What is Crowdfunding Real Estate

What is Crowdfunding Real Estate?

What is crowdfunding real estate? Well, real estate crowdfunding is a passive way to invest in real estate. Have you ever thought about investing in real estate but didn’t want to take on buying and selling properties? Does the upkeep have you frightened?

You are not alone if you answered yes to not wanting to take on buying, selling, and managing properties. For years real estate investing wasn’t within reach for the ordinary investor. Real estate crowdfunding changed all of that allowing smaller investors to pool their money. This opened the door for the smaller investor to be a real estate investor. What is in it for crowdfunding investors also known as sponsors? They are able to access large amounts of cash to invest in a very quick manner. It is a win win for both parties. Small investors are able to invest in real estate and become equity owners in property, and the sponsors connect with them and have access to funds to acquire real estate.

What are the requirements to invest in real estate crowdfunding?

Until recently, you had to be an accredited investor to be able to invest in crowdfunding. Investor.gov (https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3) defines an accredited investor as one of the following:

has earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR

has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence), OR

holds in good standing a Series 7, 65 or 82 license.

This requirement really doesn’t help the small investor right? I say it doesn’t really help. Finally in May of 2016 the SEC relaxed this stringent requirement and now allows non-accredited investors to invest in real estate crowdsourcing. This is known as Regulation A+.

How does crowdfunding work?

With that, any investor can go to a crowdfunding site and invest in shares of an investment property. These are private REIT’s (real estate investment trusts) and don’t confuse them with public REIT’s. Public REIT’s are bought and sold as shares over the open market with a brokerage. A crowdfunded real estate investor can make money in two ways. First, through quarterly dividends obtained from rental income. A second way is through appreciation. Some crowdfunding sponsors distribute gains over the life of the project, and then will provide a larger lump sum gain when the property is sold and the appreciable value is realized. Others pay this out after the property is sold.

You will be able to see which investment properties you partially own. Any reputable real estate crowdfunding company will provide this key information so you can be informed of what you actually own. If they don’t provide this info, you may want to steer clear of them.

Is real estate crowdfunding worth it?

I want to switch gears and use a case study to discuss the value in crowdfunding. I invest in Fundrise (https://fundrise.com). With that, I feel I can provide a very hands-on assessment of crowdfunding.

One advantage of crowdfunding is it doesn’t take a large sum of money to invest. You can get started at Fundrise with a minimum of $10. Such a low investment is a great way to start out on a trial basis to see what kind of returns are achievable. I decided to start with $5000 at the Core level as it provides more flexibility in investment options. There are a range of offerings from more conservative to more aggressive. I went with a more aggressive approach that focuses on appreciable gains vs just primarily receiving dividends.

Another advantage of crowdfunding is you can invest using a self-directed IRA or Roth IRA. In fact, this is what I really love about Fundrise. You don’t have to setup a self-directed IRA as they have an in-house custodian to do that for you. They do charge $125 a year, but you can waive that by either investing $3,000 or more a year or have a total investment of $25,000 or more.

Lastly, real estate crowdfunding lets you access one of the great wealth builders by investing in real estate.

Is real estate crowdfunding safe?

Very few investments have a guarantee to always make money. Real estate investing certainly doesn’t make a guarantee on returns and crowdfunding is no different. Doing due diligence on who you use as a crowdfunding sponsor can mitigate risks. I studied multiple reviews and combed through their website in detail before choosing Fundrise.

My research shows that crowdfunding is a safe investment. Having invested in the stock market for many years, I really needed to find something less volatile. In my research, I found that returns were positive every quarter. They may be slow and steady but massive losses aren’t happening. Average returns have been around 5.5% per year for the past five years. I can tell you that I am on pace to earn around 4.5% my first year. Fundrise also emphasizes the longer term. The longer you keep your investment with them the greater the gains.

Drawbacks of real estate crowdfunding.

The first negative aspect of crowdfunding are the fees. The sponsors have to make money off the efforts of finding, buying, managing, and selling properties. At Fundrise, I found their fees to be lower than most crowdsourcing companies. They charge .15% annual advisory fee for managing the online account. They also charge .85% for managing the funds in the account. A 1% total fee is pretty reasonable and amounts to $10 for every $1000 invested. If I am still netting say 5.5% with little downside risk I am pretty content with that.

Another disadvantage to crowdfunding is really more of a disadvantage to investing in real estate. Investing in real estate is generally a long term investment of 3-20 years. With Fundrise they state you can expect an approximate penalty of 1% for withdrawing within 0-5 years of the initial investment. After 5 years they won’t assess a penalty. Even then, 1% isn’t a hefty fee after making 5% for a year or two.

In conclusion, I found real estate crowdfunding to be easy to do and safe. I also really needed some diversification in my portfolio and found public REIT’s to trade too much like stocks. The supply and demand aspect of REIT’s and stocks create volatility. You don’t have to worry about that in a private REIT and real estate crowdfunding.

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