 10% of the investment.

Modern online financial technology or crowdfunding sites allow investors to pool their money to fund real estate investments to eventually earn a profit. That said, a few hundred dollars can be enough to get started with this investment solution. 

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Generally, crowdfunded investments are paid to Real Estate Investment Trusts (REITs) or similar financial means. These structures serve as holding companies that own and operate diverse real estate investments. Different investments may include houses, apartments, condos, retail or office space, hotels, malls, and more. 

That said, some real estate crowdfunding platforms allow access to private market real estate investments that may offer higher returns than publicly traded REITs. For instance, a public market investment with daily liquidity has an average 20-year annual return of 8.2%. On the other hand, a private market investment may offer 20-year trailing returns of 12.3% or more. 

While it may seem like an exciting opportunity, you probably don’t want to dedicate too much of your portfolio to crowdfunding services. After all, it’s best to have a balanced portfolio. But, if you’re looking to diversify your portfolio and potentially earn favorable returns, allocating some funds to a crowdfunding platform can be beneficial. 

Next, let’s discuss how you can get started in real estate crowdfunding.

Learn More About Real Estate Crowdfunding

Finding an online real estate crowdfunding platform isn’t hard; they’re generally ready and willing to accept your contributions. However, it’s crucial to do research on real estate crowdfunding and different platforms before making any investments. 

Here are some points to consider if you’re looking to start crowdfunding.

  • Research pros and cons of each online crowdfunding platform
  • Consider how much you’re able to invest
  • Think about how long your money will be tied up and determine how long you can go without access to funds
  • Determine and review the type of property holding you’d like to invest in
  • Calculate what kind of return you’re looking for per your investment
  • Compare online sites, services, terms, and investment opportunities
  • Prepare necessary documentation or tax forms to prove your investor status
  • Meet with your accountant to determine any potential tax impacts of real estate crowdfunding

Once you’ve covered all the bases, it’s time to find a platform that will adhere to your investment goals. Here are the top crowdfunding platforms for investors. 

Top Crowdfunding Platforms for Investors

Now that real estate crowdfunding is becoming more and more popular, there are several competitive online platforms that want your investment dollars. However, no two platforms are made equally, and each site offers different features, opportunities, and potential returns. 

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It’s also crucial to note that real estate crowdfunding is relatively new, so careful research before investing is extremely important. In addition, you’ll want to look at user commentary and feedback before committing to investing via an online platform. That said, here’s a list of the most popular and well-established crowdfunding sites to potentially choose from.

  1. CrowdStreet
  2. Fundrise
  3. EquityMultiple
  4. RealtyMogul
  5. YieldStreet

CrowdStreet

One of the more popular real estate crowdfunding sites is CrowdStreet. Its innovative approach allows accredited investors direct access to a large range of quality real estate opportunities. Typically, these projects look to deliver high returns for investors. 

Additionally, CrowdStreet provides some due diligence for investors by conducting background and reference checks on developers who want to contribute financially. However, it’s important to note that many offerings require a minimum investment of $25,000, which is quite a lot compared to other platforms. 

Fundrise

Fundrise allows any investor to get started with real estate crowdfunding, whether they’re accredited or not. With Fundrise, you can team up with other investors and buy residential or commercial properties quickly.

This platform is best for beginners since it’s easy to use and highly innovative, making the process a little less daunting. However, it’s important to note that most privately held investments don’t provide much liquidity, so they’re geared toward more long-term investors.  

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EquityMultiple

This platform focuses mainly on privately managed commercial assets. For instance, some investment opportunities may include office spaces, hotels, data centers, and more. That said, minimum investments through EquityMultiple may range from $10,000 to $40,000, which appeals more to wealthy, accredited investors. 

RealtyMogul

Both nonaccredited and accredited investors can access commercial real estate investments or individual properties with RealtyMogul. Additionally, it includes a variety of REITs, allowing financiers to spread their dollars across several real estate holdings. 

However, investment minimums are relatively high, typically around the $5,000 mark, where fees can vary depending on your individual investment choices. 

Yieldstreet

Yieldstreet is excellent for those who want to invest in a variety of privately structured. Luckily, these deals are backed by assets to help protect your principal, leaving you with less to worry about.

Additionally, if you’re just looking to get started in real estate crowdfunding, Yieldstreet offers opportunities ranging from as little as six months to 5 years. Although the platform is mostly for accredited investors, even nonaccredited investors that want to earn passive income can do so by investing as little as $1,000. 

Advantages and Disadvantages of Real Estate Crowdfunding

Like any investment strategy, real estate crowdfunding has some pros and cons. So, before you commit to a real estate project, you must review the advantages and disadvantages to make an educated decision. Here’s what to consider.

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Pros of Real Estate Crowdfunding

  • Access to unique real estate opportunities and projects
  • Allows property owners to expand and diversify their portfolios
  • Often pays higher dividends than traditional investments
  • Eliminates some common concerns that owners and Washington DC property managers encounter
  • Requires minimal upfront and ongoing payments compared to traditional real estate investments

Cons of Real Estate Crowdfunding

  • Depending on the platform, you could have annual fees of 1% to 2.5% of your assets.
  • Assets are illiquid, so you can’t sell them quickly or easily
  • Some platforms allow only accredited investors
  • Many newer platforms may not have a lengthy track record of success.
  • Investors have to pay taxes on the income they receive

Protect Your Real Estate Investments with Property Management

No matter how you want to invest, keeping your personal assets managed properly is crucial. Whether you own rental properties or contribute to crowdfunding platforms, it’s best to have a trusted property management team by your side. 

Bay Property Management Group offers comprehensive rental management services, from tenant screening to maintenance. If you’re looking for rental management in Baltimore, Philadelphia, Northern Virginia, or Washington, DC, contact BMG today!

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