In the old days, investing in real estate was reserved for the very rich and famous. The barrier to entry was so high that only people with eight- and nine-figure annual incomes could afford it. They were buying a commercial building or swanky mansion to expand their already impressive portfolio.
Not anymore. The introduction of crowdfunding platforms has made it possible for more lower-income investors to get a piece of the real estate pie. In this article, we’re discussing how real estate crowdfunding works. We’ll also be taking a closer look at the top crowdfunding platforms for this niche.
Crowdfunding as a Concept
Crowdfunding began as a way of bringing budding entrepreneurs and large networks of ordinary people together. It’s a practice that has created entrepreneurial activities that weren’t accessible before.
Leveraging social media and dedicated websites, crowdfunding allowed business-minded individuals to raise vast amounts of capital. A new entrepreneur with a lucrative idea could start a business not just with the aid of venture capitalists but anyone with a bit of money to invest in a new company.
Crowdfunding was previously used for specific types of investment projects. Now, it has expanded into the real estate market.
Jumping into the Real Estate Market
Large-scale real estate developments used to be available only to individuals or groups who held private equity in Real Estate Investment Trusts or REITs. REITs own many types of commercial real estate. These include office and apartment buildings, warehouses, hospitals, shopping centers, hotels, and commercial forests.
These trusts have always allowed for minimal amounts of shared real estate investment. However, it wasn’t until the 2010s that the market truly opened up to the average person.
Fundrise was one of the first sites to focus on mass-scale real estate investments. Following the Kickstarter model, the platform helped the average Joe and Jane invest in property developments previously funded only by huge corporate entities.
How It Works
Now many platforms offer a different investment experience. Still, the process is the same across the board.
Real estate crowdfunding generally works in the following ways:
- Crowdfunding platforms use advanced networking technology to significantly reduce the costs of finding the best real estate deals for the small investor.
- When these collectives find ‘diamonds in the rough,’ they allow individuals to invest in them for as little as a few hundred dollars.
Investors can choose from a wide variety of residential and commercial projects to invest in. Typically, the group behind the crowdfunding site funds the deals in advance. This allows participants to begin earning interest at the start of their investment term.
Top 3 Crowdfunding Sites for 2021
BEST FOR BEGINNERS. Fundrise has invested in more than $5 billion worth of real estate across the United States since it began in 2012. Today, it manages over $1.5 billion of equity on behalf of more than 150,000 individual investors.
The company offers five account tiers: Starter, Basic, Core, Advanced, and Premium. Each tier has a minimum investment requirement, as well as varying investment strategies and potential returns.
BEST PROPERTY SEARCH. More than 212,000 investors have joined RealtyMogul since it was founded in 2013. The company is known for its exemplary due diligence. It vets every potential property in person and scrutinizes each deal using proprietary methods and models.
RealtyMogul only works with real estate partners with proven track records and experience managing assets. It does not invest in raw land, ground-up construction, or other non-cash-flowing investments.
BEST FOR INSTITUTIONAL COMMERCIAL REAL ESTATE. This platform focuses almost exclusively on institutional commercial real estate. Additionally, it offers equity, preferred equity, and senior debt investments. Recently, the company added tax-advantaged real estate investments (Opportunity Zone and 1031 exchange) and fund products to its lineup.
In the budding real estate crowdfunding industry, how do you know who will survive? Who will fall short? Who will fail?
Consider these three key concepts:
- First, don’t listen to the “experts.” Do your research and determine what will work best for your specific circumstances.
- Second, don’t listen to the noise. Always ask to see actual numbers and check the company’s track records. Ask questions. Gauge the level of understanding you are sensing from the company before you commit to investing with them. Then, take all that and make an informed decision.
- Finally, try before you buy. Start small and analyze the results to determine if the real estate investment you’re eyeing is right for you.