We created this article as a guide for those seeking more information on Real Estate Crowdfunding. Please consult your advisor before making any investment decision. This is for informational purposes only.
Real estate crowdfunding is an exciting (and relatively new) way for investors to diversify their portfolios and get into a powerful asset class without a massive capital infusion.
Crowdfunding can make it easier to invest in real estate by letting large numbers of investors pool their resources to buy a stake in large commercial projects. However, there are some definite best practices you might want to follow — and pitfalls to avoid — if you want to make the most of it.
This beginner’s guide to real estate crowdfunding will give you the basic tools to get started, including best practices, types, pros, cons, and tips. Please consult your financial advisor or investment expert prior to making any investment decisions.
What Is Real Estate Crowdfunding?
Real estate crowdfunding is a way to invest in commercial real estate projects by combining money with other investors. Contrary to traditional investing, where say one or two big investors may put up large sums to fund a project, with crowdfunding, many investors each contribute a smaller amount.
Where Did it Come From?
Real estate crowdfunding didn’t exist before 2012, when the Jumpstart Our Business Startups (JOBS) Act legalized it. Today, according to Fundera.com crowdfunding raises over $17 biillion per year, and according to a report by DataHorizon Research, the market is expected to pass $300 billion by 2032.Below, we’ll show you the ins and outs of crowdfunding, and give you some pointers on how to get started.
One of the assets in the CalTier portfolio.
Types of Real Estate Crowdfunding
Before we proceed, there are typically three different kinds of real estate crowdfunding to understand, each with its own pros and cons. They are equity investments, debt investments, and hybrid investments.
Equity Investments
Equity investing is the most straightforward kind of real estate crowdfunding. With equity investing, you buy a stake in a real estate property or project and share any returns with the other investors.
Pros:
- Higher potential returns: Investors share directly in the property’s success, which can be significant if its value increases or it generates high rental income.
- Tax benefits: In some areas, investors can benefit from tax deductions such as depreciation.
Cons:
- Higher risk: Potential market fluctuations and potential losses if a property doesn’t perform as expected.
- Illiquidity: Depending on market conditions, it can take time to sell shares in real estate.
Pro Tip: Look for a crowdfunding platform that offers short-term investment options.
Debt Investments
With debt investments, investors don’t buy shares of a project or property. Instead, they lend money to property owners or project developers and typically receive fixed interest payments in return.
Pros:
- Lower risk: Real estate borrowers have to pay lenders first, before they share any profits with equity investors.
- Regular income: Income streams from real estate debt are generally steady.
- Shorter term: Debt investments typically have shorter terms than equity investments, often from six months to a few years.
Cons:
- Capped Returns: Returns are limited to the interest rate of the loan. Lenders don’t share in the profits from a property sale or rental income.
- Default risk: Even though debt investment carries less risk than equity investment, if the borrower defaults, debt investors may face challenges recovering their investment.
Hybrid
Hybrid real estate crowdfunding investments combine elements of both equity and debt investments, merging the fixed returns of a debt investment with the potential profit sharing of an equity investment.
Pros:
- Balanced risk and return: In ideal situations, hybrid crowdfunding can offer a sweet spot between the high returns of equity investing and the low risk of debt investing.
- Flexibility: Can be tailored to the needs and risk tolerance of different investors.
- Returns: Crowdfunding — especially in real estate — carries the potential for high returns, but please always consider that every financial investment conveys a risk.
Cons:
- Complexity: Because they combine debt and equity crowdfunding features, hybrid deals can be more complex or harder to understand.
- Medium liquidity and risk: Hybrids can offer more security than equity but they’re generally less liquid, with higher risk than full debt instruments.
Benefits of Real Estate Crowdfunding
Why invest in real estate crowdfunding? Crowdfunding offers several key benefits, including easier access to opportunities than traditional real estate investing, lower capital requirements, the possibility for easier exit, often greater diversification, and potential tax benefits.
Easier Access
Investing in real estate crowdfunding projects can be similar to shopping online. Let’s say you’d love to invest, but you don’t have $500 million to purchase a mall in Des Moines, $100 million for an office building in Amesbury, or even $400,000 for a single-family home in Arcana — and you can’t get a loan for any of those. One of the biggest advantages of real estate crowdfunding is that it lets you invest smaller amounts by pooling your funds with a group of other investors.Potential for Easier Exit
Just like investing in crowdfunding can potentially be easier than buying real estate outright, so can cashing out. Many platforms have a set duration for investments, but some let you exit anytime for a fee. Review the terms of any crowdfunding platform before you sign up.
Diversification
It can be a little daunting to put all your savings into stocks, bonds, or a mix. Both can crash suddenly, wiping out a carefully grown nest egg overnight. Investing in real estate can give you a hedge against stock market crashes by putting some of your money in a different asset class with its own market factors.
Tax Benefits
Crowdfunding deals can come with tax benefits, including a lower tax rate on capital gains, mortgage interest deductions, depreciation deductions, and the ability to fund projects with tax-advantaged retirement accounts. Be sure to understand the tax implications before investing.
Disadvantages of Real Estate Crowdfunding
Real estate crowdfunding does have its potential downsides, including the possibility of market volatility, risk, caps on the amount you can invest, and less control over the direction of projects.
