There are a bunch of new startup platforms aiming to make investing in real estate easy and it’s difficult to tell if this would be a lucrative investment for you or your portfolio. Here’s everything you need to know about real estate crowdfunding before you start to invest in this viral trend.
Real estate crowdfunding allows you to invest your money toward a larger investment you wouldn’t be able to invest into otherwise. Jonathan Wasserstrum, founder of SquareFoot a commercial real estate technology company said “You get access to deals that wouldn’t have been available to individual investors. It’s not only about access, but also the size of some of these transactions. The average consumer can’t buy a $10 million building, however they can take on a $100 share of it.”
That investment can be used a couple different ways and it all depends on the platform through which you choose to invest. Some real estate crowdfunding platforms buy and manage properties and others take the investment pool and lend it to other real estate investors.
The return on your investment (ROI) depends on the platform you choose to invest in. Some crowdfunding sites offer the same return to all its investors. Brain Davis, the director of education at a property management app SparkRental explained stated “Fundrise operates this way, with a few different fund options to choose from. Other crowdfunding sites allow you to pick and choose the individual projects you want to invest in. GroundFloor is an example.”
Since the passage of the Jumpstart Our Business Startups Act of 2012 (JOBS Act), real estate crowdfunding has exploded. That legislation updated the way investment capital can be raised thus making it OK to advertise investing opportunities. The Act also loosened up the restrictions around who has to register the securities they’re selling with the SEC. According to Title II of the JOBS Act now gives crowdfunding the ability to directly market its investment opportunities to a larger pool of investors using social media and the internet.
As popularity continues to grow for real estate crowdfunding investments one can expect more niche-specific options popping up. For example, Fund That Flip where you invest in loans for house flippers. There are plenty of options for people already interested in real estate crowdfunding. Fundrise. PeerStreet. Realty Mogul. CrowdStreet. RealtyShares. RealCrowd. EquityMultiple. GroundFloor. The list can go on but as real estate technology continues to evolve, you can expect to see more choices for investors in the future.
Investing your money in real estate projects is far from a new idea. In the 1960s Real Estate Investment Trusts (REITs) allowed investors to buy publicly traded real estate projects through a standard brokerage account, 401(K) or IRA. Each REITs focuses on specific kinds of real estate investment from apartments to storage units to hospitals or malls.
“They’ve been around for a long time, and are just as liquid as stocks or funds,” Davis said. “Although the problem is that they often move alongside the stock market since they’re traded on the same exchanges, which partially defeats the purpose of diversification.” Traditional REITs are typically long-term investments that perform the best with an average annual return of more than 9%.
Crowdfunding platforms have potential costs to consider. Fees may vary based on the size and longevity of each investment. Typically they feature lower fees in exchange for higher investments. You can expect a fee in the 1% range for an actively managed portfolio. If you are just getting started with real estate crowdfunding you should be comfortable having your money tied up for a while. Most crowdfunding investments last at least one year, sometimes five years or even longer. Some companies allow you to sell your investment early but you usually will pay a penalty. While real estate crowdfunding is a passive as it get you don’t have as much control over how much money you can make on your investment. Start small to build comfort and build up from there. You don’t have to invest thousands right away.