What is Real Estate Crowdfunding? How It Works & Investments

By Martin Christensen
August 26th, 2023
12 minutes read

Real Estate crowdfunding enables investors to participate in real estate projects and development by contributing a fraction of the total purchase price. In exchange, investors gain partial asset ownership, a share of the returns, and a proportionate share of the risk.
 

What is Real Estate Crowdfunding?

Real estate crowdfunding is transforming how everyday investors enter the world of property investments. Also known as property crowdfunding, it is increasingly becoming a popular way to diversify your investment portfolio. Crowdfunding in real estate allows you to pool money online with other investors directly in a single property or a loan secured by real estate.

Real estate crowdfunding offers the opportunity to become a real estate investor with a low upfront investment. It makes it possible to diversify your real estate assets into individually selected property crowdfunding investments and grow your wealth as a group of investors.

Learn more about real estate crowdfunding as an online investment strategy. Understand its unique advantages and disadvantages, how it differs from REITs, and discover how it can grow your financial holdings.

Key Takeaways

  • Real estate crowdfunding lets everyday investors easily invest in property, unlike traditional methods needing large capital and handling property management.
  • Real estate crowdfunding provides lower costs and diversification benefits but entails risks such as potential investment loss and reduced liquidity compared to publicly traded REITs.
  • Investors can potentially earn higher returns via rental income, property appreciation, or profit-sharing models.
  • Developers can raise funds, attracting investors for property projects through shares or loans.

How Real Estate Crowdfunding Works

Buying investment property has long been a favored approach for individuals looking to increase and diversify their financial assets. The traditional path usually requires taking out a mortgage from a bank or credit union, which comes with a hefty down payment and ongoing expenses such as maintenance, utilities, and property taxes.

In contrast, real estate crowdfunding offers a more accessible route, enabling investors to contribute smaller amounts of capital via online crowdfunding platforms. The aim is to collectively fund real estate projects for a potential profit, either one-time or recurring. Investment opportunities are presented on websites and directly marketed to the general public, facilitating direct engagement between project concepts and potential investors.

The real estate crowdfunding platform vets the opportunity and facilitates the payments. As such, the investors can become direct shareholders in a property or buy a part of a loan secured by real estate.

The money is typically paid into privately held Real Estate Investment Trust (REIT), Special Purpose Vehicle (SPV), or similar entities that manage the real estate. The range of properties in these ventures can include residential units like houses, apartments, and condos, as well as commercial spaces such as malls, hotels, and offices. Distinct from many publicly-listed REITs, crowdfunded projects are privately owned.

How To Get Started Crowdfunding Real Estate

Real estate crowdfunding enables investors to pool money for real estate projects, granting access to opportunities typically reserved for large institutions. Before investing, it is important to assess financial readiness and risk tolerance. Here are the steps to begin investing in real estate crowdfunding:

  • Research Various Platforms: Researching platforms is essential. Each varies in eligibility, fees, transparency, and investment types (equity or debt). Choose a platform that matches your goals and offers a clear investment process.
  • Choose a Platform and Create an Account: Creating an account involves providing personal and financial details. Funds are typically transferred from a bank account, sometimes requiring wire transfers for larger investments.
  • Start Investing and Monitoring Your Investments: Investing wisely includes diversifying across projects and monitoring performance through platform updates. Understanding fees, potential returns, and the difference between equity and debt investments guides decision-making.

Following these steps with the right platform can lead to successful real estate crowdfunding, potentially achieving significant returns aligned with your financial goals and comfort with risk.

Real Estate Crowdfunding Platforms

Europe boasts a vibrant real estate crowdfunding scene with platforms like Crowdestate for comparing offerings and EstateGuru for loan-based investments. In the US, the user-friendly Fundrise stands out. It is important to research before investing, as regulations, investment options, fees, and minimums differ between regions. Here are three popular platforms:

Estateguru

Estateguru is an Estonian platform launched in 2014, licensed as a European crowdfunding service provider. It connects property developers and investors across EU countries with property-backed loans, offering development, bridge, and business loans. It has raised over €818 million, averaging €7.9 million monthly, with 161,100 investors.[1] [2]

Crowdestate

Crowdestate is another popular European real estate crowdfunding platform, based in Estonia. It enables investors to finance property loans across Europe with a low minimum investment of €100. Crowdestate rigorously selects projects, securing loans against properties and offering a secondary market. It operates across the EU, attracting 68,100 investors who have collectively invested about €134 million. The platform advertises an average annual net return of 9.48%.[3]

