Real Estate Investing

What Is Real Estate Crowdfunding?

Stephanie

August 18, 2022

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https://www.getaway.co/articles/what-is-real-estate-crowdfunding

Real estate crowdfunding is a way for investors to pool their money together to invest in property. It's a relatively new concept, and there are a few different platforms that allow people to do it. Essentially, you find a property you want to invest in, typically on a crowdfunding platform or other fintech app. Other people can then invest money into that campaign, and if the campaign is successful, the property is purchased, and everyone who invested gets a share. 

There are a few different benefits to real estate crowdfunding. First, it allows people to invest in property without having to come up with a large amount of money themselves. Second, it's a way to diversify your investment portfolio. And third, it can be a way to get involved in the real estate market without being an expert. 

Of course, there are also some risks associated with real estate crowdfunding. The most obvious risk is that you could lose your investment if the campaign doesn't reach its goal. There's also the risk that the property might not be worth as much as you thought it was or that it could take longer to sell than expected. 

Overall, real estate crowdfunding is a great way for people to invest in property without having to put up a lot of money themselves. It's important to do your research and understand the risks before you invest, but if you're comfortable with the risks, it can be a great way to get involved in the real estate market.

How Does Crowdfunding Work In Real Estate?

Real estate investments are gaining popularity, primarily due to overall volatility in the real estate markets and the consistent, high returns offered by productive real estate assets. However, not everyone has the time, skill, and desire to locate, acquire, and manage residential or commercial properties. Not to mention the high financial cost of acquiring a single-family home, let alone a multi-unit apartment building or commercial property. 

You'll also have significant ongoing costs and management duties- sucking up more of your valuable time. But what if you could access real estate's stability and cash flow without the hassle and time commitment? Enter real estate crowdfunding.

Real estate crowdfunding allows investors to pool their money via crowdfunding platforms, apps, and other forms of financial technology to seek out, purchase, and hold fractional real estate assets. Rather than buying an entire property for a few hundred thousand or even millions of dollars, you can invest in many crowdfunding projects for as little as $100. You can invest in a wide variety of properties via regulation crowdfunding, in fact, you have just as many options as you would if you were seeking direct ownership. Common crowdfunded real estate property types include:

  • Vacation rentals
  • Multifamily apartment complexes
  • Single-family homes
  • Condos
  • Retail space
  • Commercial properties
  • Restaurant properties
  • Hospitality properties
  • Undeveloped lots

….and almost any other property type you can think of.

Crowdfunded real estate investors gain access to exclusive private market property opportunities that are not available to the general public, particularly if you're an "accredited investor," someone who is allowed to trade securities that are not registered with financial authorities. The term usually refers to high-net-worth individuals and institutions, such as banks and hedge funds, that are considered sophisticated and knowledgeable enough to understand the risks of investing in unregistered securities. 

Generally, to qualify as an accredited investor, you generally need to have an annual income above $200,000, or a net worth of $1 million, or the ability to demonstrate significant financial acumen through education, certificates, or business experience.

Types Of Real Estate Crowdfunding

There are two main types of real estate crowdfunding: equity crowdfunding and debt crowdfunding. 

Equity crowdfunding allows you to own a piece of the property that you're investing in. You'll share in the project's profits (or losses) and have a say in how the property is managed. 

Debt crowdfunding is a loan that you make to the project. With this type of crowdfunded real estate investing, you'll receive interest payments on your loan and be repaid in full when the project is completed. 

Equity Crowdfunding

In short, equity crowdfunding is a way for startup companies to raise money by selling shares of ownership to many small investors rather than relying on a few large investors. This crowdfunding type has become increasingly popular in recent years as it allows real estate sponsors to tap into a larger pool of potential investors and raise more money than they could through traditional methods. 

One of the major benefits of equity crowdfunding is that it allows real estate sponsors to raise capital without giving up control of their company. In traditional fundraising methods, such as venture capital, investors often demand a seat on the company's board of directors in exchange for their investment, giving them a lot of control over the company's direction and decisions. 

With equity crowdfunding, investors do not have this level of control, as they are simply buying shares in the company. This can give startup companies the freedom to make their own decisions without having to answer to investors. 

Another advantage of equity crowdfunding is that it is a more democratic way of raising money. Anyone can invest in a property or property portfolio through equity crowdfunding, regardless of their wealth or connections. Deal sponsors can raise money from a wider range of people, which can benefit both the company and the investors.   

Equity crowdfunding does have some risks, however. One of the most significant risks is that the company may not be able to raise enough money to reach its goals. This can be a problem if the company has set a high goal to attract more investors. Another risk is that the company may not be successful, and the investors may not see a return on their investment. 

Debt Crowdfunding

Debt crowdfunding is a type of real estate crowdfunding that allows investors to fund property acquisitions in exchange for interest payments. This type of crowdfunding can be used for a variety of purposes, including debt consolidation, business expansion, or real estate investment. 

It offers a number of benefits for both borrowers and investors. For borrowers, it can be a source of financing that is not available through traditional lenders. For investors, debt crowdfunding can provide a higher return than other investments, such as bonds or CDs. 

Pros And Cons Of Real Estate Crowdfunding

When it comes to real estate crowdfunding investments, there are pros and cons that you should be aware of before you decide to move forward. Here are some of the key points to consider:  

Pros  

1. Access to previously unattainable investments.  

2. Potentially higher returns than other investment options. 

3. Diversification of your investment portfolio.  

4. Ability to invest in multiple projects at once.  

5. Increased transparency and communication with the project’s sponsor.  

Cons  

1. Crowdfunding is a relatively new industry and thus is subject to more regulatory scrutiny.  

2. You are investing in a project with other people, so your investment is not as liquid as it would be if you were investing alone.  

3. There is always the risk that the project you are investing in will not succeed, which could lead to a loss of your investment.  

4. You may not have as much control over the project as you would if you were the sole investor.  

5. You may not receive regular updates about the project’s progress, making monitoring your investment difficult.

Differences between Real Estate Crowdfunding vs. REITs vs. Rentals

Real estate crowdfunding, REITs, and direct rentals are all popular ways to invest in real estate. But what are the key differentiating factors between them? And which one is right for you? 

Real estate crowdfunding is a somewhat new way to invest in real estate. You can invest in real estate crowdfunding platforms like RealtyMogul and Fundrise. With real estate crowdfunding, you can invest in a variety of properties, including residential and commercial properties. You can also choose to invest in a specific project, like a new development.  

On the other hand, REITs are a more traditional way to invest in real estate. REITs are publicly traded companies that own and operate income-producing real estate. You can buy shares of REITs that own a variety of properties, including office buildings, shopping malls, and apartments. Or, you can invest in an REIT that specializes in a particular property type, like healthcare or self-storage. 

Rentals are a third way to invest in real estate. With rentals, you purchase a property and then rent it out to tenants. Rentals can be an excellent way to generate income, but they also come with many responsibilities, like finding tenants, maintaining the property, and paying the mortgage. 

So, which is the best way to invest in real estate? It depends on your goals and preferences. Real estate crowdfunding offers the potential for high returns, but it also comes with more risk. 

REITs are a more stable investment, but they typically offer lower returns. 

Rentals can provide a steady stream of income, but they require a lot of work. At the end of the day, the best way to invest in real estate depends on your individual goals and risk tolerance.

What Are The Requirements For Investing In A Crowdfunded Real Estate Deal?

Unlike traditional investing, which typically requires a large amount of money and a great deal of knowledge, crowdfunding allows anyone to invest in real estate with as little as $100. There are different requirements for different investors, typically based on your financial and professional background. 

The requirements for investing in a crowdfunding real estate deal are relatively simple. First, you must be an accredited investor, which generally means having a net worth of at least $1 million or an annual income of at least $200,000. One thing to keep in mind, if you're not quite there yet, you can still access real estate crowdfunding deals- just seek out those open to non-accredited investors. 

Second, you must be willing to risk your investment, as there is always the possibility that you will not make any money back. Third, your money may be locked up for months, or even years, depending on the deal you choose- so be ready to be illiquid for a certain period of time. However, there are also liquid options, depending on the crowdfunding platform.

 If you meet these requirements, you can start investing in crowdfunding real estate deals. You can use several different platforms to find and invest in these deals, so be sure to do your research before you choose one. Our mission with Getaway is to democratize access to real estate investing by making it accessible, fun and approachable.

The Bottom Line

Crowdfunding is an innovative way to raise money for real estate projects, and it has the potential to democratize investing. However, it's still a relatively new concept, and there are some risks to consider before investing. 

You need to analyze each platform and individual deal on its own merits- don’t get excited about a project simply because it is being presented to you as some new and innovative way to beat inflation or preserve your capital. 

If you do your research and understand the risks before you invest, there are significant opportunities to be had across real estate sectors, from vacation rentals to multifamily properties to single-family homes. 

Disclosures
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Getaway has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Getaway has not reviewed such advertisements and does not endorse any advertising content contained therein. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters.

References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any offerings. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.
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