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Investors who want to grow and diversify beyond the stock market will often look to make their next dollar using real estate. Typically, direct ownership of an investment property such as a rental home, vacation rental, or Airbnb can be a good way to produce supplemental income while also achieving capital appreciation. But then the owner is also stuck with all the work and responsibility that comes along with them.
Investors also have the option to invest in publicly-traded REITs (real estate investment trusts) as a way to capitalize on large-scale real estate projects. But some REITs can be susceptible to market fluctuations and are often vague about their actual holdings.
For these reasons, it's no surprise that the real estate crowdfunding industry has grown with immense popularity.
Real estate crowdfunding is an attractive investment because it offers a unique way for people to passively make money off large-scale investment properties and developments. It helps to mitigate risk while also providing a lot of transparency and opportunity to new investors.
In this post, we'll talk about the many advantages that real estate crowdfunding can offer its investors. We'll also compare and contrast these benefits against direct ownership and REITs to show why they've garnered so much positive attention.
Why Real Estate Crowdfunding Is An Attractive Investment
Since its inception in 2012, the concept of real estate crowdfunding has gained a lot of traction. Real estate entrepreneurs had a way to raise capital without using traditional avenues like banks. And investors had a new way to get in on the ground floor without having to be uber-wealthy.
This is why relatively new platforms such as Fundrise, RealtyMogul, CrowdStreet, YieldStreet, and many others now each manage billions of dollars of transactions each year. In fact, the global markets for these platforms are expected to grow 33.4 percent per year until 2028.
So what’s in it for investors? What makes crowdfunding so much more appealing than direct property ownership or holding shares of REITs?
The following are ten reasons why so many people are turning to real estate crowdfunding as their investment property platform.
1. You'll Passively Invest In Real Estate
Suppose you bought a rental property because you wanted to get into real estate. You appreciate the income that it produces, maybe you’ll even be able to sell the property for more than what you originally paid for it.
But along with property ownership comes a lot of responsibility and time investment. You'd have to deal with every complaint from the tenants as well as maintain the property. If only there was a way to collect the rental income without the headache of ownership …
That’s where investing in real estate crowdfunding shines. Investors can passively make money off the market without actually having to be involved every step of the way.
In fact, many of the properties on these crowdfunding platforms are single-family homes. For instance, check out this one on Fundrise featuring a home in Tucson, AZ.
By using real estate crowdfunding instead of buying a property outright, you get to leave all of the work to someone else. You are no longer the one who has to deal with tenants, maintain the property, or tally up all the receipts at tax time.
Additionally, shareholders won't have to worry about missed rent payments or vacancy periods. Just like stock ownership, the investors get to sit back and wait for their dividend payments or shares to appreciate.
2. Non-Accredited Investors Are Welcome
For decades, the only way someone could invest in a large-scale real estate project was to be what's called an accredited investor. This is a person who has a net worth of $1 million (not including the value of their primary residence) or has a gross income of $200,000 or more as a single-filer ($300,000 if they file jointly). Even today, most private equity companies won't work with you unless you can prove that you're accredited.
However, with real estate crowdfunding, the doors are open. Both accredited as well as non-accredited investors can put their money into the platform and capitalize on these projects.
This makes it possible for investors to take part in real estate ventures that they never would have had access to otherwise. For instance, they might invest $1,000 and become shareholders of assets that contain apartment complexes, warehouses, and neighborhood developments.
Note: On most real estate crowdfunding platforms, non-accredited investors will be placed in private REITs that are managed by the platform. These REITs will provide exposure to dozens of various projects across the platform. Typically, for someone to invest in individual projects directly, they have to be considered accredited.
3. The Minimum To Invest Is Lower
Let's say that you do qualify as an accredited investor and can work with a private equity firm. Historically, the standard minimum investment amount is a staggering $25 million!
Some firms have lowered this amount to as low as $25,000 as a way to widen their potential client base. Still, that's a lot to ask of someone – even if they are a millionaire.
By contrast, real estate crowdfunding reduces the barriers to entry to virtually next to nothing. For instance, Fundrise lets new members join with as little as $10. YieldStreet has the next lowest minimum at $2,500.
If you want to advance out of the platform's general private REIT and participate in their more exclusive funds, these thresholds usually escalate to $5,000 to $10,000. However, even that is still significantly less than what you'd need with private equity.
When compared to purchasing your own investment property, this is also a much cheaper option. Buying a standard single-family home for around $150,000 would mean putting forth a 20 percent down payment of at least $30,000. Compared to the $10 minimum asked by Fundrise, it's clear that real estate crowdfunding is far less capital intensive.
4. Diversification Is Better Optimized
A big problem with rental properties is that an investor is literally putting all their eggs into one basket. Everyone always hopes that their venture will go well, but what if it doesn't? There's always the possibility that the tenants won't pay or – worse – they might do damage to the property that you'll have to pay to repair.
REITs can certainly help to spread out this risk. Just like how a mutual fund or ETF (exchange-traded fund) is a diverse collection of stocks, a REIT is a collection of various properties.
But is there a possibility that some REITs might be too diverse? If they own hundreds or even thousands of different properties, wouldn’t the returns eventually become diluted by the potential risk?
This is where real estate crowdfunding seeks to find the sweet spot. Some of the more exclusive funds may only be invested in a dozen or so projects at a time.
Even Fundrise's Flagship Real Estate Fund, a private REIT, invests in about 50 of the platform’s projects. That helps to keep the risks down while still having enough opportunity exposure to achieve optimum growth.
