Curious about real estate crowdfunding? You’re not alone. Since the industry’s beginnings in 2012, it has enjoyed success
among investors—and there are good reasons for its popularity.
Real estate investments have the potential to generate passive income, and they may enjoy a low correlation
with the price movements of stocks and bonds. What’s more, they may display relatively low volatility
, and their historical performance has been estimated by some as averaging more than 9%
over the last 30 years.
Real estate investments have the potential to generate passive income, and they may enjoy a low correlation with the price movements of stocks and bonds.
I’m Robert, and I’m a Senior Associate in Investor Services at RealtyShares. I started my career at Merrill Lynch, where I worked to support the management of over $500 million of client assets. Before coming to RealtyShares, I performed equity research at Cowen and Associates, an investment bank.
Maybe you’ve been aware of real estate crowdfunding opportunities for some time, but you wonder if now is the right time to invest. If so, what might be the best investment vehicle for you? What could help you deliver on your plans for early retirement, college education for your children or travel with your spouse?
There is certainly a lot to consider. In this guide, I will equip you with the information you need to begin to build a real estate allocation in your portfolio. From there, you can learn how real estate crowdfunding works, how it can help you diversify, and how to get started. (article continues below)
What is real estate crowdfunding?
Real estate crowdfunding allows multiple investors to pool their money together to invest in properties and projects bigger than they could afford or manage on their own.
Investors generally visit an online marketplace
and browse opportunities that vary by investment type, geography, and target returns. Once they have selected an investment that aligns with their goals, their funds are pooled with other investors (typically up to 99 of them), and the investment is closed.
From there, if all goes to plan, they collect passive income while monitoring the performance of their investment until it “exits.” Real estate crowdfunding platforms typically share certain common characteristics, a few of which I have bulleted out below.
Some real estate crowdfunding investments have a “value-add
” component—a plan for renovations designed to increase the occupancy and/or rental rates for a given property. That way, it may be resold at a higher price point.
The target hold time for value-add investments is typically 3-5 years. They are often also “private placements,” meaning they cannot be traded or resold after the initial investment. It is important for investors to know that they will need to commit their funds for the entire anticipated investment period—or more, if the project does not go according to plan. Learn more about the risks and potential rewards
of illiquid investments.
- Different from a REIT. REIT stands for real estate investment trust. REITs are professionally managed funds that usually hold multiple properties. For example, a given REIT might own several grocery-anchored shopping centers in the Los Angeles suburbs. When you buy in, you’re buying an indirect interest in each of those shopping centers, and the performance of your investment depends on how much income they produce.
There’s a lot to like about REITs. For years, they were one of the only ways the average investor could get into real estate. Many are publicly traded and thus “liquid,” meaning you can buy and sell shares at any time.
But as with other investment types, REITs have limitations
. Because they can be traded in the market place, the performance of public REITs typically track more closely with the stock market, which may not help as much if you’re looking for true portfolio diversification.
And—here’s the kicker—you can’t decide which properties you like within a given REIT and which ones you don’t. You’re either in or you’re out with the fund’s properties as a whole.
How does crowdfunding compare with other ways to invest in real estate?
Real estate investments have become more accessible over the last 50 years, and the recent rise of crowdfunding has brought renewed attention to the sector.
That said, not all investment vehicles are created equal. Real estate investing can be executed through direct investment, outright property ownership, REITs, and most recently, real estate crowdfunding. Each investment vehicle has advantages and disadvantages, some of which I’ve highlighted below. (article continues below)
Disclaimer: There are a number of material differences between the investments listed: Only outright property ownership offers investors complete control over the management of a property. Other investment options carry management risk and other risks stemming from a lack of direct control over the investment. Public REITs face greater regulatory scrutiny and reporting requirements than the other investment options presented. The quality of investment offerings on various funding platforms varies widely.
We recommend that you consult with your financial advisor, attorney, accountant, and/or other professionals who can help you understand and evaluate the risks associated with any investment opportunity on the RealtyShares platform.
7 reasons to consider real estate crowdfunding
Real estate investments have become more accessible over the last 50 years, and the recent rise of crowdfunding has brought renewed attention to the sector.
In this way, real estate has gone from being an investment option largely limited to institutional investors and the ultra-affluent, to an alternative investment that can help to diversify portfolios across investor groups.
