These days, there’s no shortage of creative ways to invest. Crowdfunding, which started as a donation-based way to raise money, has become a popular form of real estate investing. When you participate in real estate crowdfunding, you pool your money together with many other investors to fund a particular project. If all goes well, you all earn passive income from it.
In this guide, you’ll learn what real estate crowdfunding is, how it differs from other forms of real estate investing, and whether it’s right for you.
What Is Real Estate Crowdfunding?
Crowdfunding is a way of raising capital by accepting small contributions from a large number of people. Crowdfunding was originally used primarily as a donation-based system, but thanks to technology, it’s been quickly adopted for business purposes as well.
Real estate crowdfunding is a way for many investors to come together to finance a particular real estate project. Individual investors are able to enter the market for far less money than they would if they invested in real estate on their own, and, in return, they should be able to earn passive income.
Real estate crowdfunding ventures typically have three primary parties:
- The project initiator, who proposes the idea and seeks funding. In the case of real estate crowdfunding, this party is often a developer.
- The investors, who contribute money to help fund the project.
- The platform that facilitates crowdfunding. There are plenty of crowdfunding platforms on the market specifically designed to help project initiators raise capital for their business ventures.
In the case of real estate crowdfunding, the platform that facilitates it typically vets the projects. Then, individuals are given the opportunity to invest passively. Unlike many forms of real estate investing, individual investors don’t play a hands-on role in business decisions, which removes a significant barrier to entry for many individuals.
Unlike traditional real estate investing, which can require hundreds of thousands of dollars of capital, investors can participate in real estate crowdfunding for amounts as low as $1,000—and on one, just $10—depending on the platform. Popular real estate crowdfunding platforms include Fundrise, CrowdStreet, Modiv, DiversyFund, and PeerStreet.
Benefits and Disadvantages of Real Estate Crowdfunding
Lower required investment
Choose your own investment opportunity
A source of passive income
Sometimes only open to accredited investors
Lack of liquidity
High level of risk
- Lower required investment: Investors can often get started with real estate crowdfunding for amounts as low as $1,000, eliminating some of the barriers to entry for real estate investing.
- Choose your own investment opportunity: When you sign up for a real estate crowdfunding site, you’re often able to choose which properties to put your money into, giving you more control in the process. In some cases, you may also have a voice in the process.
- A source of passive income: Real estate crowdfunding creates a source of income that’s more passive than many real estate investments. According to Timothy Li, chief information officer of the crowdfunding site Realty Mogul, returns on their deals average between 6% and 12%.
- Sometimes only open to accredited investors: Some real estate crowdfunding opportunities are only open to accredited investors, meaning individuals with incomes of more than $200,000 (or $300,000 with a spouse), a net worth of $1 million, or a Series 7, 65, or 82 license.
- Lack of liquidity: Real estate crowdfunding—and real estate, in general—often has lower liquidity than other investments. Not only can you easily resell your investment as you might with a stock, but crowdfunding platforms often have minimum terms, often a number of years, during which you’re required to keep your money in the investment.
- High level of risk: Every investment requires some level of risk, but according to the Securities and Exchange Commission, crowdfunding is a particularly high-risk type of investment. Li also said these investments are high risk.
REIT vs. Crowdfunding
A real estate investment trust (REIT) is a company that owns and operates income-producing properties and gives individuals the opportunity to invest. Similar to real estate crowdfunding, anyone can invest in REITs with just a small upfront investment by purchasing shares in the REIT company.
At first glance, real estate crowdfunding and investing in REITs sound quite similar. And it’s true—the two do have some key things in common. Investors can participate with just a small initial investment, and the holding results in passive income for the individual.
But there are also some key differences to point out:
|Real Estate Crowdfunding||REITs|
|Investors can choose which projects to invest in||Investing in an REIT gives you broad exposure to a portfolio of assets|
|People can invest with as little as $1,000||Individuals can invest with as little as the cost of one share|
|Real estate crowdfunding is a private equity investment||REITs are a public equity investment|
|Real estate crowdfunding is illiquid, and investors generally must keep their money in for a minimum term||REITs are liquid and investors can generally sell their shares anytime|
So which is right for you? Both real estate crowdfunding and REITs allow individuals to passively invest in real estate for a low minimum amount. But for investors who want experience in the real estate industry or who want to be a bit more hands-on, real estate crowdfunding might be the right option. In this case, you get to choose your own investments and often have the opportunity to work with the developer to share your input in the process.
How To Get Into Crowdfunding
Are you interested in getting into real estate crowdfunding? First, consider the type of real estate you’d like to invest in. Do you want to invest in single-family homes, or would you prefer commercial real estate?
Once you’ve decided what type of real estate properties you’d like to invest in, you can seek out the right crowdfunding platform for you. Some platforms, such as CrowdStreet, specialize in commercial property, while others, such as PeerStreet, offer many single-family homes you can invest in. Keep in mind that different platforms have different requirements for investors. For example, CrowdStreet is only open to accredited investors, but that isn’t the case with many other platforms.
One of the benefits of real estate crowdfunding platforms is that you can often choose which projects you invest in. Therefore, once you’ve chosen the right type of property and the best platform, you can start shopping for the right investment.
Many real estate crowdfunding platforms allow you to invest with as little as $1,000, and you can invest in multiple projects, giving you the opportunity to diversify your real estate portfolio.
As you choose your investments and decide how much you’ll invest, remember that real estate crowdfunding is a largely illiquid asset. Depending on the platform, you may be required to keep your initial money invested for years before you can withdraw it. As a result, it’s important that you only invest money you don’t expect to need in the near future.
Is Crowdfunding Right for You?
Real estate crowdfunding is one of the options available to real estate investors, but it’s far from the only one. Other options include investing in REITs, or even buying your own properties to rent out and earn a monthly income from.
Real estate—especially real estate crowdfunding—can be a risky investment. As with any investment, there’s always a chance of losing some or all of your money. Therefore, it’s best suited as an addition to a more diversified portfolio, rather than the entire portfolio itself.
If you’re planning to invest in real estate and aren’t sure which option is best for you, ask yourself how hands-on you want to be and how much you want to invest. For those who prefer to be hands-off and invest smaller amounts, real estate crowdfunding is likely a good choice. Those with more money to invest who want to take a more hands-on approach might prefer owning their own properties.
Frequently Asked Questions (FAQs)
How do investors in real estate crowdfunding services make money?
You can earn money in two different ways with real estate crowdfunding. First, you’re paid dividends (usually quarterly) for your share of the investment earnings. You may also make money if the property you invest in appreciates.
How much does it cost to get into real estate crowdfunding?
Some real estate crowdfunding sites allow individuals to invest with as little as $1,000.
How is real estate crowdfunding taxed?
The tax treatment of your real estate crowdfunding investment will depend on several factors, including the platform where you invest. In most cases, you’ll receive a Form 1099 from the crowdfunding platform. You’ll record the income on Form 1099 as taxable income when you file your tax return, and it will be taxed at your normal income tax rate.