Fundrise

Fundrise is a US real estate platform founded in 2012 that allows individuals to invest in private real estate deals with low minimums. It offers diverse investment options and is suitable for long-term investors seeking diversification outside of stocks and bonds. Fundrise has more than 385,000 investors and a portfolio total value of $7 billion.[4]

Real Estate Crowdfunding Pros

Real estate crowdfunding offers numerous advantages for investors, including lower initial investments, diversification across various properties, potential for passive income through rentals, transparent investment details, and simplified management compared to owning property directly. Here are listed the most notable ones:

Pros

Description

High yield potential if the campaign succeeds

Offers the potential for significant returns if the investment campaign is successful.

 

Diversifies and expands investment portfolio

Allows investors to spread their investments across various projects, which can reduce overall risk and potentially enhance returns over time.

 

Real estate opportunities for non-accredited investors

Provides access to real estate investments that are typically reserved for accredited investors, offering unique avenues for diversification and growth.

 

Reduces responsibilities of property ownership

Minimizes the day-to-day management and maintenance responsibilities associated with owning property, allowing investors to focus more on financial outcomes.

 

Lower minimum investments than traditional real estate

Requires less initial capital and ongoing financial commitment compared to traditional direct real estate investments, making it more accessible to a broader range of investors.

 

Real Estate Crowdfunding Cons

Real estate crowdfunding has many benefits, but it is important to understand the potential drawbacks before investing. The table below highlights key concerns associated with this investment approach:

Cons

Description

Bankruptcy risk

Investors can potentially lose their entire investment if the company owning the real estate declares bankruptcy. When this happens, creditors have priority over investors, which can result in a total loss.

 

Management and payout fees

Many investment platforms charge fees for managing investments or distributing payouts to investors. These fees can erode overall returns and affect the profitability of the investment. Investors should consider these costs when evaluating potential returns.

 

Limited asset liquidity

Real estate investments can be illiquid, meaning they cannot be easily converted into cash. This lack of liquidity can pose challenges when investors need to sell their assets quickly.

 

New platform performance

Some real estate investment platforms are relatively new and lack a long-term performance track record. Investors should assess the platform’s reliability, transparency, and past performance before committing funds to mitigate potential risks associated with unproven platforms.

 

Regulatory gaps in certain locations

Investment platforms located in jurisdictions with less stringent regulatory oversight may expose investors to higher risks. Regulatory gaps can lead to inadequate investor protections, lack of transparency, and increased susceptibility to fraud or mismanagement.

 

Is crowdfunding real estate worth it?

Whether crowdfunding real estate is worthwhile depends on your investment goals and risk tolerance. This approach offers lower minimum investments compared to traditional real estate, making it accessible. Diversifying across properties can lower risk, and platforms often manage properties, providing passive income through rentals or appreciation. However, investments are generally illiquid, with limited control over property decisions and risks associated with platform reliability. Fees like platform, management, and acquisition fees can affect returns. Before investing, assess your goals, risk tolerance, and familiarity with real estate to decide if crowdfunding suits your financial strategy.

Can you crowdfund a property?

Yes, you can use real estate crowdfunding to raise funds for property purchases or developments. Via online platforms, developers can attract investors who contribute towards the project’s funding goals. Investors may participate by purchasing shares in the property or providing loans, enabling developers to access capital with reduced upfront costs. This approach offers an alternative to traditional financing methods, expanding the pool of potential investors interested in participating in property projects.

What is an example of crowdfunding in real estate?

Here is a small example of how real estate crowdfunding works: a developer seeks to buy and renovate a historic apartment building worth €1 million. Traditionally reliant on bank loans or major investors, crowdfunding offers an alternative. Using an online platform, the developer pitches the project to a broad audience. Investors can contribute as little as €50, receiving a share of rental income and potential profits upon sale. This democratized approach enables the developer to aggregate funds from numerous small investors, sidestepping traditional financing constraints. Simultaneously, it provides investors with an accessible avenue for real estate investments, allowing broader participation in property markets.

Sources:

  1. Estateguru: “For Investors”
  2. P2PMarketdata: “Estateguru Statistics”
  3. Crowdestate: “Crowdestate unlocks professional real estate investments for everyone.”
  4. Fundrise: “About”