All you need to know about real estate crowdfunding

Inquirer Los Angeles / 03:15 PM May 27, 2021

Real estate crowdfunding could be the new addition your portfolio needs. It allows more people to invest in real estate even with a few hundred bucks. If you lacked the funds before, crowdfunding might help you become a real estate investor!

First, let’s discuss what real estate crowdfunding is and the available options. Then, we’ll talk about the pros and cons of this new investment option. Lastly, we’ll explain how you could start crowdfunding today.

Back then, only the wealthy could afford to invest in real estate. With real estate crowdfunding sites, you can start with around $500. Diversify your portfolio by adding this long-term investment option.

What is real estate crowdfunding?

You need a lot of time and experience to become a real estate investor. What’s more, you need to meet more requirements if you want properties with institutional quality.

Accredited investors should have a net worth of $1 million, according to the SEC. That alone stops a lot of people from getting into real estate.

That may change with the rise of real estate crowdfunding. These platforms allow more first-timers to get into this private market much easier.

Individual investors only need a relatively low amount to start. For example, Fundrise is one of the most popular platforms that only need a $500 minimum investment.

What’s more, it’s hassle-free. Real estate investors usually deal with plenty of red tapes. With real estate crowdfunding, the platform takes care of those.

The platform will manage your investments daily. Some even look for new additions to your real estate portfolio. What’s more, the platform lets you check how your investments are doing.

Besides investing in single properties, you may place money in certain funds. Fundrise lets you invest in its eFund and other eREITs (Real Estate Investment Trusts).

Real estate crowdfunding options

There are several types of investments available. For instance, you may choose either equity or debt crowdfunding. Read more for further details:

Equity-based – Your returns depend on how much the property earns from rent. Typically, the investors get the payouts every quarter. If the property gets sold, they get a share of its value increase. However, they could lose money if the value decreases.
Lending-based – This is the simplest way of real estate crowdfunding. You just give some money to the property owner. Eventually, you earn fixed interest based on the mortgage loan and the amount invested. You receive the money every quarter or month.

Moreover, you may classify the options according to their uses. They could be buy-to-let, buy-to-sell, or development loans. Learn more about them below:

Buy-to-let – Your money will help a property get renters. Specifically, it will improve the place so more folks would likely rent it.
Buy-to-sell – It’s similar to buy-to-let since you’ll fund renovations as well. Instead of renters, buy-to-sell attracts buyers.
Development loans – Unlike the other two, this needs funds to construct a new building. Once it’s done, the goal is either to sell the place or rent it out.

Pros of real estate crowdfunding

It’s relatively affordable – As we said, the old way needed a lot of money. Real estate crowdfunding lets you start with less than a thousand bucks.
Simpler and faster – You won’t have to go through too many hoops. The platforms take care of the rest while you watch your investments grow.
Good passive income – You may earn more than a regular savings account.
Less risk – You may place your funds on numerous properties on one platform. Also, you may add investments from other sites.
Sell relatively easier – