What is Real Estate Crowdfunding? How It Works & Investments

By Martin Christensen
August 26th, 2023
10 minutes read

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 provides a low-barrier entry for everyday investors to directly invest in property, differing from traditional methods that often require large capital and carry the burden of property management.
  • Real estate crowdfunding offers advantages like lower initial costs and portfolio diversification but also carries risks like the potential loss of investment and less liquidity compared to publicly traded REITs.
  • Regulatory shifts, such as the JOBS Act in the U.S. and similar EU regulations, have enabled both accredited and non-accredited investors to participate in real estate crowdfunding, expanding the pool of potential investors.
  • The real estate crowdfunding market is rapidly growing, with a market size expected to reach into the billions and offering increasingly diverse investment opportunities.

What is Real Estate Crowdfunding?

Real estate crowdfunding is the easiest way for everyday investors to enter the world of direct property investments. It is a way to raise money online from a group of investors to acquire real estate assets. Individuals, businesses, and real estate developers can use crowdfunding to access capital from a large group of investors through the internet.

The idea is that many people investing a small amount of money quickly can accumulate to raise a large amount. Real estate crowdfunding benefits both investors and capital seekers.

Several factors make real estate crowdfunding an attractive option for investors:

  • It offers portfolio diversification with lower upfront capital, compared to traditional real estate investments.
  • The co-funding model enables access to larger and more diverse real estate opportunities
  • Investors gain exposure to the real estate market without the burdens of property maintenance or mortgage qualifications.
  • Investments can include both commercial and residential assets, enhancing portfolio variety in real estate.

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 for $500 in the United States and as little as €50 in Europe.

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.

Pros and Cons of Real Estate Crowdfunding

Crowdfunding was first made possible in the United States by the enactment of the Jumpstart Our Business Startups Act (JOBS Act) legislation that authorized crowdfunding as a means to help small and medium-sized enterprises secure the funding they need.[1] Most recently, the Regulation on European Crowdfunding Service Providers authorized crowdfunding for businesses in the European Union (EU).[2]

Investing in real estate through crowdfunding comes with its own set of advantages and disadvantages. Before you invest in any crowdfunded property venture, it's important to weigh both the benefits and drawbacks commonly found with crowdfunding platforms.

Advantages

  • Potential for a high yield if the campaign is successful
  • Facilitates the diversification and expansion of your investment portfolio
  • Offers unique opportunities in real estate projects to non-accredited investors that may not be otherwise accessible
  • Reduces the common issues and responsibilities associated with being a property owner
  • Lower minimum investments and continual financial commitment than classic direct real estate investments

Disadvantages

  • Risk of a total loss if the company owning the real estate goes bankrupt
  • Platforms may charge investors with management or payout fees
  • Limited liquidity as selling off your assets quickly can be challenging
  • Many platforms are relatively new, lacking a long-term performance record
  • Some platforms are located in geographies with a lack of regulation

The Securities and Exchanges Commission (SEC) lifted the restrictions that prohibited non-accredited investors from investing in crowdfunding activities.[3] Originally, equity crowdfunding was an exclusive avenue available only to accredited investors to protect less experienced investors. To be considered an accredited investor, an individual needs to either have an annual income of at least $200,000 or possess a net worth exceeding $1,000,000.[4]

Real Estate Crowdfunding vs. REITs

Real Estate Crowdfunding and Real Estate Investment Trusts (REITs) are both avenues for investing in property, but they differ in some key aspects.

  • Ownership - REITs let you buy shares in companies that own multiple properties, while crowdfunding allows you to directly invest in specific real estate projects alongside other individual investors.
  • Liquidity - REITs offer better liquidity, being publicly traded. Crowdfunding investments are generally less liquid and require a longer commitment.
  • Dividends - Both may offer dividends, but REITs are legally required to distribute most of their income as dividends, unlike crowdfunded investments.
  • Diversification - REITs usually own a broad portfolio of properties, providing diversification. Crowdfunding often focuses on single properties, making it riskier.*

Before the JOBS Act came into play, real estate investment options were largely limited to purchasing physical properties or buying into Real Estate Investment Trusts (REITs). However, crowdfunding has introduced a new avenue for engaging in real estate investment.

Choosing between the two depends on your investment goals, risk tolerance, and how hands-on you want to be in managing your investment.

