Tweet
Crowdfunding | Realestate Crowdfunding
For Crowdfunding investors, real estate crowdfunding could be suitable. It gives ordinary investors a chance to access assets that only the wealthy can. The crowdfunding platforms help connect a real estate developer with an investor without them having to own, finance, or manage properties.
However, although this may be a great real estate investment type, it doesn’t work for everyone. It’s why we have written this guide about all the fundamental things about crowdfunded real estate to help you make an informed decision. Read on to learn more.
What Is Crowdfunding
To understand what real estate crowdfunding is, you need to understand what crowdfunding means. It’s simply a way of getting people to raise funds for a specific cause or project for a specified time, usually a few months.
Crowdfunding happens online usually on social networks. As such, it’s easy for supporters to contribute to the project or cause using their social channels. Crowdfunding can be used for personal projects or by businesses and organizations. It can be used to raise funds for school tuition, creative projects, business startups, etc.
There are two types of crowdfunding. One is donation where individuals contribute to a new project. In most cases, donors are usually promised that the product or service that will be developed by the crowdfunding money will yield returns. However, for charitable donations, the donor will not be the beneficiary, but he or she may be offered some perks.
The other type is investment crowdfunding used to give a business capital by selling ownership stakes online either in debt or equity form. In such a case, a funder becomes a shareholder or owner. Thus they can receive some financial reward.
Real Estate Crowdfunding
Real estate crowdfunding falls under the investment type of crowdfunding. Investors raise money to be used on a real estate deal. For example, an experienced real estate investor can establish an opportunity to build an apartment then sell at a profit. But if he or she lacks the necessary funding, they may ask for help from other investors through crowdfunding to attempt to raise the needed capital.
So how does crowdfunding for real estate work? Well, as we’ve earlier said, an expert investor spots an investing opportunity, but since they can’t fund the investment on their own, they ask for help from other investors through crowdfunding. There are three major players in real estate crowdfunding investments;
The Deal Sponsor- they identify and run the entire investment. They will facilitate the assets buying, arrange for contractors and financing, and oversee the whole process until the final sale is made. Sometimes, they may give some contributions to fund the projects. If they do, they have a right to receive a certain percentage of the profits got from that deal.
Crowdfunding Platforms- these connect deal sponsors to investors who help them raise the needed capital for a project. These platforms act as the middlemen between investors and sponsors. They make sure that the investment meets specified standards, ascertains that the investors meet those standards, advertises deals to investors, and regulates the deals. They also collect funds from investors on behalf of the sponsor.
The Investors- these are people who fund deals and are entitled to money that the deals produce. They get some income and profits once the investment goes through.
Let us now look at an example. An investor identifies an outdated business building that doesn’t have modern amenities and is not fully occupied being sold at say 10 million dollars. But after analyzing, the sponsor realizes that they can renovate and improve the space, then lease or sell the vacant space and triple the income from this property. Plus, once renovated, the building’s market value will increase after some years.
But they realize that the renovations will need like 4 million, and they can only afford 1 million. So they then choose to list the deal on a crowdfunding platform and offer anyone who invests equity of a certain percentage to them.
Now that we have understood what crowded real investments are, let us understand the benefits they offer to;
Borrowers
Investors
However, note that crowdfunding for real estate also has some drawbacks. When you contribute cash, you pay some fees and taxes. Some platforms will also charge a percentage to manage your funds. Additionally, you may also pay some extra taxes, depending on the profit you make on the deal. However, you can seek guidance from a tax advisor in this area.
We also should mention that real estate is viewed as an illiquid asset. Therefore, if you want to withdraw your funds, it’s not as easy as when withdrawing from a brokerage account.
For the borrowers, doing their crowdfunding is a lot of work. You may find getting a loan from a single person much easier than going to multiple investors. Also, the more the investors, the less your profit will be. Also, structure all your deals legally, which involves too much paperwork. Although real estate crowdfunding can raise funds faster, swinging from different investors takes a lot of time.
Best Crowdfunding Sites
PeerStreet
If you are an accredited investor and you want to invest in private real estate loans, this might be the best site for you. PeerStreet offers a marketplace where investors give lenders capital that they lend real estate borrowers. Then, the borrowers will make monthly payments to this site, which gives a share of these payments to investors.
You can use investments from different lenders, locations, asset classes, borrowers, rates, loan to value ratios, and terms to manually or automatically diverse your portfolio. The maximum term limits for the loans are 36 months, which reduces the interest rate risk. However, it accepts accredited investors, and individuals only invest in debt.
FundRise
This site was launched in 2012. Today, it has invested in real estate worth more than $5 billion across the USA. Its total investor distributions are more than 100 million dollars, and they’ve been having a return of 7.42%-12.42% since 2014.
It allows a minimum investment of $500-$100000, depending on a person’s account level. The investment opportunities also vary in different account levels. Account levels offered are Starter, Basic, Core, Advanced, and Premium.
Investors don’t need any accreditation. Plus, it’s among the few platforms with a well-rated mobile app. You can also request share redemption anytime only that you may be charged some fees and the redemption may not be granted. It, however, doesn’t support non-qualified dividends.
EquityMultiple
EquityMultiple is mostly focused on institutional commercial real estate. Some of the investments offered include equity, preferred equity, and senior debt. They also added two tax-advanced investments on real estate, which are Opportunity Zone and 1031 exchange as well as funds to their product line up.
They charge fixed fees of 1% on equity investments, but in other investments, how much you pay depends on the type of offering. The minimum investment one can make is $10000 with an average annual return of 14.5%. Their total investor distribution is $62.8 million.
The platform is easy to use and offers various investment opportunities. However, it only allows accredited investors, plus its minimum investment is steep.
DiversyFund
What makes this site unique is that it looks for investment opportunities, develops and manages them, and after collecting the cash flow, it divides the profit among its investors. Users also don’t pay any broker or management fees.
The minimum amount you can invest is $500, which is a bit low compared to other platforms. Plus, it has a mobile app, and you don’t have to be an accredited investor to invest. Its total investor distributions total $135 million, and the average returns are 10-20%, depending on the type of investment.
However, the investment options are a bit limited. And like most platforms, it doesn’t allow early withdrawals. Also, users get paid at the end of the investment term.
CrowdStreet
Crowdstreet was founded in 2014 and has its headquarters in Portland, Ore. It has published over 400 commercial real estate deal offerings and at least forty of those have been realized fully.
The platform has over 100000 investors, thanks to its innovative approach. This allows them to make various legit and high-quality real estate investments. If you are accredited, you can either invest in one property or a fund.
Investment options include individual deals, tailored portfolios, funds, etc. The minimum investment one can make is $25000 and features an average annual return of 11.5-26.4%. The site is user-friendly, featuring a helpful chatbot. Once you sign up for a free account, you can easily find investment details. However, it doesn’t allow early withdrawals. Plus, investors must be accredited.
What about GoFundMe & Kickstarter?
GoFundMe and Kickstarter are the most popular crowdfunding platforms. They are mostly tailored towards personal projects like raising medical bills or school fees. However, businesses and organizations can also use them.
While you can use them for real estate crowdfunding, they won’t be tailored towards an individual’s particular mission. It’s better to use sites that have been specifically designed for real estate crowdfunding. Apart from the ones we’ve reviewed above, you can also try Feather The Nest, Hatch My House, Down Payment Dreams, and Honeyfund.
How to Make Money Crowdfunding on Real Estate
Real estate crowdfunding has significantly grown, and businesses, as well as individuals, are making returns. For instance, CrowdStreet reported posting 1.7 billion dollars with 60 crowdfunding offerings for real estate through their marketplace.
So how can you make money using crowdfunding for real estate? Here are some ways;
Create Your Crowdfunding Platform
Individuals have always relied on established crowdfunding platforms. But did you know that you can also create your site and have access to investors? Since REITs are ever-growing, you can use the Job’s Act Regulation A+ to attract investors to your platform.
But when setting your platform, remember to include the right technology that ensures safe transactions on the site. Additionally, design something that offers very competitive advantages. Otherwise, you’ll not stand out from your competitors.
Offer Key Services
Legal and tax considerations will always play an essential role when a company or individual raises funding. There are also other services that are needed to complete the transaction. You’d be surprised by the income you can make providing ancillary services on these platforms.
Refer investors to Crowdfunding Platforms
You can be compensated for referring investors, whether accredited or not, to a crowdfunding site. If you know any investor that might be interested, you can look for crowdfunding platforms offering this service.
Invest in a Crowdfunding Site
Well, most platforms aren’t open to non-accredited investors. However, you can join the many investors using REIT-style products and incorporate them into your portfolio.
But note that most of these investments are illiquid. As such, you can’t redeem your shares. But you can wait for some liquidation events or a chance to sell your shares to other investors on the crowdfunding platform.
Conclusion
Real estate crowdfunding continues to grow in popularity. It allows investors to expand their investments in opportunities that they would have otherwise missed. This form of financing is beneficial to a person who wants to fund a project and those who want to get funding. But, before using crowdfunding sites for real estate, please conduct thorough research to ensure that you are choosing a reputable and reliable platform.
However, although this may be a great real estate investment type, it doesn’t work for everyone. It’s why we have written this guide about all the fundamental things about crowdfunded real estate to help you make an informed decision. Read on to learn more.
What Is Crowdfunding
To understand what real estate crowdfunding is, you need to understand what crowdfunding means. It’s simply a way of getting people to raise funds for a specific cause or project for a specified time, usually a few months.
Crowdfunding happens online usually on social networks. As such, it’s easy for supporters to contribute to the project or cause using their social channels. Crowdfunding can be used for personal projects or by businesses and organizations. It can be used to raise funds for school tuition, creative projects, business startups, etc.
There are two types of crowdfunding. One is donation where individuals contribute to a new project. In most cases, donors are usually promised that the product or service that will be developed by the crowdfunding money will yield returns. However, for charitable donations, the donor will not be the beneficiary, but he or she may be offered some perks.
The other type is investment crowdfunding used to give a business capital by selling ownership stakes online either in debt or equity form. In such a case, a funder becomes a shareholder or owner. Thus they can receive some financial reward.
Real Estate Crowdfunding
Real estate crowdfunding falls under the investment type of crowdfunding. Investors raise money to be used on a real estate deal. For example, an experienced real estate investor can establish an opportunity to build an apartment then sell at a profit. But if he or she lacks the necessary funding, they may ask for help from other investors through crowdfunding to attempt to raise the needed capital.
So how does crowdfunding for real estate work? Well, as we’ve earlier said, an expert investor spots an investing opportunity, but since they can’t fund the investment on their own, they ask for help from other investors through crowdfunding. There are three major players in real estate crowdfunding investments;
The Deal Sponsor- they identify and run the entire investment. They will facilitate the assets buying, arrange for contractors and financing, and oversee the whole process until the final sale is made. Sometimes, they may give some contributions to fund the projects. If they do, they have a right to receive a certain percentage of the profits got from that deal.
Crowdfunding Platforms- these connect deal sponsors to investors who help them raise the needed capital for a project. These platforms act as the middlemen between investors and sponsors. They make sure that the investment meets specified standards, ascertains that the investors meet those standards, advertises deals to investors, and regulates the deals. They also collect funds from investors on behalf of the sponsor.
The Investors- these are people who fund deals and are entitled to money that the deals produce. They get some income and profits once the investment goes through.
Let us now look at an example. An investor identifies an outdated business building that doesn’t have modern amenities and is not fully occupied being sold at say 10 million dollars. But after analyzing, the sponsor realizes that they can renovate and improve the space, then lease or sell the vacant space and triple the income from this property. Plus, once renovated, the building’s market value will increase after some years.
But they realize that the renovations will need like 4 million, and they can only afford 1 million. So they then choose to list the deal on a crowdfunding platform and offer anyone who invests equity of a certain percentage to them.
Now that we have understood what crowded real investments are, let us understand the benefits they offer to;
Borrowers
- Creates more sources of funding hence can grow their network of investors
- Small real estate companies can start their operations quickly thanks to peer-to-peer lending
- Successful real estate deals build you, loyal customers
- Since crowdfunding involves direct marketing, it helps promote their real estate business
- The online crowdfunding community gives you valuable feedback that helps you address any flaws in your business
- Using a user-friendly crowdfunding site can save you time and money
Investors
- Allows them to access low investment levels
- One can make short term investments like between 2-48 months
- There are no investment fees with peer-to-peer lending, so you get a high return on investments
- The sites offer transparency of transactions. Thus you know how your funds will be used
- You can invest in various asset classes and countries.
However, note that crowdfunding for real estate also has some drawbacks. When you contribute cash, you pay some fees and taxes. Some platforms will also charge a percentage to manage your funds. Additionally, you may also pay some extra taxes, depending on the profit you make on the deal. However, you can seek guidance from a tax advisor in this area.
We also should mention that real estate is viewed as an illiquid asset. Therefore, if you want to withdraw your funds, it’s not as easy as when withdrawing from a brokerage account.
For the borrowers, doing their crowdfunding is a lot of work. You may find getting a loan from a single person much easier than going to multiple investors. Also, the more the investors, the less your profit will be. Also, structure all your deals legally, which involves too much paperwork. Although real estate crowdfunding can raise funds faster, swinging from different investors takes a lot of time.
Best Crowdfunding Sites
PeerStreet
If you are an accredited investor and you want to invest in private real estate loans, this might be the best site for you. PeerStreet offers a marketplace where investors give lenders capital that they lend real estate borrowers. Then, the borrowers will make monthly payments to this site, which gives a share of these payments to investors.
You can use investments from different lenders, locations, asset classes, borrowers, rates, loan to value ratios, and terms to manually or automatically diverse your portfolio. The maximum term limits for the loans are 36 months, which reduces the interest rate risk. However, it accepts accredited investors, and individuals only invest in debt.
FundRise
This site was launched in 2012. Today, it has invested in real estate worth more than $5 billion across the USA. Its total investor distributions are more than 100 million dollars, and they’ve been having a return of 7.42%-12.42% since 2014.
It allows a minimum investment of $500-$100000, depending on a person’s account level. The investment opportunities also vary in different account levels. Account levels offered are Starter, Basic, Core, Advanced, and Premium.
Investors don’t need any accreditation. Plus, it’s among the few platforms with a well-rated mobile app. You can also request share redemption anytime only that you may be charged some fees and the redemption may not be granted. It, however, doesn’t support non-qualified dividends.
EquityMultiple
EquityMultiple is mostly focused on institutional commercial real estate. Some of the investments offered include equity, preferred equity, and senior debt. They also added two tax-advanced investments on real estate, which are Opportunity Zone and 1031 exchange as well as funds to their product line up.
They charge fixed fees of 1% on equity investments, but in other investments, how much you pay depends on the type of offering. The minimum investment one can make is $10000 with an average annual return of 14.5%. Their total investor distribution is $62.8 million.
The platform is easy to use and offers various investment opportunities. However, it only allows accredited investors, plus its minimum investment is steep.
DiversyFund
What makes this site unique is that it looks for investment opportunities, develops and manages them, and after collecting the cash flow, it divides the profit among its investors. Users also don’t pay any broker or management fees.
The minimum amount you can invest is $500, which is a bit low compared to other platforms. Plus, it has a mobile app, and you don’t have to be an accredited investor to invest. Its total investor distributions total $135 million, and the average returns are 10-20%, depending on the type of investment.
However, the investment options are a bit limited. And like most platforms, it doesn’t allow early withdrawals. Also, users get paid at the end of the investment term.
CrowdStreet
Crowdstreet was founded in 2014 and has its headquarters in Portland, Ore. It has published over 400 commercial real estate deal offerings and at least forty of those have been realized fully.
The platform has over 100000 investors, thanks to its innovative approach. This allows them to make various legit and high-quality real estate investments. If you are accredited, you can either invest in one property or a fund.
Investment options include individual deals, tailored portfolios, funds, etc. The minimum investment one can make is $25000 and features an average annual return of 11.5-26.4%. The site is user-friendly, featuring a helpful chatbot. Once you sign up for a free account, you can easily find investment details. However, it doesn’t allow early withdrawals. Plus, investors must be accredited.
What about GoFundMe & Kickstarter?
GoFundMe and Kickstarter are the most popular crowdfunding platforms. They are mostly tailored towards personal projects like raising medical bills or school fees. However, businesses and organizations can also use them.
While you can use them for real estate crowdfunding, they won’t be tailored towards an individual’s particular mission. It’s better to use sites that have been specifically designed for real estate crowdfunding. Apart from the ones we’ve reviewed above, you can also try Feather The Nest, Hatch My House, Down Payment Dreams, and Honeyfund.
How to Make Money Crowdfunding on Real Estate
Real estate crowdfunding has significantly grown, and businesses, as well as individuals, are making returns. For instance, CrowdStreet reported posting 1.7 billion dollars with 60 crowdfunding offerings for real estate through their marketplace.
So how can you make money using crowdfunding for real estate? Here are some ways;
Create Your Crowdfunding Platform
Individuals have always relied on established crowdfunding platforms. But did you know that you can also create your site and have access to investors? Since REITs are ever-growing, you can use the Job’s Act Regulation A+ to attract investors to your platform.
But when setting your platform, remember to include the right technology that ensures safe transactions on the site. Additionally, design something that offers very competitive advantages. Otherwise, you’ll not stand out from your competitors.
Offer Key Services
Legal and tax considerations will always play an essential role when a company or individual raises funding. There are also other services that are needed to complete the transaction. You’d be surprised by the income you can make providing ancillary services on these platforms.
Refer investors to Crowdfunding Platforms
You can be compensated for referring investors, whether accredited or not, to a crowdfunding site. If you know any investor that might be interested, you can look for crowdfunding platforms offering this service.
Invest in a Crowdfunding Site
Well, most platforms aren’t open to non-accredited investors. However, you can join the many investors using REIT-style products and incorporate them into your portfolio.
But note that most of these investments are illiquid. As such, you can’t redeem your shares. But you can wait for some liquidation events or a chance to sell your shares to other investors on the crowdfunding platform.
Conclusion
Real estate crowdfunding continues to grow in popularity. It allows investors to expand their investments in opportunities that they would have otherwise missed. This form of financing is beneficial to a person who wants to fund a project and those who want to get funding. But, before using crowdfunding sites for real estate, please conduct thorough research to ensure that you are choosing a reputable and reliable platform.