5. Projects Have Been Vetted By The Platform
Suppose you found a property you wanted to buy, or someone came to you with a proposal to form a business partnership and buy a piece of commercial real estate. Unless you already have some experience in this area, how would you know if it's going to be a good deal or not? While deals like these can be lucrative, they are not for the inexperienced.
Fortunately, the process of inspecting and vetting a deal is something that real estate crowdfunding platforms do on behalf of their users. Before a project can receive any funding through the platform, it must first apply and go through rigorous screening and financial stress testing to ensure its validity.
Many of the platforms boast that the majority of the projects that come to them are turned away.
By doing their due diligence, this process filters out any projects that don’t have a good financial foundation or team of professionals in place to see them through to fruition. That leaves only the best projects to rise to the top so that platform members can invest with confidence.
6. There's Better Share Price Stability
When comparing the value of a typical publicly traded REIT to the private REIT from a crowdfunded real estate platform, investors will notice that the share prices of private REITs have much better price stability.
This makes sense when you think about the investment structure of a public REIT vs a private REIT. With a public REIT, people can buy and sell shares anytime they wish. While this is great for investor liquidity, it causes the valuation of the company to fluctuate like a stock.
However, most real estate crowdfunding platforms require that investors commit their capital for a specific minimum amount of time – often 5 years. The logic behind this is that since these real estate projects are long-term investments, their success relies on the preservation of the investor capital.
With users making fewer trades, this creates better stability for the private REIT. Hence, as long as the real estate projects are doing well, investors can expect the shares to rise more consistently over time.
7. Consistent Income Payments
While investment properties like rental homes and vacation rentals can certainly create a lot of cash flow for the owners, they are also susceptible to gaps. For instance, what happens if the tenants stop paying their rent or the vacation rental sits empty for a few weeks or even months (as was the case for many during the start of the COVID-19 pandemic)? This can create a massive disruption to the investor’s income stream.
While REITs solve this issue by distributing 90 percent or more of their profits to the shareholders, again – the expected income may not be as lucrative. This is because the earnings can get diluted given the range of activity and diversity of holdings within the REIT.
Generally speaking, real estate crowdfunding investors can expect dividend yields to be higher than those of publicly-traded REITs. For instance, the RealtyMogul Income REIT has paid distributions between 6 and 8 percent over the past five years. Several other funds also offer equally attractive dividend payments.
While it should be noted that dividend payments are never guaranteed for a certain amount, there is a higher likelihood that it would be more generous from a REIT than a stock. Stocks can cut their dividend payments to zero if they wish to retain capital.
However, REITs must distribute their profits. Therefore, as long as these real estate projects are making money, the investor can expect to be compensated.
One aspect of real estate crowdfunding that a lot of investors really appreciate is the effort to be as transparent as possible about the projects involved. Users can log in to the platform and see the details of any of the investment properties contained within their portfolio.
This information may include:
- Financial information
- Project status
Unfortunately, the same cannot be said for publicly-traded REITs. While a REIT may list some of its holdings in the investment prospectus, these details are often very difficult to find or simply not available. Therefore, it’s very unclear to REIT shareholders what their money is actually going towards.
9. You Have More Choices
When it comes to the higher-level projects and funds offered by real estate crowdfunding platforms, investors will have the ability to be more specific in which ones they'd like to participate in.
For instance, Fundrise has eREITs that are specific to properties on the east coast, west coast, and heartland. People who may have had an interest in investing in one of these areas or who may wish to support the local area can simply contribute to one of these funds.
While some REITs will invest in certain industries or types of properties, again – it’s unclear what or where they're actually buying. Some may even be buying a mixture of debt or mortgage-backed securities in addition to the properties, so there is some ambiguity about how they are making their money and what communities are benefiting.
10. Easier Exit Strategy
Let's say everything goes great with your rental property or vacation home, but you've reached the point where you'd like to get your principal investment back. Or perhaps you need the capital for something else and have to unload your real estate holdings in a hurry. What can you do?
Depending on the market, it could take some time to find interested buyers and sell your investment property. Or worse, you may have to sell it at a loss due to the urgency.
By comparison, real estate crowdfunding shareholders will not have the same challenges. As long as they've met the minimum required holding period dictated by the platform (usually 5 years), then they can sell those shares without penalty. This makes unloading and exiting from one investment to the next much easier.
Even in the event that they do have to pay a penalty for early redemption, the fees are not that substantial. For instance, Fundrise only charges a 1 percent fee for shares held less than 5 years.
As an example, a $10,000 investment would only incur a fee of $100. Again, compared to the potential losses of an investment property, there’s no contest.
Will You Consider Real Estate Crowdfunding For Your Next Investment?
When it comes to making money off of real estate, most investors will choose to purchase properties directly or buy shares of publicly-traded REITs. However, over the past decade, a new way to invest has emerged called real estate crowdfunding.
Real estate crowdfunding is an attractive investment on many levels. For starters, it’s a great way for non-accredited investors to passively invest in large-scale real estate projects. New members can get started on some platforms with as little as $10.
Real estate crowdfunding platforms go to great lengths to ensure that only the best and most lucrative projects come aboard by vetting the projects first. Because of the way these platforms structure their accounts, fewer withdrawals are being made by investors. This leads to better capital appreciation and higher dividend yields.
Overall, real estate crowdfunding platforms can offer more transparency and options for customization to their users than they’ll find with most publicly-traded REITs. In the end, that will produce greater returns and give better opportunities to exit when you're ready to cash in and move on.
Of course, there's nothing wrong with direct ownership of investment properties or holding shares of REITs. Relative to these investments, real estate crowdfunding may be a better fit for some people.
As with all financial matters, investors should weigh the pros and cons of each, and pick the tools that will be the best fit for them individually.