Is Crowdfunding in Real Estate a Good Investment?
Ask a rich man how he got rich, and he will most likely say that he invested in real estate. In fact, real estate is considered one of the safest ways to accumulate wealth. This is why there is no shortage of people looking to buy a home and watch its value rise over time. There are homeowners willing to manage tenants for years in exchange for the potential profit from their purchase. And then there are the people you see on TV who buy houses down the drain in search of seemingly almost instant profits.
Even if buying a home doesn’t fit your personal vision of the American Dream, you might still consider investing in real estate. And buying real estate directly is no longer your only investment option. Real estate crowdfunding is another way to diversify your investment portfolio, often with a lower upfront cost.
But with a boom in startups and platforms looking to make crowdfunding easier for real estate, it can be hard to tell if this investment method is right for your portfolio. Here’s what you need to know before you start.
What is real estate crowdfunding?
As the name suggests, real estate crowdfunding allows you to invest your money in larger real estate investments. “You get access to deals that would not be available to individual investors,” said Jonathan Wasserstroom, founder and CEO of commercial real estate technology company SquareFoot . “It’s not just access, but the size of some of these transactions. The average consumer cannot buy a building for $ 10 million, but he can buy back his share of $ 100. “
How this contribution is used depends on the platform through which you decide to make your investment. Some real estate crowdfunding platforms buy and manage real estate, and some take the pooled money and lend it to other real estate investors.
Likewise, the type of return you see on your investment depends on the platform you choose. “Some crowdfunding sites pool funds that offer the same return to all investors,” explained Brian Davis, director of education for property management app SparkRental . “Fundrise works this way by offering several different funds to choose from. Other crowdfunding sites allow you to select individual projects that you want to invest in. An example is GroundFloor. ” (Davis personally uses both Fundrise and GroundFloor.)
Why is it popular right now
Fundrise. First floor. PeerStreet. Mogul real estate. CrowdStreet. RealtyShares. RealCrowd. EquityMultiple. I could continue! There are many options for people interested in real estate crowdfunding, and they all have very startup names.
Real estate crowdfunding has skyrocketed in recent years due to the passing of the JOBS (Jumpstart Our Business Startups) Act 2012. This law changed the way investment capital was raised and allowed the promotion of investment opportunities. The Vacancies Act also eased restrictions on who must register the securities they sell with the SEC. As Investopedia writes , “In essence, Title II [of the Vacancies Act] gives crowdfunding companies the green light to directly enter the market for a large group of potential investors via social media and the Internet.”
As this investment method evolves, you can expect new niche-specific options to emerge. “It is becoming more sophisticated and the consumer has more choices,” said Wasserstroom, referring to the example of Fund That Flip, which invests in loans for household flippers. “Like so much else in real estate technology, we are still in the early stages of development.”
How crowdfunding differs from REIT
Online crowdfunding may be new, but investing your money in larger real estate projects is far from news. Real estate investment funds , or REITs, have been around since the 1960s. REITs allow investors to buy publicly traded real estate projects through a standard 401 (K) brokerage account or IRA. Each REIT focuses on a specific type of real estate, from residential complexes to warehouses and hospitals or shopping centers, Business Insider notes.
“They have been around for a long time and are as liquid as stocks or funds,” Davis said. “The problem though is that they often move with the stock market as they trade on the same exchanges, which partially negates the goal of diversification.”
How much does it cost to make money investing in real estate
As always, there are potential costs to consider. The fees for a crowdfunding platform vary, usually a lower commission in exchange for a higher investment. For example, CrowdStreet requires a minimum investment of $ 10,000 for a minimum of 36 months, but does not charge an account fee. Fundrise allows you to start with $ 500, but will charge a fee of 1% per year, that relatively expensive in comparison with the Commission for roboadvayzerov , which usually ranges from 0.25% to 0.60%. You can expect commissions in the 1% range for an actively managed portfolio.
Be patient because you won’t get rich quickly
Traditional REITs are usually the most efficient long-term real estate investments with an average annual return of over 9%. In the meantime, Joseph Hogh of My Stock Market Basics investigated the average return on real estate crowdfunding platforms, with open investments yielding around 14.7% and completed deals averaging 14.6%. Returns can be attractive, but consider the shorter lifespan of crowdfunding startups after the recession compared to traditional REITs and other investment vehicles. (If they have a longer shelf life in the market, their returns may not be as consistently high.) According to Haug, the best benefits of this type of investment are the potential for diversification and ease of crowdfunding.
If you’re just starting out in real estate crowdfunding, you should be comfortable with your money tied up for a while. “Most investments are for at least a year, and sometimes five years or longer,” Davis said. “In some cases, you can sell your investment [earlier], but usually with a fine and not quickly.”
And while real estate crowdfunding is as passive as possible, you don’t have as much control over how much money you can make from your investments as if you bought and managed a rental property.
If you’re not investing at all – bearing in mind that you don’t have a 401 (K), Roth IRA, or brokerage account – you’re probably not ready to invest in real estate. It’s best to start with the basics and keep most of your investment goals for the future after you’ve taken on debt and set up your emergency fund . But if you’re comfortable with your current portfolio and want to mix things up, real estate crowdfunding can help you diversify.
“Start small first to create comfort,” advised Davis. “Nothing suggests that you need to invest thousands at once.”