The Basics of Crowdfunded Real Estate Investments
Want to invest in brick and mortar properties but don’t like the idea of being a hands-on landlord? Want to add real estate but not too interested in Real Estate Investment Trusts (REITS) or Mortgage Investment Corporations (MICs)? Consider real estate crowdfunding.
Over the last decade, a new method of real estate investment has cropped up, known as real estate crowdfunding.
What is Real Estate Crowdfunding?
In general, crowdfunding refers to the practice of pooling investment funds from various people into one investment vehicle or asset.
Real estate crowdfunding works on the same principle, only the asset involved is real property.
For developers, property managers and everyday homeowners, these crowdfunding firms can help them raise equity.
How does crowdfunding work in real estate?
Real estate crowdfunding involves three key parties: the sponsor, the crowdfunding platform, and the investor.
The Sponsor
The sponsor refers to the company or the individual who identifies, develops the investment strategy, and does the administrative work to invest and monitor the outcome of the investment. In essence, the sponsor is like a portfolio manager—deciding how to invest, when to invest and when to sell, if applicable.
Sponsors typically get paid a fee—either a percentage of assets invested, or a percentage of profits—and many will also take a percentage of the investment profits.
The Crowdfunding Platform
The real estate crowdfunding platform refers to the website or online portal where the sponsor connects with investors. This si the online platform that introduces investors to the assets, to the investment strategy and provides necessary information about the asset involved.
Over the last decade, a number of real estate crowdfunding sites, or platforms, have emerged. Firms like RealtyMogul.com, NexusCrowd.com, PatchofLand.com, ClearDoor.io, Sharestates.com as well as Canadian-focused, AddyInvest, all offer a chance for regular investors to pool their money and invest in real estate.
While there are differences—some are only open to American investors, some only cater to accredited investors—all operate under the same basic premise: use technology to help individual and institutional investors to buy equity shares of real property.
The Investor
Over the last decade or so, investing in real estate has provided investors with sizeable returns.
Real estate crowdfunding has filled a niche that allows investors to tap into real property ownership, without the hassle of becoming a landlord.
Advantages of Crowdfunded Real Estate
If you are eyeing long-term gains, crowdfunded real estate investments could be a great option.
Over the last few years, some platforms have helped investors earn annual returns of 14% or more. Very few other asset classes have this kind of income potential.
While relatively large earnings is a major reason behind the growth of crowdfunded real estate, there are other advantages to this type of real property investment.
Investors who want to diversify their portfolio can use real estate crowdfunding as a way to move away from equities and bonds and into an asset class that’s considered to be a stable alternative to fixed income.
Real estate crowdfunding offers investors a chance to invest in a variety of real estate classes, including multifamily properties, single-family units and commercial projects.
Unlike REITs (real estate investment trusts), most crowdfunding projects work on a particular property rather than a portfolio of properties. This gives investors a chance to drill down into the project, or to select the type of diversification they require from the crowdfunded opportunity.
Rather than return on capital or monthly, quarterly or annual payments, many crowdfunded real estate investments only pay as a lump sum payout—meaning an investor can anticipate and plan on large earnings within a specific timeframe.
Drawbacks of Crowdfunded Real Estate
If you are not ready to invest in illiquid assets, crowdfunded real estate is not for you. Once you make the investment, your money is typically tied up for a specified period of time.
Certain investment opportunities are available only to accredited investors.
Depending on the platform, you need to shell out advisory fees or broker fees.
Diversification isn’t as strong with crowdfunded real estate when compared to other options such as REITs or real estate focused exchange-traded funds (ETFs).
Top Platforms for Real Estate Crowdfunding
While crowdfunded real estate investments often advertise higher than standard returns, it should be noted that the risk associated with these investments is much greater.
Still, if you’re interested in checking out the options, here are the leading crowdfunded real estate platforms currently operating in North America.
- CrowdStreet (USA)
CrowdStreet happens to be one of the leading platforms for crowdfunding in real estate, where you can start with an investment of just USD $25,000.
In 2021, the platform yielded an annual return of 17.3%, with investors paying fund fees between 0.50% to 2.5%.
The platform offers plenty of investment choices, ranging from individual deals to pooled funds. Currently, over 100,000 American investors use the platform.
- Fundscraper (Canada)
Fundscraper was launched with the motto of providing Canadian investors with direct access to institutional deals plus a wealth of intelligent investment tools.
The minimum to start investing is CDN $5,000 and there are currently more than 7,500 investors using this platform. Over the years, they have invested in projects worth $420 million.
- Realty Mogul (USA)
This is one of the most popular real estate crowdfunding platforms for US residents.
The minimum to get started is USD $1,000. Investors must pay fees that range between 1% to 1.5% but can expect an annual return between 4.5% to 8%.
At Realty Mogul, you can choose from a number of REITs and individual properties like retail, individual, offices, multifamily, medical offices, and several exchanges.
RealtyMogul is one of the oldest crowdfunding real estate platforms in the market and more than 219,000 investors use their services.
- NexusCrowd (Canada)
Canadian real estate investors have found a great option in NexusCrowd, which was launched in 2015.
This is the first platform in the country where accredited investors can channel their funds to real estate assets alongside institutional partners. Currently, the total property value on NexusCrowd is more than $410 million.
The platform is known for its professional and diligent work with each of its partners.
- DiversyFund (USA)
This platform is known for its low minimum investment options and zero management fees. Here, one can start investing in real estate for as little as USD $500.
Historically, the platform has delivered an annual return of 17% to 18% to the investors and its focus is on REITs.
DiversyFund has come up with a unique model for crowdfunding. It doesn’t work like a broker, connecting projects and investors. Instead, the platform purchases a property, develops the site, and then manages it. As the manager of the site, the platform then collects the property’s cash flow (primarily through rents) and distributes the profits among the investors.
- AddyInvest (Canada)
This platform is known for its ultra-low minimums—it takes just CDN $1 to start investing!
Overall, Addy identifies an investment opportunity, then divides that opportunity into equal parts, before selling each unit for $1. The more you invest, the greater your share of that particular investment.
Unlike other platforms, Addy doesn’t charge fees; however, it does an annual membership fee that starts at CDN $25.
Final Thoughts
Before choosing a crowdfunding platform for real estate projects, it would be wise to check their risk profile. Only after scrutinizing the investment category, historical returns, amount of debt in the project, and most importantly, the sponsor’s experience, can you make an informed decision.
Before you sign up and start buying into a crowdfunded real estate platform, make sure you read the fine print. Most of the current crowdfunding sites are not bound to the standardized financial reporting requirements that are mandatory by firms regulated by the SEC or Canada’s equivalent, OSFI. As a result, many crowdfunding platforms don’t offer a full prospectus—a formal legal document, required by and filed with a regulatory body, such as OSFI, that provides details about an investment offered for sale to the public. A prospectus should contain all the facts that an investor needs to make an informed investment decision.
That said, investors can usually find some information, such as an investment plan, an appraisal report and a financial breakdown for each project, but it still pays to do your own due diligence with this type of investment. Just remember, you’re essentially getting into the private mortgage business and that can come with great reward, along with significant risk.
People need to be very careful to understand the risk and deal with reputable people. In reality, very few people have the risk profile and appropriate understanding to get involved in this type of investment.
Still, if your purpose is to find alternative investments, such as real estate, or to expand and diversify your portfolio, then crowdfunded real estate may be a good option for you.