Potential Risk
The real estate market is generally positive, increasing steadily over time. But even in an up market, not all projects bear fruit. As with any investment, losses can happen.
This graph from the Federal Reserve shows the generally positive trend of the median sale price of U.S. homes over time.
Regulation
Because of the risk involved with real estate crowdfunding, the SEC has put regulations in place to protect non-accredited investors. For example, if you make $124,000 a year or your net worth is less than that amount, you can invest up to 5% of your income in crowdfunding, or $2,500. If you make more than $124,000, you can invest up to 10% of your income, with a max investment amount of $124,000.
Accredited investors don’t have any limits on the amount they can invest.
Potential Illiquidity
When you invest in the stock market, you can generally get your money back within a day or so. With real estate crowdfunding, your investment may have a longer term before you can tap into any returns. Some platforms, like CalTier, offer a mix of funds and other projects that can fit different needs.
Variable Returns
Returns aren’t guaranteed. Some platforms boast high returns, while others cite earnings lower than some savings accounts. Choose your platform and projects with care, and don’t invest money you can’t afford to lose.
Less Control
When you invest in real estate directly, you’re in charge of making the important decisions that affect the project’s profitability. When you invest via crowdfunding, you don’t have the same level of control, since the platform itself is in charge of those decisions. Depending on the platform, equity investors and hybrid investors may get voting rights that help give them a say, though debt investors never do.
How to Get Started with Real Estate Crowdfunding
It’s easy to invest in real estate crowdfunding. You just choose a platform, evaluate the available investments, and click to buy.
While the steps below are not investment advice, they do offer a good way to start your evaluation:
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Choose a Platform
Selecting a platform is arguably the most important step. Your platform will determine the available investments and terms, such as duration and fees. Look for a platform with low fees, redemption flexibility that lets you choose from short-term and long-term options, and open access to accredited and non-accredited investors alike. CalTier platform could be a great option.
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Evaluate Their Investments
This is by far the most enjoyable part of getting started with real estate crowdfunding investments. Each platform has its own portfolio and list of available investments. You can browse properties from California to Texas and Utah to Virginia. A reliable platform will publish asset details such as size, type (multifamily home, mixed use, apartment complex), and historical net operating income (NOI) or return. The more details you have before you start, the easier it is to decide on an investment.
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Make Your First Investment
Many crowdfunding platforms let you start investing with as little as $500 or less. Investing is fairly simple — usually as easy as signing up for an online account, entering a method of payment, and choosing your investment.
Do You Need to be Accredited?
No, you don’t need to be an accredited investor to invest in real estate crowdfunding. Crowdfunding’s key attraction is that any investor at any income level can invest. The SEC does enforce upper limits on non-accredited investors. If your income and net worth don’t both exceed $124,000, you’ll be limited to a maximum investment of $2,500.
If you are an accredited investor, there are no limits on the amount you can invest.
Real Estate Crowdfunding Case Studies
Below are a few case studies that show actual crowdfunding projects investors have taken stakes in.
The Vue
In September of 2021, real estate crowdfunding platform CalTier gave investors access to a 156-unit apartment complex inAustin, Texas called The Vue. By making a few key updates, property managers were able to increase rents by nearly 40%, significantly increasing net operating income. Within 13 months, the property sold, and investors saw an overall return of more than 120%.
Lakewood
In March 2021, investors on the CalTier platform were able to buy into an 88-unit apartment complex in Houston. Renovations at the Lakewood property including stainless steel appliances, wood-style flooring, and upgraded plumbing.
The Lodges at Glenwood
The 194-unit Lodges at Glenwood student apartment complex in Provo, Utah was recently renovated and is 100% occupied and outperforms its initial projections. Investors in the project via the CalTier platform are enjoying an 8.45% return on their investment, with enrollments at nearby universities projected to grow in future years.
Solano Vista
Investors who bought a stake in the Solano Vista apartment complex got a nice surprise soon after they put up their money. This 352 unit complex in Glendale, Arizona sold in 2021, achieving an astounding 72% IRR and a 3x equity multiple. While results like that obviously aren’t typical for any real estate investment, several controllable factors influenced the project’s success.
Invest in Real Estate Crowdfunding With CalTier
CalTier is a leading real estate crowdfunding investment and technology platform that lets investors access typically hard-to-reach institutional-grade multi-family real estate investments. With CalTier, you’ll tap into a diverse portfolio of cash-flowing apartment buildings throughout the U.S. CalTier provides access to both non-accredited and accredited investors.
Enjoy low fees, a 90-day money back guarantee, redemption flexibility, and the opportunity to diversify your portfolio, providing you with both short and long-term options.
Sources
- https://www.cnbc.com/2022/05/24/this-32-year-old-grosses-431000-per-year-from-real-estate-investments-and-lives-off-passive-rental-income.html
- https://www.mckissock.com/blog/real-estate/success-story-flexible-jobs-melanie-bajrovic/
- https://www.globenewswire.com/en/news-release/2024/02/13/2828130/0/en/Real-Estate-Crowdfunding-Market-To-Reach-USD-300-7-Billion-By-2032-DataHorizzon-Research.html
- https://www.irs.gov/pub/irs-pdf/i8824.pdf
- https://fred.stlouisfed.org/series/MSPUS
- https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_crowdfundingincrease
- https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor
