A Beginner's Guide to How Real Estate Crowdfunding Works

Real estate crowdfunding allows individuals to invest in property development projects, such as building apartments or renovating commercial spaces, with as little as $1,000.

Investors can choose from a variety of projects, each with its own unique characteristics, such as loan terms and potential returns.

Real estate crowdfunding is an investment avenue that uses crowdfunding to raise money for investments in real estate assets.

It's a way for investors to deploy capital in a wide range of properties without having to purchase or manage real estate directly themselves.

Investors contribute to a pool of capital that is collectively sourced from other investors, providing financial backing for current or prospective real estate investments.

These investments can be residential or commercial holdings, including the development of new housing, retail or office space, or partial ownership in a share of existing holdings.

The pooled money from investors is typically used to support real estate projects such as multifamily apartment buildings, retail centers, or office buildings.

A developer, sometimes also called a 'sponsor' or 'operator,' takes on the day-to-day responsibilities for managing the property, freeing up investors to focus on their own interests.

Real estate crowdfunding platforms are the websites or apps where sponsors connect with investors to raise capital for real estate projects. A platform manager works to confirm that any posted deals follow legal and financial regulations.

Some popular platforms include Fundrise, CrowdStreet, RealtyMogul, and EquityMultiple. Fundrise allows investors to browse investment offerings based on location, asset type, risk, and return profile.

CrowdStreet is a software and services company that enables real estate operators and developers to engage in online capital formation. RealtyMogul is an online marketplace for real estate investing, connecting investors with real estate companies that need capital.

EquityMultiple offers a range of property types, including multifamily, office, and industrial. Fundrise gives investors the ability to transact entirely online, including digital legal documentation, funds transfer, and ownership recordation.

Here are some key characteristics of these popular platforms:

Each platform has its unique features, opportunities, and potential return on investment.

Real estate crowdfunding works by pooling your money together with many other investors to fund a particular project. This is a popular form of real estate investing.

You can access real estate crowdfunding through social media and the Internet, which connects investors to property investments. Real estate crowdfunding is similar to equity investing, where an investor can buy into a property and become a shareholder.

Crowdfunding involves raising capital from investors by using the internet or social media sites to reach a large group of investors. This has been associated with donations for those in need and with equity transactions that enable small- and midsized entities to pool money and use the funds for future growth.

Here's a breakdown of the two crowdfunding models:

Note: The SEC's Office of Investor Education and Advocacy recommends considering the risks before making a crowdfunding investment, which includes the risk of not achieving the goal in an AON campaign.

Real estate crowdfunding is a way for investors to pool their money together with many other investors to fund a particular project. This can be a great way to diversify your investment portfolio and earn passive income on a property without the "legwork" of maintaining an investment.

You can invest in real estate crowdfunding through platforms like Crowdstreet, Fundrise, and YieldStreet. These platforms allow you to invest in commercial real estate with a variety of investment strategies.

Crowdfunding real estate providers can offer investors access to exclusive private market property investments that may otherwise be unavailable to general audiences. This can be a great way to expand and diversify your financial holdings.

There are two main types of real estate crowdfunding: equity REITs and debt REITs. Equity REITs tend to offer more long-term growth potential, while debt REITs tend to offer better cash flow and dividends.

Here are some key differences between equity and debt REITs:

Some platforms, like Fundrise, offer a combination of both equity and debt REITs, allowing you to invest in a diversified portfolio of properties and loans.

Investing in real estate crowdfunding can be a great way to earn passive income, but it's essential to do your due diligence and understand the risks involved. Be sure to research the platform and the investment thoroughly before investing your money.

A financial projection is a crucial part of any crowdfunding campaign, and it's essential to carefully vet the underwriting proposed by the sponsor.

Start by looking at the pro forma, which should include rent projections that are in line with market averages.

Be wary of expenses that seem too low or too high, and ask questions about what the sponsor has baked in for vacancy and other contingencies.

A qualified sponsor will be happy to review their underwriting assumptions in detail with prospective investors, so don't be afraid to ask tough questions.

The going-in and exit cap rates used by the sponsor are also important to consider, as they can impact the overall financial viability of the project.

Real estate crowdfunding deals can be divided into different subcategories, each with its own risk profile, payment schedule, and return potential. There's no one-size-fits-all option, so it's essential to understand the differences between the three most common types: preferred equity, common equity, and debt crowdfunding.

Equity crowdfunding is the most common form, offering regular returns through rental income and appreciation gains upon sale of the property. Investors become shareholders, with their stake proportional to their investment amount. Returns come in the form of a regular share of rental income, minus expenses, fees, and other charges.

EquityMultiple is a platform that allows you to invest in either property-secured debt or equity in individual properties. They have a strong track record, with an average IRR of 15.01% since launching in 2015. The minimum initial investment is $5,000, although most projects require a minimum of $10,000-20,000.