There are many reasons that investors may be drawn to real estate crowdfunding; the following are just a few of my personal favorites.
Two levels of diversification. Real estate is already interesting because it may behave differently from stocks and bonds. With real estate crowdfunding, investors can diversify within the real estate sector, augmenting their portfolio with any number of individual properties. That enables them to diversify across geographic regions, development strategies, and property types—among other factors.
Potential tax benefits.
The investment structures of common equity real estate investments typically allow for the “pass-through” of tax benefits
, including shares of the project’s depreciation and mortgage expense deductions. These benefits depend on your individual tax situation.
Passive investments. Unlike being a landlord, real estate crowdfunding does not entail time-intensive responsibilities like leasing, building maintenance, and other property management chores. Once you’ve done your due diligence and selected an investment, it is the developer’s responsibility to manage the project.
Lower investment minimums. In the past, if you wanted to directly invest in real estate, you had to know a developer and have $100,000. But today, because the cost is shared among many investors, crowdfunding sites can offer fees and investment minimums that are lower. That way, investors can allocate their funds across multiple real estate projects.
Enhanced transparency. Some crowdfunding sites actively negotiate investment structures to deliver better terms for investors and align their incentives with sponsors. They also provide clear and succinct offering materials to illuminate those financials. After investments have been placed, these sites offer live dashboards and qualitative reports that allow investors to track the performance of their investments.
Hand-pick investments that align with your goals. Prefer equity to debt? Think Dallas is heating up? Great news. With real estate crowdfunding, you choose the individual projects that most appeal to you. It’s a key difference with REITs and funds, where you invest in a basket of properties selected by someone else.
- Lower Fees. Compared with private REITs and certain other investment options, crowdfunding sites may feature lower fees. These often come in the form of an annual asset management fee, typically around 2%. Some sites also take a portion of the project’s profits, but others do so only after investors have been paid. That way, everyone’s interests are aligned.
How does real estate crowdfunding work?
Once an investment has been approved, it is typically marketed to investors through an investment page
The investment page includes a project overview; descriptions of the sponsor and the local market; a financial summary with details about the business plan; potential future cash flows; and a review of risks, fees, and legal structures.
Once investors have reviewed the offering materials and done any additional due diligence they want, the actual investment transaction is fairly simple.
- Select the investment you like and sign the legal (subscription) document.
- The funds will be debited from your bank account.
- Your funds are then pooled with those of other investors.
- The investment is closed when enough money has been pooled
You may begin to receive distribution payments as outlined in the investment offering materials, provided that the investment performs as projected.
Of course, as with all investments, returns are not guaranteed. Real estate investments can underperform for any number of reasons; for example, the sponsor could be unsuccessful in implementing their business plan, or they could simply have mistimed the market. As a result, real estate investors have the potential to lose some or all of their invested capital.
Careful consideration of the investment’s risk profile and your own goals is critical. A good rule of thumb for all investing is this: never invest money that you cannot afford to lose.
Where do these investments come from?
Investors don’t see an investment opportunity until it is listed on a crowdfunding site, but the process of finding and (in some cases) vetting an investment can start months earlier
It starts with investment origination, also known as sourcing. In this stage, crowdfunding sites work with real estate developers (“sponsors”) to identify investment opportunities that may be appealing to investors.
What follows can be a rigorous and data driven process. Alternately, some sites choose to skip this step entirely and simply list every opportunity that comes their way.
What follows varies from site to site. It can be a rigorous and data-driven process
that includes sponsor evaluation, asset evaluation, underwriting, investment structuring, and approvals. (For that reason, at RealtyShares, fewer than 10% of the opportunities that come across our desk are ultimately approved and offered to investors.)
Alternately, some crowdfunding sites choose to skip this step entirely and simply list every opportunity that comes their way.
Investors may research the different sites and discover how they vet their investments, because it can affect how the investments ultimately perform. If you’re interested in learning how we do it at RealtyShares, you can read this article about our stringent, five-step vetting process
. (article continues below)
What are the differences between real estate crowdfunding sites?
Generally speaking, real estate crowdfunding sites use similar legal structures to allow investors to pool their funds and directly invest in individual projects—but that may be where the similarities end.
Different sites vary in the kinds of investments they offer, their minimum investment amounts, their fees, and the amount of underwriting they do—just to name a few. And these differences can affect how your investments perform.
