A Beginner’s Guide To Real Estate Crowdfunding

Key Takeaways


Crowdfunding is more than just a 21st-century buzzword; it’s a new, exciting way for real estate investors to raise capital. But how does crowdfunding real estate work? What are the benefits of crowdfunding real estate deals? What do you need to know about looking for real estate investment loans from the masses? And what returns could you get by investing in another investor’s crowdfunding project?

Though real estate crowdfunding is not a traditional means of raising capital, it is important for investors to understand this powerful form of real estate financing.

What Is Real Estate Crowdfunding?

Crowdfunding is a way for business owners to raise money, not by asking one investor for a huge investment, but by reaching out to a large pool of investors who each contribute a small amount of money. A key difference between crowdfunding and more traditional methods of raising money, is in the platform used, as crowdfunding is usually done online.

Along with crowdfunding websites, business owners turn to social media platforms such as Facebook or Twitter to market their ventures directly to wider audiences of interested investors.

Real estate investors have adopted crowdfunding as an alternative to more traditional means of financing investments. For example, large developers are using crowdfunding platforms to solicit investments from groups of accredited investors, while small business owners have launched campaigns to raise funds for smaller investment deals. The section below illustrates why real estate crowdfunding has grown in popularity among investors in recent years.


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crowdfunding real estate

Benefits Of Crowdfunding For Real Estate

Whether you’re just beginning your real estate investing journey or you’re a seasoned pro, locking down the necessary financing to fund a deal can be a challenge. With its advent in the real estate sector, many investors have taken advantage of crowdfunding as an alternative way of funding their deals. Furthermore, crowdfunding has become associated with several other notable benefits, including:

  • Crowdfunding real estate increases your funding options while growing your investor network.

  • Direct marketing through crowdfunding also doubles as a tool to promote your business.

  • Successful projects will lead to positive word of mouth and client loyalty over time.

  • Save time and money by taking advantage of a user-friendly investment platform.

  • Gain access to valuable feedback from your online community so you may address any business flaws.

Real estate crowdfunding

Easy Access To Capital

Crowdfunding offers easy access to credit and capital without all of the hassle of getting a loan, and is used for virtually any type of fundraising effort you can think of: personal, familial, business and real estate investing. Investors can benefit from real estate crowdfunding by keeping their personal credit free and available for other uses, while keeping their personal credit scores in tact. This allows small business owners to get their companies up and running more quickly, and also help secure funding for deals when more traditional options are limited.

Great Marketing Tool

Aside from the direct benefit of funding, crowdfunding lends itself as an excellent marketing tool for business owners who would like to promote their brand. By promoting fundraising campaigns through social media and directly on crowdfunding platforms, real estate investors have an opportunity to rapidly grow their investor network. A best practice is to provide a credibility package on your website, showing past projects and returns, along with your company’s mission and goals. This helps to demonstrate your credibility and professionality to interested investors.

Builds Investor Loyalty

A crowdfunding campaign is a smart way to prove the appeal and financial viability of an idea or project. By providing compelling information through the campaigning process, you can attract potential investors and garner support. Once you’ve secured your funding, your contributors will become invested in your success, and will go the extra mile to help you succeed. By providing consistent results, your investors will develop a sense of loyalty, which can lead to positive word-of-mouth marketing, repeated business and direct referrals.

User Friendly Platforms Available

Many real estate crowdfunding sites make it easy for investors to launch their fundraising campaigns, thus saving them time and money. These platforms are designed to showcase campaigns in a visually appealing manner, while allowing fundraisers to reach a large audience without excessive effort. Be sure to keep reading to discover some of the best real estate crowdfunding platforms available today.

Way To Gain Valuable Feedback

Due to the public nature of crowdfunding, campaigns will be subject to reactions, with or without invitation. However, this is a great opportunity for business owners to monitor user comments and gain valuable feedback. For example, pay attention to input left from other experienced investors, or even criticism as a way to identify and fix business flaws. Responding and thanking users for leaving the time to reach out can help you open up lines of communication and develop genuine connections with new contacts.

In addition, it is important to recognize that there is a learning curve for those who have not yet participated in crowdfunding. When launching your first campaign, some of this feedback can be a great way to learn how to improve your campaigns in the future. It can also be an opportunity to introduce the concept of crowdfunding to those who are not yet familiar.

Disadvantages Of Crowdfunding

While crowdfunding may seem like an attractive strategy, it is important to be aware of the disadvantages that investors face when funding your deal.

  • Uncertainty: One of the biggest challenges that you will face when recruiting investors for your crowdfunded deal is that investors may be unfamiliar with you or your business. This can lead them to hesitate before trusting an investment in the hands of a borrower that they are not familiar with. There is a risk of losing their investment, and although you will be confident your deal will succeed, investors may need more convincing before agreeing to get in business with you.

  • Rate of return: It is common for crowdfunded real estate deals to have an investment period of up to 5 to 7 years, meaning that investors will not see an immediate return on their investment. While there is long term potential for a large profit, some investors may see the holding period of a crowdfunded deal as a drawback.

  • Lack of control: Investors also do not have decision making control of the property they are investing in. Some investors may be weary to contribute to your crowdfunding campaign if they are not completely confident in placing the future of their investment in your hands. You may find that a more detailed presentation of the trajectory of your project will help to alleviate investor’ hesitations before they are convinced that the project will be worth their investment.

Crowdfunding Investment Limits

The US Securities and Exchange Commission has put regulations in place for non accredited lenders in order to account for the risk involved with crowdfunded deals. Depending on a lender’s income, there are limits to the amount of money you can contribute to these kinds of deals. If your annual income is less than $107,000, you can make a yearly investment of 5% of your income with $2200 as the maximum investment allowed. If your annual income is greater that $107,000 you can make an investment of up to 10% of your income or a maximum investment no greater than $107,000.

Types Of Crowdfunding

If you are a real estate investor who has built up some capital, you may now be looking for ways to grow your wealth a bit more passively. For this type of investor, real estate crowdfunding essentially has two options: equity investments and debt investing.

Equity Investments: Pros & Cons

This is the route most real estate crowdfunding investors take, mainly because it provides a higher return than debt investing. However, this also presents risk. Equity investments give investors an equity stake in a residential or commercial property, effectively turning them into shareholders.

If you choose to invest this way, your return will be based on the rental income of the property, minus fees needed for the crowdsourcing platform. In the event the property is sold, you will also earn a share of its appreciation value. Payouts are typically sent every quarter.

Pros include:

  • The Sky is the limit on returns: You can see (at times) an 18 to 25 percent annual return, with the possibility for more, since equity investments do not have caps on them.

  • Lower fees: You have the option to pay an annual fee to maintain your shares on the property, instead of upfront fees and monthly fees.

  • Tax benefits: Since you own a share of the property, you can deduct expenses on it from your annual income tax (e.g. depreciation, repairs).

Cons include:

  • Riskier: You will be second in line for payouts. If the property does not attain a profit, you will not get any return on your investment.

  • Longer hold period: If you want more liquidity in your portfolio, equity investing is probably not for you. The holding period usually lasts for five to ten years.

Debt Investments: Pros & Cons

Debt investing, on the other hand, means the investor (you) are basically the lender to the property owner. You receive a fixed return based on the interest rate of the owner’s mortgage loan, as well as the amount you have invested.

Payments are usually given every month or every quarter. And since you are in debt investing, you will be have priority during property payout.

Pros include:

  • Steady returns: You are more likely to predict how much and when you will receive your payout, thanks to how the investment is structured. You may be looking at a potential of an 8 to 12 percent annual return.

  • Less risk: You have less risk with debt investments, since the property owner will be the one to secure the mortgage loan. If the owner fails to pay the loan, you can recover your loss via a foreclosure action.

  • Shorter hold time: Since debt investments are usually done with development projects, the holding period only stretches from six to 24 months.

Cons include:

  • Higher fees: Once you decide to invest, the crowdfunding platform may take a percentage off of your payout.

  • Capped returns: Debt investments are calculated based on the interest rate of the owner’s mortgage loan. As such, your yields will be limited.

property crowdfunding

Best Real Estate Crowdfunding Platforms

With a myriad of crowdfunding platforms available, it’s easy to get lost in a sea of options and features. It is recommended that you pick a platform based on site functionality, credibility, documentation, and customer service quality. For starters, you want to stay away from sites that function as nothing more than listing services. Go for platforms that act as a broker-dealer. Additionally, aim to pick a platform that has previous experience handling the kind of investments you’re looking for.

Next, you’ll want to look for a site with solid venture capital backing. Since your investment could be locked up for a certain amount of time, make sure you are using a credible platform that will be up and running for a long time. In addition, inspect how the platform conducts their due diligence. Be sure to ask the important questions: What kind of documentation does the platform collect for potential deals? Do they ask companies to provide liabilities or indemnities to investors, should something go wrong?

Finally, verify that the platform provides quality customer service. As you’re researching different platforms and ask them your set of questions, you should be able to get a sense of their customer service quality by their willingness to provide the information and assurance that you need.

Now that you’ve got a primer on crowdfunding for real estate deals, you might be wondering which real estate crowdfunding platform you should go with. Here are a few to consider:

  • RealtyShares: With a minimum requirement of only $5,000, RealtyShares is a tech-enabled platform that allows borrowers to present their projects to accredited investors. For investors, on the other hand, you can look into a market of pre-screened residential, commercial, retail, and mix-use properties.

  • RealtyMogul: Catering to both debt and equity investors, RealtyMogul also features a $5,000 minimum investment. They put investor protection at the top of their priorities, making sure all investment opportunities are vetted.

  • iFunding: If you’re looking to invest in commercial retail and single family residential projects, you may want to check out iFunding. For borrowers, the website has professionals who can lend a hand in raising capital for a project. Minimum investment is also $5,000.

  • Patch of Land:This is a peer-to-real-estate lending marketplace that acts as bridge between investors looking for high-yield, short-term investments and borrowers looking for rehabbing funding.

  • Fundrise: Fundrise acts as an online marketplace with some investments available for as low as $5,000. Since its creation in 2012, Fundrise has connected countless property owners with real estate investors.

  • Prodigy Network: For those hoping to get involved in commerical real estate, Prodigy Network is a great option. The minimum investment is $10,000 however their extensive six part vetting process helps provide piece of mind for those ready to get started.

Summary

Crowdfunding real estate is a rising trend in the investing space, and for good reason. Utilized correctly, it can benefit both those looking to fund investments, and receive funding, alike. As this is a newer trend, be sure to research real estate crowdfunding platforms and mind due diligence when making investments. If you want to try a non-traditional form of real estate investing, it’s possible that crowdfunding could be the key to a new form of investing success.

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