Real Estate Crowdfunding: 7 Platforms for Passive Investing

Learn how real estate crowdfunding offers investors the opportunity to get in on real estate projects with lower barriers to entry, diversify their investment portfolios, and potentially earn returns through rental income or property appreciation.

By
Nichole Stohler
|
Last Updated
February 26, 2024
Real Estate Crowdfunding: 7 Platforms for Passive Investing

Have you ever wanted to invest in real estate but didn't have the capital or experience to buy and manage properties on your own? Real estate crowdfunding platforms allow investors to pool their money with others to invest in real estate and earn returns. With an expected industry growth rate of 16% CAGR from 2023 to 2030, this form of investing is gaining momentum.

In real estate crowdfunding, a group of investors each contributes money to finance a real estate project, like flipping houses, building apartments, or investing in commercial properties. Compared to traditional real estate investing, real estate crowdfunding opens up opportunities to invest small amounts of money into projects you couldn't access.

This investment approach allows you to diversify into different markets and property types while leaving the day-to-day work to professionals. With lower barriers to entry than physical real estate, crowdfunding makes real estate investing attainable for more people.

Let's look at how real estate crowdfunding works, its benefits and risks, and how to start investing in real estate. If you're new to real estate investing or want to add to your investments, crowdfunding real estate could be a good option to consider.

What is real estate crowdfunding?

Real estate crowdfunding is a way of raising capital for real estate investments through small contributions from a large number of individual investors.

In real estate crowdfunding, developers, operators, or sponsors list investment opportunities online. Investors can browse the available deals and invest directly in the ones that fit their criteria.

The real estate sponsors get access to capital for their projects, while the individual investors get exposure to the real estate market. Each investor owns a small piece of the overall property or project.

How does crowdfunding work?

While each real estate crowdfunding platform may have slightly different processes, the general workflow typically follows this basic structure:

  1. Sponsor creates a listing: The sponsor is usually a real estate company, developer, or experienced investor who identifies a promising property deal. They provide all the key details about the property, financial projections, and business plans. The sponsor has extensive knowledge of real estate to find profitable opportunities.
  2. Investors review the deal: On the platform, investors browse through current property deal listings to find ones that fit their investment objectives. They can filter deals by property type, location, risk level, and target returns. Investors conduct due diligence by digging into the sponsor's background, financials, and market conditions, assessing risks before deciding which deals to commit to.
  3. Investors commit funds: Interested investors commit capital toward deals they want to participate in. This lets investors diversify into real estate. They set up an account on the platform to easily manage their investments and track deal updates.
  4. Deal gets funded: If enough investor commitments come in to fund the deal amount fully, then it moves forward. Real estate crowdfunding platforms set minimum funding goals to make sure that there's enough capital to purchase and operate the property. If not fully funded, the project doesn't move forward, and investors get a refund of their investment.
  5. Sponsor executes the plan: Once funded, the sponsor takes ownership and implements the business plan. This involves purchasing, renovations, property management, leasing, and maintenance. The sponsor handles all real estate work while providing regular progress reports to investors.
  6. Investors get paid: As milestones are hit, like generating income and eventually selling the property, the investors receive distribution checks. These distributions represent their share of the returns on the project, typically ranging from 6-12% annually.

Who can invest in real estate crowdfunding opportunities?

If you want to invest through a crowdfunding platform, be aware that there are eligibility criteria due to SEC regulations. These platforms follow specific rules that determine investor qualifications, and there are two main types of investors:

1. Accredited investors: Individuals with high income or net worth, allowing them to access a broader range of investment opportunities.

2. Non-accredited investors: Those with lower income or net worth face more restrictions but are still able to participate in some real estate crowdfunding platforms.

Each platform selects its guidelines within these regulatory frameworks to verify compliance and investor suitability.

Investment structures in crowdfunding

Crowdfunding platforms offer access to different types of asset classes, and they can offer different investment structures, including:

  • Equity investments: Investors own a share in the property and earn returns from rental income and property appreciation.
  • Debt investments: Investors lend money to owners or developers and earn returns through interest payments on real estate debt.
  • Hybrid investments: Includes both equity and debt features, offering a mix of fixed income and potential for appreciation.

Benefits of real estate crowdfunding

Real estate crowdfunding comes with risks like any investment, but it offers several compelling advantages:

  • Diversification: Since the minimums to invest are low, investors can diversify across multiple properties, deals, and markets. This spreads out the risk instead of having substantial capital in just one or two big investments.
    Diversification improves the stability and consistency of returns over time. Investors can build a portfolio of small stakes in deals rather than saving up 6 figures to buy an investment property.
  • Accessibility: Real estate crowdfunding is more welcoming to those who don't have access to private real estate investments or the capital for physical properties. With traditional real estate investing, you often need hundreds of thousands in capital to buy an investment property directly.
    Crowdfunding offers exposure to the asset class for as little as $500, making it easier to fund real estate investments for more people.
  • Geographic flexibility: Crowdfunding platforms provide access to deals across the U.S. and even globally. This geographic flexibility allows investors to capitalize on strong real estate markets anywhere, not just in their immediate area.
    They can invest in cities and property types they believe will perform well but where they can't physically own and manage buildings.
  • Passive income potential: Most real estate crowdfunding investments generate returns in the form of quarterly or monthly cash distributions. This creates a relatively steady stream of passive income for investors without taking out a mortgage or dealing with tenants.
  • Low investment amounts: The minimum investment amount can be as low as $500. But for high net-worth investors, the platforms also offer the option to invest more substantial amounts in the hundreds of thousands on a single deal. The low minimums allow everyday investors to get started while accommodating larger investors, too.