How to get started with Real Estate Crowdfunding for beginners

For your first real estate crowdfunding investment, consider starting small to test the waters. Once you're comfortable and have a better understanding of how things work, you can gradually increase your investment. Be aware of any management or service fees that the crowdfunding platform might charge. This can impact your returns, so read the fine print carefully. Investing in private markets is risky and this is my opinion on how a beginner could go about it. Before engaging in any type of financial decision you should always consult with a professional financial advisor.

As a beginner in real estate crowdfunding, you can follow these steps to get started:

  1. Educate yourself and consult with a financial advisor: Learn the basics of real estate crowdfunding, including its benefits and risks.
  2. Set financial goals: Determine your investment objectives, such as income generation or portfolio diversification.
  3. Choose a platform: Select a reputable crowdfunding platform that aligns with your investment goals.
  4. Verify credibility: Check the platform's regulatory status and user reviews for legitimacy.
  5. Pick an investment: Choose a property or project that fits your financial goals and risk tolerance.
  6. Invest: Create an account, pass identity checks, and contribute your initial investment.
  7. Monitor and manage: Keep track of your investment's performance using the platform's monitoring tools.
  8. Reinvest or cash out: Upon project completion, either reinvest your returns or withdraw them.

By following these straightforward steps, you can make informed decisions and begin your journey in the world of real estate crowdfunding.

Is Real Estate Crowdfunding A Good Investment?

Real estate crowdfunding offers an accessible entry into property investment with the potential for solid returns, often ranging from 8-12% annually. It minimizes traditional barriers like high initial costs and the need for hands-on management. However, profitability isn't guaranteed and varies based on factors like market conditions and project oversight.

Is it worth it? That depends on your risk tolerance and financial goals. Crowdfunding allows for diversification by enabling investment in multiple projects, reducing overall risk. While it's generally considered a good investment, due diligence is essential for maximizing potential returns and minimizing risks.

Is Real Estate Crowdfunding Safe?

Safety in real estate crowdfunding depends on various factors, including the reliability of the platform, the quality of the chosen investments, and overarching market conditions. Regulatory compliance has helped to enhance the safety margins; platforms are often required to meet stringent rules laid down by financial regulators, adding a layer of investor security.

That said, like any investment, real estate crowdfunding carries inherent risks. Market downturns, project mismanagement, and lack of liquidity are just a few of the challenges you could face. Therefore, investors are advised to exercise due diligence, diversify their investment portfolio, and be fully aware of all associated risks before taking the plunge into this form of real estate investment.

How Large Is The Real Estate Crowdfunding Industry?

The real estate crowdfunding industry has seen significant growth in recent years, becoming an increasingly popular alternative to traditional investment avenues. Although exact numbers can vary, industry reports suggest that the market size is expected to reach billions of dollars. The market for real estate crowdfunding was estimated to be $14.3 billion in 2022 and is expected to grow more than 50% annually by 2032.[5]

Is Real Estate Crowdfunding Open to Non-Accredited Investors?

Yes, the door is open for non-accredited investors to partake in real estate crowdfunding, a shift made possible by recent SEC regulation updates. Although once exclusive to accredited investors, the field is now more inclusive. However, investing through crowdfunding platforms does come with risks, such as possible loss of your initial investment. It's essential to do your due diligence before participating.

The Conclusion

Real estate crowdfunding is revolutionizing the way we approach property investment, breaking down barriers that once reserved this arena almost exclusively for accredited investors. Thanks to pivotal regulatory changes like the lifting of certain SEC restrictions, this investment strategy is now accessible to the general public. Much like traditional crowdfunding, where a compelling pitch can attract a wide range of backers, real estate crowdfunding allows for collective financial contributions to bring property projects to fruition. While the investment landscape always presents some degree of risk, the democratization of real estate investment through crowdfunding opens up new opportunities for diversification and potential profit for investors at all levels.

Article Sources

  1. United States Congress: “H.R.3606 - Jumpstart Our Business Startups”
  2. The European Union: “Regulation (EU) 2020/1503 of the European Parliament and of the Council”
  3. U.S. Securities and Exchange Commission: “Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers”
  4. U.S. Securities and Exchange Commission: “Accredited Investors – Updated Investor Bulletin”
  5. Polaris Market Research: “Real Estate Crowdfunding Market Share, Size, Trends, Industry Analysis Report, By Investors (Individual, Institutional); By Model (Lending, Equity); By Real Estate Sector (Residential, Commercial); By Region; Segment Forecast, 2023 - 2032”