When evaluating a given site, you might ask the following questions:
Who can invest? Some sites allow anyone to invest; others work only with accredited investors, who must pass certain minimum requirements for net worth or annual income.
What kinds of investments are being offered?
Crowdfunding sites offer everything from senior debt to common equity investments
. Different product types can affect your risk profile and target returns, so it’s important to understand what you’re getting.
What kinds of properties are being offered?
Real estate is divided into two types; residential and commercial. Commercial real estate (CRE) is further broken out into categories like multifamily
, and retail
. Each sector of the real estate market has its own unique demand generators and risk profiles; which is most attractive to you?
Are these investments vetted?
If so, how? Some crowdfunding sites go to considerable lengths
to protect investors by evaluating, underwriting, and structuring their investments. Others may merely function as a matchmaker. Do you prefer to conduct your own quantitative analysis on the sponsor’s business plan, or would you rather let a corporate underwriting team take a first pass?
What is the minimum investment amount? Minimums vary from site to site: some allow you to invest for $500, others require $50K. Investment minimums may affect how real estate investments function in your portfolio. For example, would you prefer to invest in one property for $50K or ten properties for $5K each?
How does the site make money? Short answer: fees. Project sponsors typically pay crowdfunding sites a fee for having raised funds for a project. In addition, investors may pay a fee of 1-2% to cover the cost of investment reporting, tax preparation, and asset management.
Does the site align the interests of sponsors and investors? When project sponsors have “skin in the game,” they may be further incentivized to deliver on their business plans. For that reason, some sites structure investments so that sponsors make equity investments alongside their investors. Similarly, some sites negotiate a “promote” interest; that is, sponsors may receive higher returns only after their investors have been paid a base amount.
Does the site work with a registered broker-dealer?
Some crowdfunding sites are affiliated with registered broker-dealers. This affiliation assures that other eyes are reviewing the diligence performed on the transaction and that any marketing materials are fair and balanced. Others do not
- What is the process if an investment underperforms? Even with the most carefully underwritten investments, some may underperform. So it's good to know in advance whether a crowdfunding site offers asset management services, or whether you may have to chase down a delinquent sponsor yourself.
6 questions to help you determine whether real estate crowdfunding is right for you
Are you looking to diversify your portfolio beyond stocks and bonds? Then it may be prudent to consider an allocation to real estate.
As we’ve seen, the performance of real estate assets is typically less correlated with stocks and bonds; the cycles and return characteristics can be different. Historically speaking, real estate in major markets has tended to appreciate over time
. And because rents typically rise with the cost of living, real estate investments can function as a hedge against inflation
Think you may be ready to invest in real estate crowdfunding? You might ask yourself these questions. Are you…
- …investing for the long term?
- …seeking the potential for passive investment income?
- …interested in allocating part of your investable capital to real estate?
- …seeking to potentially insulate your portfolio against uncertain financial markets?
- …looking to diversify beyond a traditional portfolio of stocks and bonds?
- …interested in choosing your own properties, rather than having them chosen for you?
If so, you may be ready to build your real estate allocation and diversify your portfolio. (article continues below)
Start Building Your Portfolio Today
In portfolios that contain a large allocation of stocks and bonds, real estate can be an effective diversifier. According to a 2017 report by UBS and Campden Wealth Management, the ultra-wealthy keep about fifteen percent
of their investable capital in real estate.
But, as with any investment, it’s crucial to understand the structure of the investment vehicle and the nuances of each individual offering; that way you can feel confident that you have selected the right opportunities.
At RealtyShares, we believe that commercial real estate assets have characteristics that can make them an attractive addition to many portfolios. Our goal is to unlock this previously inaccessible investment class and offer it to the widest possible audience of potential investors.
At RealtyShares, our goal is to unlock this previously inaccessible investment class and offer it to the widest possible audience of potential investors.
Including, potentially, you. We know that you work hard for your money, and we take your investment objectives very seriously.
That’s why we engage in continuous self-examination and self-improvement: with the aim of providing the best possible investing experience, one that our investors keep coming back to. In fact, more than 70% of them return to RealtyShares for a second investment.
Ready to take the first step? Sign up for an account
or give us a call at 1-855-880-6050. We’d love to be your partner in this important work.