Drawbacks to consider

While real estate crowdfunding provides some significant advantages, there are a few drawbacks to consider:

  • Lower returns than direct ownership: The annual returns from real estate crowdfunding can have lower returns than owning a rental property or doing fix-and-flip deals. These active real estate investments have larger financial rewards because they're more work.
    The hands-off nature and diversity of investments provide valuable trade-offs for passive investors. For those who don't have the time or experience, or those who simply don't want the hassle of managing properties, crowdfunded real estate investments provide a great way to invest.
  • Illiquidity: There is no active secondary market for crowdfunded real estate investments. So, exiting an investment early can be difficult compared to liquid stocks or bonds that you can sell at any time.
    Investors need to plan to hold crowdfunding investments for the entire duration of the project, often 5-10 years, depending on the project length.
  • Lack of control: Investors have no decision-making power or direct control over the property. The sponsor maintains full authority over day-to-day management, renovations, leasing, and major decisions. Investors must trust the sponsor's capabilities and track record.

Best real estate crowdfunding platforms

Now that we’ve covered the basics of real estate crowdfunding, let’s take a look at some of the top platforms available today:

1. Arrived

Arrived is a real estate crowdfunding platform that allows individuals to invest in rental and vacation homes easily, aiming to provide passive income through rental income and property appreciation. It's designed for U.S. citizens or residents above 18, including non-accredited investors, offering a straightforward process to buy shares in properties.

Arrived manages the properties, making real estate investment accessible and hassle-free. The platform showcases a selection of pre-vetted properties across various markets, with a rigorous diligence process to ensure investment potential.

2. CrowdStreet

CrowdStreet is one of the largest real estate crowdfunding platforms, offering accredited investors access to institutional-quality commercial real estate investments. Their highly selective sponsor vetting provides access to deals brought by experienced real estate companies like Tishman Speyer, Prologis, JLL, and Blackstone.

CrowdStreet deals include major property types like Class A office towers, luxury hotels, high-end retail centers, self-storage facilities, and more. Investors can pick from different risk and return options for each deal. Some deals offer lower risk but stable returns, while others have higher risks but more potential for growth.

CrowdStreet also provides materials for investors to conduct due diligence on sponsors, markets, and financials. Their technology allows seamless investing online into some of the same commercial real estate assets that pension funds and endowments target.

3. DiversyFund

DiversyFund enables non-accredited investors to invest in multifamily properties, making it simple and accessible for everyone. It allows people to invest in a portfolio of multifamily properties with a minimum investment starting at $500.

The platform focuses on creating passive income for investors by targeting undervalued apartment buildings for value creation in strong markets. DiversyFund manages every aspect of the investment process, including property selection, tenant management, and rent collection, providing a hands-off approach to real estate investing.

4. EquityMultiple

EquityMultiple is a leading real estate crowdfunding platform focused on larger commercial real estate projects sponsored by experienced operators with proven track records. The platform screens each sponsor for their expertise across property types like multi family homes, offices, retail, hospitality, and industrial assets.

EquityMultiple offers three main types of investments for accredited investors. You can lend money for interest, get a mix of lending and owning, or fully own a piece of commercial real estate. The first two options are safer and pay you first while owning offers a chance for bigger profits if the property's value goes up.

5. Fundrise

Fundrise pioneered the eREIT model for real estate crowdfunding, allowing investors to build customized portfolios aligned with their goals. Investors choose their own allocation across Fundrise's diversified offerings, including residential, commercial, retail, and industrial.

The eREITs make regular quarterly distributions, providing a steady income. Fundrise carefully vets deals, focusing on major metro markets with strong job and population growth. The platform features an easy-to-use investing experience and low minimums.

Fundrise's proprietary technology and direct structure aim to maximize returns while cutting out middlemen fees. They add new investment offerings on a regular basis, enabling investors to add new projects and keep portfolios balanced.

6. RealtyMogul

RealtyMogul provides accredited investors diversified access to commercial real estate asset classes. Their offerings include private REITs focused on property types like multifamily, retail, industrial, and office.

For hands-off investing, RealtyMogul can auto-invest across multiple deals. RealtyMogul focuses on major metro markets with strong job growth and demographic trends that support real estate fundamentals.

