Crowdfunding is undoubtedly a gem for entrepreneurs, real estates, or simply anyone who has an idea but no capital to execute it. While most crowdfunding campaigns you hear about are related to tech, art, or design, there’s a lot more to raising money online than that.
Real estate crowdfunding is possibly the most straightforward way to make your portfolio or fund a property that you’d never be able to buy alone. In the past few years, real estate crowdfunding has become quite popular and profitable.
So much so that some experts hail it as more profitable than stocks. A part of its popularity is credited to people’s understanding of the online marketplaces. Plus, automation tools like JustEarlyBird further make real estate crowdfunding a breeze for even the novice.
So, what is real estate crowdfunding? What’s the potential? Can everyone do it? Here’s an in-depth guide on real estate crowdfunding to help you understand how it works.
What is Real Estate Crowdfunding?
Real estate crowdfunding is a way of funding real estate projects through mutual collaboration from multiple investors. In layman terms, plenty of people come together to pool money for a particular project.
In return, they get a portion in that property and earn through monthly or quarterly payments. It might sound simple, but real estate crowdfunding is quite different from other crowdfunding types in many ways.
For starters, the minimum pledge is relatively high. When you’re backing someone’s tech project, you can pledge as little as $10 or as high as $100.
However, for most real estate projects, the minimum is in thousands. So, if you want to plunge into real estate crowdfunding, your head and wallet must be in the game.
Types of Real Estate Crowdfunding
Depending on the type of payment you receive from a property, real estate crowdfunding is categorized into equity and debt crowdfunding.
● Equity Crowdfunding
Equity crowdfunding refers to a situation in which you own a share in someone’s property. For instance, you may pledge $20,000 and become a shareholder of a house or shop.
The dividend you get from this pledge will come from rental payments.
Now, let’s say it in simple terms. Person A wants to buy a property that costs a hundred thousand grand, but they don’t have the money. They run a crowdfunding campaign, asking others to pool money.
Person B (that’s you) invests $10,000 in this property and becomes a 10% shareholder. After Person A has reached their target, they’ll buy the property and rent it out.
Depending on the rental type, you’ll get a 10% share of the rent. In a situation that Person A sells the property, you’ll get 10% of the profit on that sale.
Since equity investments are long-term, they give higher returns. As a result, they’re the more common type of real estate crowdfunding.
Equity investments are further divided into two types:
- Common Equity
- Preferred Equity
Here’s a table explaining the differences between both kinds:
Return on Investment
10% to 25%
10% to 13%
Last to be paid
Paid before common equity
Remember that not all crowdfunding sites will offer both types of investments. Thus, if you’re interested in a particular type, make sure you choose the site accordingly.
Although equity investments have a high cash return, they’re also riskier than debt crowdfunding. If a property does not generate cash or its value decrease over time, you can lose your investment.
Pros of Equity Crowdfunding
The largest benefit of equity crowdfunding is the higher returns on investment. In debt crowdfunding, you get a limited ROI, depending on the interest rate.
However, in equity investments, a higher rental payment means you get paid a higher share. Similarly, if the property’s value appreciates over time, you’re in for a massive cheque once it’s sold.
Secondly, equity crowdfunding has tax benefits. While this may not be the same for every country, in most regions, you don’t have to pay taxes until the shares sell.
Moreover, investment fees for equity crowdfunding are also lower. In most cases, they’re 1% to 2%, much lower than debt crowdfunding.
Cons of Equity Crowdfunding
Equity crowdfunding poses a higher risk than other types of real estate crowdfunding. You’ll be paid second – after the loan investors – so there’s a risk of losing money.
What if the property performs poorly? What if its value decreases? All these factors can contribute to your monetary loss.
Besides, equity investments are long-term. Thus, your money is gone for anything from three to ten years. In simple terms, it translates to less liquid funds.
● Debt Crowdfunding
In debt crowdfunding, your money is being used to fund an investment loan. In return, you’ll get an interest-based dividend.
For most projects, the investment period ranges from six months to two years. On average, you’ll receive a return of 8% to 9.1%. Plus, you can’t exit whenever you want. Before the timeline begins, everything will be decided between you and the real estate developer.
Debt crowdfunding is further divided into:
- Syndicated debt
- Platform issued debt
Here’s a table to explain the differences between them:
Return on Investment
8% to 12%, usually fixed
Often up to 1% more than syndicated debt, also fixed
Not as risky as equity
Not as risky as equity
Secured by property
Secured by property
First in line to be paid
First in line to be paid, equity investors come second
When you invest in syndicated debt, you’re investing in a pre-existing loan. A professional lender or a middleman gave this loan. While the presence of a third-party increases security, it also brings in an additional fee of 0.5% to 1.5% per year.
As an investor, you’ll receive a certain amount in return, mostly 8% to 12%. The investment term is often short, lasting up to 24 months. Thus, your funds become liquid pretty soon.
