What Is Real Estate Crowdfunding?
Crowdfunding is a way to fund a project or venture by pooling small investments from a large group of investors. The idea is that when enough people make small investments, it’s possible to raise substantial amounts of money quickly. One of the most well-known crowdfunding sites is GoFundMe, a platform used to raise money for everything from creative projects to medical bills.2
Real estate crowdfunding raises capital for real estate investments. When developers or real estate professionals find investment opportunities, they may not want to fund the entire investment themselves (or they may not be able to). Thus, they turn to crowdfunding to let individual investors help finance the project. The process enables investors to invest in real estate without having to own, finance, or manage properties.
Pros
-
Real estate exposure without having to own, finance, or manage properties
-
Low minimum investment, so you can access assets that would be unaffordable otherwise
-
High profit potential through distributions and a lump-sum return at the end of the investment
-
Automatic investing on most platforms
Cons
-
Illiquid, so your money may be tied up for at least three to five years
-
Higher risk than other types of equity investments
-
High fees, depending on the platform and investment you choose
-
Some opportunities only for accredited investors
How Does Crowdfunding Work in Real Estate?
Real estate investment platforms connect investment opportunities with funding. Most real estate crowdfunding deals have a sponsor, a crowdfunding platform, and investors. Here’s a quick rundown of how it works:
-
The sponsor is the individual or company responsible for the project. The sponsor acquires, manages, and sells the investment.
-
The crowdfunding platform connects the sponsor to interested investors. It explains deals to potential investors, handles regulatory issues, and collects money from the investors on behalf of the sponsor.
-
The investor contributes to the project’s funding in exchange for a
share of the profits.
How Can You Start in Real Estate Crowdfunding?
Crowdfunding platforms connect sponsors and real estate investors. To get started in real estate crowdfunding, research the various crowdfunding sites to find an opportunity that interests you—whether that’s an individual property or a fund that owns dozens of properties.
Pay close attention to the platform’s vetting process for deals as well as its sponsors. The top platforms employ high levels of due diligence to make sure that sponsors—and any deals offered by the sponsors—have been rigorously evaluated.
Can You Crowdfund in Commercial Real Estate?
Yes, real estate crowdfunding platforms give individual investors access to commercial real estate projects, such as hotels, apartment complexes, medical complexes, self-storage, and retail. Without crowdfunding, these
large-scale investments would otherwise be unaffordable to most individuals.
Can You Make Money from Crowdfunding?
Yes, there is the potential to earn competitive returns in real estate crowdfunding.
According to some estimates, average real estate crowdfunding returns are
between 11% and 15% per year.3
Still, real estate crowdfunding is considered a risky investment. Just like the stock market, there are no guaranteed returns, and you could lose your entire investment. In addition—depending on the investment and unlike the stock market—your money may be tied up for a period of years.