Understanding the real estate crowdfunding process
Crowdfunding is a fundraising method that allows individuals or businesses to raise money directly from a large group of investors online. Equity crowdfunding involves private businesses raising capital from investors to finance operations. In return, these investors receive an equity stake in the business.
Real estate crowdfunding allows investors with as little as a few hundred dollars to pool their money and fund real estate investments to potentially earn a profit on those assets. Typically, crowdfunded real estate investments are paid out to a real estate investment trust, or REIT, a holding company that owns and manages the properties. Many REITs are public companies and have shares traded on major US exchanges. However, real estate crowdfunding investors can fund private REITs that can offer higher returns than their public counterparts.
Some private REITs are only available to accredited investors – people who meet specific requirements related to wealth and investment experience and who qualify for more advanced investments not available to the general public.
Once an investor chooses a real estate crowdfunding platform, they simply open an account, fund it, and begin building their customized real estate portfolio. Here are five leading real estate crowdfunding platforms to check out.
The best real estate crowdfunding platforms for investing
CrowdStreet is a Texas-based company founded in 2013 that has funded 798 real estate deals totaling $4.2 billion, with investors cashing in on 168 of those deals. According to CrowdStreet, users of the platform have generated a 17.9% realized internal rate of return, or IRR, the annual return based on assets sold.
CrowdStreet has a user-friendly platform, high-quality listings, and has completed deals involving 17 different property types in 45 US states, giving investors plenty of opportunities to find deals they like. Unfortunately, the platform is only available to accredited investors and most trades have a minimum investment of $25,000.
RealtyMogul is an excellent real estate crowdfunding option for both accredited and non-accredited investors looking to invest in commercial real estate assets. RealtyMogul has financed over $7 billion worth of properties through its platform in 10 years in business. The company has a registered membership base of more than 280,000 users and has collectively financed more than 32,000 housing units.
RealtyMogul offers access to both public, non-traded REITs and private placements. The lowest investment minimum on the platform is $5000. RealtyMogul has a total of 227 realized investments and has generated a 20.6% total realized IRR.
Fundrise is one of the world’s 50 largest private real estate investors based on over $1 billion in annual capital deployment in 2021 and 2022. The company’s portfolio of assets includes more than 20,000 well-located residential units and industrial assets focused on e-commerce. The company’s real estate portfolio is valued at more than $7 billion and includes 292 active projects and 147 completed projects. Fundrise clients have generated an average return of 31.4% after three years and 68.6% after eight years. Fundrise is open to all investors and has minimum investments ranging from $10 for a starter portfolio and up to $100,000 for a premium account.
First National Real Estate Partners
First National Realty Partners is an easy-to-use accredited real estate crowdfunding investor platform founded in 2015. The company offers a one-hour live webinar for investors prior to each real estate transaction that includes an overview of financial goals, a management plan assets and property market and demographics. First National has over $2 billion in assets under management and more than 60 current assets. The company has more than 2,600 investors and has made more than $100 million in payouts to investors since inception. First National has a relatively high minimum investment of $50,000 per project.
EquityMultiple is a real estate crowdfunding platform founded in 2015 that focuses on institutional investment in commercial real estate for accredited investors. EquityMultiple has more than 47,000 investors and has made more than $379 million in total investor distributions. The company has been involved in more than $3 billion in commercial real estate transactions, and the platform has a minimum investment of just $5,000. Its yield-oriented real estate investments have a preferred target return on capital between 7% and 12% per annum. The company also offers diversified notes as yield-oriented cash management investments.
Recommendations for potential investors
Real estate crowdfunding can be a lucrative opportunity for certain investors, but it may not be right for everyone. Before jumping into real estate crowdfunding, here are a few factors to understand and consider:
Portfolio diversification. Real estate can provide an excellent means of diversifying your existing stock and bond portfolio. Diversification can help reduce the risk that a single bad investment or asset type will reduce your overall returns.
Equity vs. Debt. Before making a real estate crowdfunding investment, understand the difference between equity investments and debt investments. Equity investing is the most common form of real estate crowdfunding investment and involves taking an equity interest or ownership in a property. Debt investments are generally lower-risk alternatives that essentially involve lending to property owners who pay interest to investors.
Geography. Carefully consider the geography and demographics of any real estate crowdfunding investment. Some businesses and property types may perform well in one area and poorly in others.
Liquidity. Private real estate investments can be extremely illiquid, meaning these investments can be difficult to sell quickly at market value. If there is a possibility that you will need access to your money in an emergency, real estate crowdfunding may not be the best investment approach for you.
Taxis. Different real estate crowdfunding platforms will charge different fees and these fees may even vary from deal to deal. Fees can reduce investment returns over time, so make sure you understand each deal’s fee structure before you buy.