In contrast, platform issued debt refers to loans that the crowdfunding site gives. The site would use investors’ money to originate loans for real estate. Like syndicate crowdfunding, the term ranges from six months to two years. However, the return is 0.5% to 1% higher than the former.
Pros of Debt Crowdfunding
Since debt crowdfunding terms hardly last over two years, you’ll get your money back soon. With this money, you can invest in other campaigns or projects.
Possibly the best thing about debt crowdfunding is the predictability. In most cases, you’ll know ahead of time what your payment will be.
Cons of Debt Crowdfunding
Debt crowdfunding has higher fees, especially if there’s a middle man involved. Also, the return on investment is lower than equity crowdfunding.
Who Should Dab in Real Estate Crowdfunding?
While the prospect seems quite inviting, real estate crowdfunding is not everyone’s cup of tea. It’s mostly an ideal choice for passive investors or people who want to learn about the field before taking a larger step.
- Firstly, real estate crowdfunding is the best option for people who don’t have enough money to buy a property but still want to invest in the market.
- Secondly, it’s ideal for investors who don’t want the added hassle of being a landlord or managing a property.
In real estate crowdfunding, all you have to do is invest. With product crowdfunding campaigns, it’s reward automation tools like JustEarlyBird lessening you work while in real estate crowdfunding, the developer or lender takes charge.
Lastly, people who want to buy property away from home should dab in real estate investment. Even if you don’t have the capital or logistic knowledge of the land, you can still be a shareholder.
On the flip side, you should not choose real estate crowdfunding if:
- You want sole ownership of a property
- You want to be in charge of budgeting, management, and the paperwork
Real Estate Crowdfunding Sites
The big guns, Indiegogo and Kickstarter, do not cater to real estate crowdfunding. But worry not, there are plenty of other options. Here’s a table that discusses some popular real estate crowdfunding sites.
Average Annual Return
0.5-% to 2%
11.5% to 26.4%
Real Estate Investment Trusts
11% to 18%
0.5% for equity, different for others
Commercial real estate, senior debt, equity, 1031 exchange
eFUNDS and eREITS
8.7% to 12.4%
1% to 1.5%
1031 exchange, REITs, offices, storage, retail, and multifamily properties
4.5% to 8%
How to Choose the Right Real Estate Crowdfunding Site?
Now that you know the basics of real estate crowdfunding, you can start looking for sites where you can invest in such projects.
Online crowdfunding platforms are not legally bound to register with the US Securities and Exchange Commission. Thus, most of the time, the local government is not regulating them.
The only way to make your investments safe is by investing in the right platform. Here are a few factors to consider before signing up for a crowdfunding platform:
● Geographical Limitations
Often, crowdfunding sites have restrictions based on the geographical location of the investors. Make sure you’re eligible to invest in a certain project before signing up.
In some cases, you may be eligible to apply, but you’ll have to meet a higher set of requirements.
● Investor Feedback
Unlike a Kickstarter campaign, you’ll be spending hundreds and thousands of dollars in real estate crowdfunding. So, it’s important to do your research well.
You can check for user reviews on sites like TrustPilot and find out what the previous investors say about a platform. Also, you can find reviews on investor communities, such as Facebook groups.
● Site History
Again, you’re probably spending your life savings on a project. You must know if the platform is reliable.
First off, check how long they’ve been operating. Then, you must search for the number of completed projects. How many of them were successful? What was the average return on investment?
Also, check if the site has received warnings from the government for any legal breach or related offense. Plus, make sure the site is transparent. If they’re not telling you where and how your hard-earned money is being spent, then you’re better off on another platform.
Although it takes time, this research will save you from any disappointment in the future.
● Investment Type
We’ve already discussed that not every platform allows each type of crowdfunding investment. If you want to dab into equity investments, make sure the platform allows them.
Some platforms allow all types of crowdfunding investments and are suitable for people who’re still deciding where they want to put their money.
● Minimum Investment
Also, you must choose a platform based on the minimum investment they allow. For example, if a platform’s minimum investment is $5000, you’ll only be able to invest in one or two projects.
However, some sites have a cut-off of $500, so you can diversify your investments across multiple projects.
Most importantly, find out if you’re eligible to invest or not. Some platforms only allow accredited investors to join and invest in a project, while others also offer the option to non-accredited investors too.
An accredited investor meets one of these three requirements:
- Has an income of $200,000 individually or $300,000, if joint, for the past 24 months
- Is a partner, officer, or director for issuing non-regulated securities
- Has a net worth of $1 million, individual or joint
A non-accredited investor is someone who does not meet these criteria. Not all platforms allow non-accredited investors, so you should look out for that.
With that, we come to the end of this guide about real estate crowdfunding. Along with discussing the basics of real estate crowdfunding, we also mentioned different types, platforms, and the factors you must consider before investing your money into a project.
To sum up, we can say that real estate crowdfunding is an incredible way to invest your savings to get a high return on investment. However, at the same time, your funds will remain illiquid for years, and the investment fees seem to be soaring with every passing year.
Hopefully, this guide gave you enough insight to decide whether and where you want to invest your savings.