Everything You Should Know About Real Estate Crowdfunding

By: ROS Team

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Crowdfunding isn’t just for start-up companies anymore. It can also be a great platform for investors. Although crowdfunding real estate is a relatively new phenomenon, it can be a worthwhile option if you understand how it works.

What is Real Estate Crowdfunding?

Real estate crowdfunding works like other crowdfunding ventures: investors pool funds to kick off the project that they believe will generate profit. Simply put, crowdfunding is a way for business owners to raise money.

A major difference between crowdfunding and traditional fundraising methods has to do with the platform. Unlike more traditional methods, crowdfunding is usually conducted online. Most real estate crowdfunding platforms funnel real estate investments directly into real estate investment trusts.

There is a high professional threshold in real estate crowdfunding. But, over time, some platforms have minimized their thresholds so people can invest with as little as $500.

Investors have adopted crowdfunding as an alternative to more traditional means of real estate investing. Larger investors use the platform to attract investment funds from groups of accredited investors, while smaller business owners often launch campaigns to raise money for their business ventures.

Benefits of Real Estate Crowdfunding

Property crowdfunding is not only an excellent fundraising alternative, but it also has other notable benefits for both borrowers and investors:

  • It helps diversify fund sources while you grow your investor network;
  • It allows companies to start operations quicker;
  • Successful projects borne through crowdfunding set up investor loyalty for future projects;
  • The nature of crowdfunding involves direct marketing, which ultimately promotes your real estate business;
  • It helps you get direct, honest, and real-time feedback from the crowdfunding community, which allows you to address issues sooner; and
  • It may save time and energy by taking advantage of a user-friendly platform.

Disadvantages Of Crowdfunding

As with most business opportunities, there are some disadvantages of crowdfunding that you should consider.  These include:

  • Unfamiliarity among investors–as a result, they may be hesitant about investing since they’re unfamiliar with you and/or the project;
  • The investment period ranges from 5 – 7 years, which means investors won’t get any return immediately (this may be unattractive to some investors); and
  • Since investors don’t have any direct control over the investment, they may be wary of contributing to your crowdfunding campaign.

Types of Investments

1- Equity Based

Equity investments provide higher returns than debt investing. In this type of crowdfunding, you earn profit returns based on the property’s rental income.  Investors receive profits quarterly, and they earn a share of the property’s appreciation value once the property is sold. One major concern that investors should know is they can lose money if the property’s value decreases.

2- Lending Based

Lending-based investments attract more investors because it is a simpler way to invest. This type of investing allows investors to lend funds to the property owner for a fixed interest rate. The interest rate depends on the amount invested and on the amount of the loan.

Real Estate Crowdfunding Platforms

DiversyFund: This site gives users the option of investing in private market assets with an initial amount of as little as $500. It is one of the most accessible real estate crowdfunding sites as it opens the investment door to all users, not just wealthy people.

Fundraise: This site also allows real estate investing with just $500 to start.

Streetwise: The minimum amount to begin investing using this platform is $1,000. This crowdfunding site vets all properties and tenants to protect investments.

Crowdstreet: This platform is your best option if you want to manage your investments by yourself. You can search for properties and select where you want to invest.

FAQs – Real Estate Crowdfunding

Can you Pull your Money Back from Crowdfunding?

Every crowdfunding platform has its own rules, so some may allow you to refund or retrieve funds while others may not.

If the crowdfunding goal is fulfilled without the use of funds, the page owner can refund donors’ money at their discretion.

Can you Crowdfund to Buy a House?

Yes, you can crowdfund to earn the down payment of your home.

How much do Crowdfunding Platforms Charge?

The average fee platforms charge is around 5% of the total money raised from the campaign. There is also usually a 3% fee on every transaction. You may also need to pay an extra fee if you don’t meet the funding target.

How much money can I Raise by Crowdfunding?

The maximum amount of money you can raise through crowdfunding is $5 million.

What are the Risks of Real Estate Crowdfunding?

Real estate crowdfunding, like any other investment, carries the risk of loss. This is why it’s critical to research the crowdfunding sponsor and the agreement.

Another risk involved in real estate crowdfunding is illiquidity. You cannot simply exit or sell your stake in a crowdfunding venture as you can in public markets. When you commit to a crowdfunded real estate venture, you’re committed for the full period.

What are 2022’s Best Real Estate Crowdfunding Platforms?

  • DiversyFund
  • CrowdStreet
  • RealtyShares
  • EquityMultiple
  • PeerStreet
  • Prodigy Network
  • iFunding
  • RealtyMogul

Final Words:

Crowdfunding real estate is a great idea for investors who want to build passive sources of income since they don’t have to worry about managing those properties. Also, it is ideal for investors who don’t have enough capital to buy property but are still interested in investing in real estate.  Plus, this option allows investors who would rather not be landlords the opportunity to invest in real estate.