Here are the main types of investments available on EquityMultiple:

EquityMultiple also offers tax-friendly ways to invest in real estate, including Opportunity Zones and 1031 exchanges.

Fractional ownership is a type of investment that allows you to own a portion of a property, rather than the entire thing. This can be a great option for those who want to invest in real estate but can't afford the full purchase price.

You can invest in fractional ownership through platforms like Arrived, Ark7, Concreit, and Lofty, which offer shares in single-family rental properties for as low as $20-100. This means you can collect rental income from the property and potentially benefit from appreciation in value when it's sold.

The minimum investment required for fractional ownership can vary, but it's often lower than traditional property investments. For example, EquityMultiple requires a minimum investment of $5,000, although most projects require a minimum of $10,000-20,000.

Fractional ownership can also offer more flexibility than traditional property investments. Some platforms, like AcreTrader, allow you to sell your shares privately to other investors, although this may not be easy to do.

Here are some key benefits of fractional ownership:

Keep in mind that fractional ownership is not without its risks, and it's essential to do your research and understand the terms and conditions of any investment before committing your money.

In a public offering, you're allowed to advertise for investors, but you're subject to considerable time-consuming and costly disclosure requirements.

Real estate developers, for instance, were de facto prohibited from advertising because their projects didn't warrant the expense of going public.

They took advantage of an exemption under the 1933 Securities Act that allowed them to raise money from people they knew or people who knew the people they knew.

This meant real estate developers had to work through inefficient private networks to find investors.

To invest in private offerings, you typically need to have a preexisting relationship with the developer or investor.

Investing in real estate can be a high-risk endeavor. The housing crash in 2008 and the Coronavirus pandemic are stark reminders of this.

Investments not guaranteed by the federal government, such as bonds, are also subject to risk. You could lose your invested capital if things go sour on a macro or micro level.

Employing strategies like diversifying your portfolio can help reduce risk in crowdfunded investments. This can help you spread your losses if one investment doesn't pan out.

Real estate investments can offer a steady income stream through rental income, but with crowdsourced investing, you receive a proportionate share of the rental income.

Fundrise and other platforms have started offering online "eREITs" - online, non-traded real estate investment trusts that function similarly to publicly-traded REITs.

These eREITs offer greater liquidity than investing directly in a property, making them a good option for those who want to buy shares of real estate.

In 2020, we're monitoring the growth of specialized eREITs, such as Fundrise's five eREITs characterized by region and investment style.

Investing in a specialized eREIT gives you more control over the assets in which you invest, making it a good option for younger investors who want to have a say in how their investment is made.

The new Jobs Act legislation allows Regulation-A products that enable direct investing, making it easier for non-accredited investors to access institutional real estate.

With a $2,500 minimum investment, anyone from 25 to any age can democratize access to institutional real estate through these eREITs.

Real estate crowdfunding can offer many benefits, such as wider access to property investments.

Investors can gain exposure to large property investments like apartment buildings or offices with minimal capital requirements, often as low as $1,000.

Non-accredited investors can participate in crowdfunding for equity and real estate transactions, a change made by the SEC that previously required accreditation.

Real estate crowdfunding typically pays larger dividends than traditional real estate investments, making it an attractive option for those looking to diversify their financial portfolio.

This is due to the unique real estate projects and opportunities that crowdfunding offers, allowing property owners to expand their financial reach.

Here are some key benefits of real estate crowdfunding:

Accredited investors are the only ones allowed to invest in many real estate crowdfunding platforms, because they meet certain wealth criteria.

These platforms don't accept money from retail investors, like you and me.

Accredited investors must meet one of two criteria:

This means you have to divide real estate crowdfunding investments into two camps: those for accredited investors only, and those for the rest of us.

Real estate investing offers favorable tax treatment, particularly through depreciation. This allows investors to claim a portion of their investment on their taxes through the depreciation schedule set forth by the IRS.

Investors in preferred equity and common equity can take advantage of this benefit. However, debt crowdfunding holders do not qualify as they are considered lenders to the sponsor, not owners of the property.

Real estate crowdfunding can be a game-changer for investors, but it's essential to understand the advantages and disadvantages before committing.

One significant benefit is that it offers wider access to property investments, allowing individuals and businesses to solicit a large pool of investors for their projects. This enables investors to gain a small cash stake in the property with lower capital requirements.

Investors can participate in crowdfunding activities without being accredited, meaning they don't need to meet certain income or net worth requirements. This is a significant shift from the previous regulations.

Crowdfunding real estate typically pays larger dividends than traditional real estate investments. In fact, investors can earn a steady income stream through rental income, receiving a proportionate share of the rental income.

The fractional ownership model of crowdfunded deals allows investors to invest as little as $500, which is substantially less than almost all other forms of property investment. This minimal upfront and ongoing investment makes it an attractive option for those looking to diversify their financial portfolio.

