Historically, real estate investing has been dominated by institutional investors–pension funds, university endowments, hedge funds–and incredibly wealthy individuals. They had the capital and the connections needed to break into the space and take their share of this trillion dollar asset class.
Smaller investors had a few options, namely residential real estate and publicly-traded REITs (real estate investment trusts), but for the most part the average investor wouldn’t be able to easily add real estate to their portfolio.
But the game has changed thanks to real estate crowdfunding.
How does real estate crowdfunding work?
Prior to the 2012 JOBS Act, real estate investors could only invest in real estate by buying a physical property or investing in REITs. The JOBS Act allowed small and mid-sized companies to use crowdfunding as a way to raise capital, giving individual investors a new way to add real estate to their portfolios.
Real estate crowdfunding platforms allow multiple individual investors to come together and pool their money to collectively invest in larger real estate projects than they could on their own. As an investor in a crowdfunded deal, you, alongside dozens or even hundreds of other investors, contribute to the equity stack in the project.
This makes real estate crowdfunding a type of private equity investment (private meaning it’s not traded on the public markets) and is one way many investors have been able to add direct real estate investments to their portfolios. Your investment often goes directly to the sponsor (aka the real estate developer or firm behind the project) for them to invest in building, renovating, or recapitalizing a commercial or residential property.
On top of that, investors in crowdfunded deals are not landlords or property managers–you are a passive investor. That means no late night emergency phone calls when the power goes out, no need to worry about finding or vetting tenants, and no day-to-day maintenance. All of those operations are handled by the sponsor.
What are the benefits of real estate crowdfunding?
There are few key benefits to investors who choose to use a real estate crowdfunding platform to invest.
1. You pick the deals you want. Unlike a REIT that is more like a fund, crowdfunded deals are akin to the stock market. You have total control over where your money goes because you’re picking and choosing the individual projects to invest in.
2. You can find investment opportunities across the U.S. Historically, real estate investing was limited to the incredibly wealthy and extremely well connected. You needed to know someone to get in on a deal. With online platforms, you can find, compare, and invest in projects on the other side of the country with ease.
3. You’re a passive investor. As mentioned before, sponsors use real estate crowdfunding platforms to raise capital from a pool of investors but they’re responsible for executing the business plan and day-to-day management of the property.
4. You get direct access to the sponsors. Since your investment is going directly to the sponsor, you get the opportunity to interact with them directly. Take that opportunity to review their track record and ask questions about the project.
How much does it cost to invest in a real estate crowdfunding deal?
Investment minimums can vary from platform to platform depending on the investment options. Some platforms offer investments into “fix and flip'' style residential projects for as little as a few hundred dollars. Others provide access to institutional-quality commercial real estate with much higher investment minimums and are only open to accredited investors. Depending on your financial situation, different platforms may be a better fit for you.
On platforms like CrowdStreet, the minimum investment amount in any single deal could be as high as $25,000. While that may seem like a lot upfront, consider the size of a down payment on a rental property. You could easily be out twice that amount (if not more) if you wanted to put more than a few percent down. And then you’re on the hook for the mortgage, property taxes, appliance upgrades, and so forth.
CrowdStreet also focuses exclusively on commercial real estate–medical offices, data centers, retail centers–across the U.S. These properties are usually worth tens of millions of dollars and have much more complicated business plans than a “fix and flip.”
How do I earn money from a crowdfunded investment?
Real estate crowdfunding platforms allow you to buy into a property like you would any stock and become a shareholder. Instead of buying the entire property and having claim to all potential profits (while also assuming all the work and risk) you can earn a portion of any profits generated.
These profits usually come from rental income streams or any proceeds from the sale of the building. Depending on the business plan, you might receive distributions (aka payments) on a monthly, quarterly, or annual basis.
The risk profile of each deal also relates to how much you could potentially earn on your investment. Just like the stock market, high risk is often correlated with high reward.
Development deals, for instance, can’t earn any rental income because there is nothing to rent–the sponsor is using your investment to build the building . They can, however, command a premium sale price a few years down the road, assuming everything goes according to plan.
Core deals, on the other hand, are usually fully-leased, best-in-class properties in major metros. They’re more likely to earn a steady income from day-to-day operations but probably don’t have much room to appreciate over time. However, these deals are usually the least likely to underperform and generate more steady returns.
How big is real estate crowdfunding?
In first-of-its-kind research, Real Estate Crowdfunding Unleashed, Dr. Adam Gower looked at how real estate crowdfunding has come of age.
Gower, who has been tracking the crowdfunding market since its inception in 2012, examined over a million data points pulled from the SEC to show how crowdfunding has grown to represent nearly 25% of all private equity capital raises for commercial real estate in America, with crowdfunded deals reaching an all-time high of $15 billion in 2020 (up from $7 billion in 2019).
Of all marketplaces specializing in commercial real estate, CrowdStreet stood out to Gower as the industry leader and the largest based on dollars raised on its marketplace. "In a milestone for the industry, CrowdStreet has become the first online commercial real estate investment marketplace to raise $2 billion in equity from individual investors," said Gower. "This is an extraordinary achievement for an industry just seven years old and for a company that had 'only' raised $200 million four years ago."
Crowdfunding has given thousands of investors a new way to invest in real estate and it really took center stage in 2020. As institutional investors stepped back, uncertain how COVID-19 would shape the markets, individual investors stepped up. CrowdStreet actually had it’s best year ever, raising more than $640 million for 100+ projects.
As Gower’s research shows, crowdfunding is taking over the private equity capital market and could change the way the finance industry works forever. That means a world of opportunity for investors.
CrowdStreet is a content partner of Benzinga.
This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and has been prepared solely for informational purposes. CrowdStreet is not a registered broker-dealer or investment adviser. Nothing herein should be construed as an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.
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