They thoroughly evaluate sponsors and properties for experience, track record, and potential value-creation opportunities. Investors earn monthly or quarterly distributions on cash-flowing properties plus appreciation when sold. RealtyMogul aims to provide an easy online real estate investment experience.

7. YieldStreet

YieldStreet differentiates itself by offering access to alternative real estate-backed investments like marine financing, aviation leasing, legal finance, and art collateralized loans. These unique assets can diversify an investment portfolio and enhance risk-adjusted returns for accredited investors.

However, alternative investments also involve more complexity and higher risks than traditional property deals. YieldStreet carefully screens its niche asset sponsors and collateral while providing transparency into each deal's structure.

Getting started with real estate crowdfunding

Ready to get your feet wet with real estate crowdfunding? Here are some tips:

1. Determine investor status

To get started in real estate crowdfunding, start by figuring out your eligibility. Look over your financials to see if you're an accredited or non-accredited investor. Accredited investors need to go through a verification process on the platform. Knowing this detail is key to deciding which platforms are accessible to you.

2. Research platforms

Start by visiting top real estate crowdfunding websites. Look into:

  • Deal types: See what investments they offer.
  • Sponsor vetting: Check how they assess the people behind the deals.
  • Sponsor experience: Find out what experience the platform requires from deal sponsors.
  • Fees: Note any charges that might affect your returns.
  • Performance history: Review past results to gauge potential success.
  • Investment fit: Verify that their offerings align with your strategy and risk comfort.

3. Compare offerings and returns

Once signed up and approved on your chosen platforms, look into the details of current investment offerings. Consider factors like location, property type, risks involved, business improvement plan, tenant details, projected returns, exit strategy, and more. Then, build a shortlist of 3-5 deals for deeper analysis before you commit funds.

4. Invest wisely

Consider starting small with your first few deals before allocating large amounts. And don't invest money you may need access to in the short-term since crowdfunded deals tie up your cash for a set time period.

Real estate crowdfunding vs. REITs

So, wondering how picking real estate crowdfunding sites stacks up against just going with public REITs? Both let you dive into real estate, but the similarities stop there.

Public REITs are like buying stocks; anyone can do it through the stock market, giving you a piece of various real estate types, from malls to offices.

Crowdfunding platforms, on the other hand, are where you get into the nitty-gritty, investing directly in specific projects. It involves more risk and potentially bigger payoffs, since you're getting in on private deals that don't trade on the open market.

Real estate crowdfunding vs. individual real estate investing

For investors interested in hands-on real estate investing, how does crowdfunding stack up against owning your properties? Here are some key points of comparison:

  • Capital required: Buying properties yourself requires a lot of money upfront for the down payment and renovations. Crowdfunding needs much less money to start, which makes it easier for small or beginning investors.
  • Hands-on work: Owning properties yourself involves a lot of hands-on work, like managing tenants, repairs, and paperwork. Crowdfunding is completely passive — the sponsor handles all the day-to-day work for you. So, you'll have less work but also less control.
  • Leverage: When you buy individual properties, you can take out loans or mortgages to help pay for them, which can increase your potential return but also add more risk. Crowdfunding means you pool money directly into properties with other investors. It's focused more on owning a share of the property and its income rather than borrowing money to invest.
  • Control: Direct owners make all the decisions and have full control over their properties and responsibilities. Crowdfunding investors rely on the sponsor's expertise and have less control.
  • Exit strategy: Selling individual properties has high costs stemming from brokers, taxes, and repairs. Crowdfunded deals have a clear exit strategy from the start, usually selling or refinancing in 5 years or so.

Crowdfunding for real estate investing

Real estate crowdfunding represents an exciting way to invest in real estate. These platforms make commercial real estate more accessible by bringing down capital requirements and opening deals globally.

As with any investment, investors must understand the risks. Performing due diligence on sponsors, understanding illiquidity constraints, and diversifying are key to investing wisely.

Crowdfunding provides a more affordable on-ramp for investors interested in expanding into real estate than traditional real estate investing. When combined with strong portfolio management, crowdfunding can be a valuable addition to generating passive income and diversifying beyond stocks and bonds.

Crowdfunding real estate FAQs

What is the 2% rule in real estate?

The 2% rule in real estate is a guideline that states you should charge at least 2% of a property's purchase price in monthly rent to cover expenses like taxes, insurance, and maintenance.

What is the average return on crowdfunding for real estate?

Returns can differ based on the specific investments and platforms used, but crowdfunding generally aims to provide stable cash flow and moderate appreciation.

Is 1031 crowdfunding legit?

Yes, 1031 crowdfunding is a legitimate way to delay capital gains taxes when selling an investment property. It allows proceeds to be reinvested in a crowdfunded real estate syndication within 180 days while avoiding capital gains taxes.

Nichole Stohler

Nichole co-founded Gateway Private Equity Group, with a history of investments in single-family and multi-family properties, and now a specialization in hotel real estate investments. She is also the creator of NicsGuide.com, a blog dedicated to real estate investing.

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