Here are some key advantages of real estate crowdfunding:

However, it's essential to consider the potential drawbacks, such as the risks associated with ownership being split among multiple investors.

Real estate crowdfunding platforms operate differently, so it's essential to do your homework before investing.

Some platforms, like Patch of Land, raise debt for real estate projects, while others, like ArborCrowd, raise equity. Fundrise, on the other hand, operates eREITs.

To get started, compare online real estate crowdfunding platforms by looking at their fee structures, terms, and investment opportunities. Research the pros and cons associated with each platform.

Consider how much you can comfortably invest without overextending yourself financially. Calculate what kind of return on investment you'd like and determine how long your money may be tied up.

Decide what type of real estate and property holding you'd most prefer to invest in. Some platforms are only open to accredited investors, while others allow anyone to invest with as little as $100.

To get started, follow these steps:

Remember, it's tempting to invest with a low barrier to entry, but it's crucial to do your research and choose a reputable platform that can withstand changing market conditions.

Real estate crowdfunding is a relatively new and exciting way to invest in properties, but it can be overwhelming with so many options available. Every site has its unique feature set, opportunities, and potential return on investment.

To make informed decisions, it's essential to research and compare different platforms. Let's take a closer look at some popular real estate crowdfunding sites.

Here are some key facts to consider:

These sites offer varying minimum investment requirements, ranging from $5,000 to $35,000, and different fee structures, including flat management fees and annual administrative expenses.

Regulation A+, also known as Title III of the JOBS Act, was passed in 2015 to increase capital-raising opportunities for small businesses. It removed many regulatory compliance hurdles, allowing companies to raise up to $50 million with less administrative burden.

The rule established two tiers of fundraising: Tier 1 for up to $20 million and Tier 2 for $20-$50 million. Companies using Regulation A are exempt from registration with state securities administrations.

Crowdfunding platforms are required to register with the Commission and become a member of a national securities association. Companies using these platforms must conduct their offering exclusively through one intermediary platform at a time.

Here are the investor/investment limits for crowdfunding offerings:

Groundfloor offers a unique way to invest in real estate-secured debt with a minimum investment of $1,000.

You can choose from one-month, three-month, and 12-month notes, although the two-year note was discontinued in March 2024.

The interest rates for these notes are competitive, but if you want a slightly higher return, you can opt for the rollover notes, which offer 25 basis points more.

These notes automatically reinvest your principal when the note matures and repays you, making it a convenient option.

Groundfloor also offers experimental investments through their Labs program, but it's invitation-only, so you'll need to reach out to them to learn more.

The minimum investment for a loan is $10, but you'll need to transfer at least $1,000 to open an account.

Groundfloor's individual short-term loans and private notes are a great way to invest in real estate-secured debt without a long-term commitment.

Regulation A+, or Title III of the JOBS Act, took effect in 2015, making it easier for small businesses to raise capital by removing regulatory compliance hurdles.

This new rule allows companies to raise up to $50 million, a significant increase from the previous limit of $5 million. The rule also exempts companies using Regulation A from registration with state securities administrations.

Companies using Regulation A are divided into two tiers: Tier 1, which allows for up to $20 million in a 12-month period, and Tier 2, which allows for up to $50 million in a 12-month period.

Here are the details of the two tiers:

Title IV of the JOBS Act was finalized in October 2015 and took effect in January 2016. It has several key features, including investor/investment limits and ongoing reporting requirements for companies that use a crowdfunding platform.

Institutional investors, such as pension funds and life insurance companies, are now entering the real estate crowdfunding scene.

They rarely invest less than $10 million at a time, which allows sponsors to raise millions of dollars at once.

Crowdfunding platforms are being used to attract institutional investment in larger projects.

In 2020, sponsors will likely use these platforms to raise capital from a mix of investors, including accredited, non-accredited, and institutional investors.

Sponsors may start by landing a major institutional commitment, such as $20 million of the $25 million needed to finance a project.

This substantial commitment can then be used to attract smaller-scale investors who take comfort in knowing a larger investor believes in the project.

By leveraging institutional capital, sponsors can raise the necessary funds for larger projects.

As a professional in a field, being a real estate professional, it means you have a specific set of skills and knowledge that can help you navigate the industry.

Crowdfunding could present an alternative funding stream to traditional lending sources for both residential and commercial buyers and sellers.

This means you'll need to stay up-to-date on the latest trends and regulations affecting your business.

Crowdfunding platforms are becoming increasingly popular, offering a new way for buyers and sellers to access funding.

As a real estate professional, it's essential to understand how crowdfunding works and how it might impact your business.

Letters to Congress can be a good indicator of upcoming changes in regulations.

You may need to adapt your business model to incorporate crowdfunding as an option for your clients.

Crowdfunding can provide a more flexible and accessible funding option for buyers and sellers who may not qualify for traditional loans.