Real estate investment has always been a game for the big dogs. With a high barrier-to-entry and a history of backroom deals and greasy palms, many investors would never even think of real estate investment as a viable option. Leave that for the big wigs, right?
Like many forms of investing, that stigma is beginning to change in the digital age. The advent of real estate crowdfunding has opened up a whole new world for investors looking to get a foot in the door of large commercial developments, residential projects and more.
So what is real estate crowdfunding all about, and how does it work? Read on to find out.
What Is Real Estate Crowdfunding?
Real estate crowdfunding is when real estate projects are allowed to be partially or wholly funded by individual investors, who have just recently gained the right to invest in these kinds of projects.
Like other forms of crowdfunding, real estate crowdfunding is a new invention. The JOBS act in 2012 helped pave the way for crowdfunding in real estate, but unfortunately for eager investors, there are rules on who can participate.
You have to have a net worth of at least $1 million, not including your primary residence. Don’t have that much in assets? You have to earn at least $200,000. Those high barriers mean real estate crowdfunding is not something the lay investor will have access to – at least not right away.
However, it does give millions more people access to one of the most secretive aspects of investing. It also allows companies to fund their goals without going through the more formal rounds of fundraising.
How Does It Work?
When you invest via a real estate crowdfunding platform, you become a limited partner in the investment- which can vary by project. You really need to look at the project when deciding. Some projects are debt-based, meaning that you are providing a loan that is secured by the property. Some projects are debt-based, but you're actually investing in a third-party note tied to the performance of the underlying real estate investment.
Some projects are equity-based, which means you are investing in a fund, such as a REIT, which holds a property or multiple properties and you'll receive cash flow as well as some of the upside in appreciation.
Many companies only require a $5,000 minimum investment in a project, so the barrier to entry is relatively low. The companies also charge fees of up to 3%, which may be a shock for those used to investing in low-cost mutual funds and ETFs. You may not see these fees directly, since they are typically paid out of the return prior to paying you.
How Do You Make Money?
Making money in real estate crowdfunding, like any type of investment, requires doing a lot of research. $5,000 may not be much for some people, but the smaller investors who will benefit the most from real estate crowdfunding need to contribute carefully.
Just like any type of investment, you can make money in two ways:
- Appreciation of the asset (typically the property you're investing in)
- Income from the asset (such as rents received)
Every investment varies – some guarantee a minimum return, some don't. You really need to read the fine print before investing.
It also helps to only invest money that you can afford to lose. This is partly why only accredited investors are currently allowed to participate in real estate crowdfunding. Some companies let investors put as little as $5,000 into a project. If you’re not completely sure about a firm’s prospects but still want to invest, investing a small amount may be the best option.
What Companies Are Involved?
- Realtyshares – Realtyshares offers investors a variety of properties to choose from, including residential, mixed-use, commercial and retail. They don’t charge their investors fees, instead placing that burden on the property holders. Investors can start seeing a return just a few weeks after the project is funded. We are partners with Realtyshares, and they're giving College Investor readers $25 for free for signing up with the code TCI25.
- Fundrise – One of the most popular real estate crowdfunding sites, Fundrise has a minimum investment of $1,000 and charges between 0-3% in fees. The site is ruthless about which projects it accepts – only about 5% of proposals are chosen. Fundrise is another one of our favorite sites simply because of the range of investment properties they have to choose from, but also because you don't have to be an accredited investor to invest – they are one of the only platforms that allows this currently.
- Realty Mogul – Investors who use Realty Mogul have the flexibility to put as little as $5,000 down, but can also participate in large-scale projects – such as the Hard Rock Hotel in Palm Springs. People can fund real estate loans or buy an equity share in a property.
- Prodigy Network – If Fundrise is like the Mcdonald’s of real estate crowdfunding, then Prodigy Network is the steakhouse. They require initial investments starting at $100,000 and ranging up to $250,000. For that money, you get personal service – all deals are made by phone, email or in person.
- iFunding – iFunding is another platform that allows investors to start at $5,000 to invest in real estate. They appear to be a smaller platform, compared to RealtyShares and Fundrise, but they also seem to target a narrower space, such as family offices.
- Patch of Land – Patch of Land maintains a different focus compared to all of the other crowdfunding sites – their main listings of real estate are funding rehabilitation and flip projects for other investors. With Patch of Land, you can receive monthly interest payments on your investment, as well as be a lein holder in the property. They also have a $5,000 minimum investment, but they have a huge selection of investments on their site.
- PeerStreet – PeerStreet has become the most “famous' real estate peer to peer lender, with the endorsement of several major finance personalities. They use a data-driven approach and focus exclusively on debt financing. PeerStreet also currently has the lowest investment minimum at just $1,000.
Final thoughts on P2P real estate investing
If you're an accredited investor and are looking to get into real estate, P2P real estate investing is something that you should consider. It's very easy to get started – but just like traditional real estate investing, it is higher risk for higher reward.
If you're willing to accept that higher risk, check out these platforms.
Have you had a good experience with any of these real estate crowdfunding sites?