Historically, real estate investment has been dominated by institutional investors – pension funds, university funds, hedge funds – and the incredibly wealthy. They had the capital and connections needed to get into space and claim their stake in this trillion dollar asset class.
Smaller investors had several options, namely residential real estate and public REITs (real estate investment funds), but for the most part, the average investor would not be able to easily add real estate to their portfolio.
But the game has changed thanks to real estate crowdfunding.
How does real estate crowdfunding work?
Prior to the enactment of the 2012 JOB Act, real estate investors could only invest in real estate by purchasing physical property or investing in a REIT. The JOBS Act allowed small and medium-sized companies to use crowdfunding as a way to raise capital, giving individual investors a new way to add properties to their portfolios.
Real estate crowdfunding platforms allow multiple individual investors to come together and pool their money to collectively invest in larger real estate projects than they could alone. As an investor in a crowdfunding deal, you, along with dozens or even hundreds of other investors, contribute to the capital of the project.
This makes real estate crowdfunding a type of private investment (private, which means they are not traded on public markets), and this is one of the ways that many investors have been able to add private equity investments to their portfolios. Your investment often goes directly to a sponsor (also known as the developer or the firm behind the project) to invest in the construction, renovation or recapitalization of commercial or residential real estate.
On top of that, crowdfunding investors are not homeowners or property managers – you are a passive investor. This means you don’t have to call emergency services late at night when the power goes out, you don’t have to worry about finding or checking tenants, or daily maintenance. All these operations are performed by the sponsor.
What are the benefits of real estate crowdfunding?
Investors choosing to use a crowdfunding platform to invest have several key benefits.
1. You choose the deals you want. Unlike a REIT, which is more like a fund, crowdfunding deals are akin to the stock market. You have complete control over where your money goes because you select individual projects to invest in.
2. You can find investment opportunities in the USA. Historically, real estate investment has been limited to incredibly wealthy people with very well-connected people. You needed to know someone to close the deal. With online platforms, you can easily find, compare and invest in projects across the country.
3. You are a passive investor. As mentioned earlier, sponsors use real estate crowdfunding platforms to raise capital from a group of investors, but they are responsible for the execution of the business plan and the day-to-day management of the property.
4. You get direct access to sponsors. Since your investment goes directly to the sponsor, you get the opportunity to interact with them directly. Take this opportunity to review their track record and ask questions about the project.
How much does it cost to invest in a real estate crowdfunding deal?
The minimum investment can vary from platform to platform depending on your investment options. Several platforms offer renovate and roll-over residential investment for as little as a few hundred dollars. Others provide access to institutional quality commercial property with much higher minimum investment and are only open to accredited investors. Depending on your financial situation, different platforms may be more suitable for you.
On platforms such as CrowdStreetthe minimum investment in any single transaction can be up to $ 25,000. While this may seem like too much upfront, consider the down payment when renting a property. You could easily lose twice as much (if not more) if you wanted to invest more than a few percent. And then you get hooked on mortgages, property taxes, home appliance upgrades, and so on.
CrowdStreet also specializes exclusively in commercial real estate – medical offices, data centers, shopping malls – throughout the United States. These properties typically cost tens of millions of dollars and have much more complex business plans than “fix and flip”.
How can I make money from crowdfunding investments?
Real estate crowdfunding platforms allow you to purchase real estate like any stock and become a shareholder. Instead of buying all of the property and claiming all of the potential profits (while taking all the work and risk at the same time), you can earn a portion of any profits made.
These profits usually come from streams of rental income or any income from the sale of the building. Depending on the business plan, you may receive payments (also called payments) monthly, quarterly, or annually.
The risk profile of each trade is also related to how much you can potentially earn from your investment. As with the stock market, high risk is often correlated with high returns.
For example, development deals cannot generate any rental income because there is nothing to rent – the sponsor uses your investment to build the building. However, they can charge a higher selling price in a few years if everything goes according to plan.
On the other hand, the main transactions are generally fully leased, best-in-class properties in large metropolitan areas. They are more likely to receive a steady income from day-to-day operations, but they probably won’t have many opportunities to appreciate over time. However, these trades are usually the least likely to perform well and generate more consistent profits.
How big is real estate crowdfunding?
In a first-of-its-kind study Real Estate Crowdfunding UnleashedDr. Adam Gower looked at how real estate crowdfunding came of age.
Gower, who has tracked the crowdfunding market since its inception in 2012, examined over a million data points from the SEC to show how crowdfunding has grown to account for nearly 25% of all private equity raised for commercial real estate in America, with crowdfunding deals hitting a record high. $ 15 billion in 2020 (up from $ 7 billion in 2019).
Of all the trading platforms specializing in commercial real estate, CrowdStreet stood out for Gower as an industry leader and largest based on collected dollars on your trading floor. “In a significant development for the industry, CrowdStreet was the first online commercial real estate investment marketplace to raise $ 2 billion from private investors,” Gower said. “This is a remarkable achievement for an industry only seven years old and for a company that raised $ 200 million four years ago.”
Crowdfunding has given thousands of investors a new way to invest in real estate, and it has truly taken center stage in 2020. As institutional investors pulled back, unsure of how COVID-19 would affect the markets, individual investors stepped up. CrowdStreet truly had the best year ever, raising over $ 640 million for over 100 projects.
As Gower’s research shows, crowdfunding is taking over the private equity market and could forever change the way the financial industry works. This means a whole world of opportunities for investors.
CrowdStreet is a content partner of Benzinga.
This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and prepared for informational purposes only. CrowdStreet is not a registered broker dealer or investment advisor. Nothing in this document should be construed as an offer, recommendation or offer to buy or sell any securities or investment product issued by CrowdStreet or otherwise. This article is not intended to be used as advice to investors or potential investors, and does not take into account the investment objectives, financial situation, or needs of any investor. Any investment involves risk, including the potential loss of the money invested, and past results do not guarantee future results. All investors should consider such factors, after consulting a professional advisor of their choice, when deciding whether an investment is appropriate.
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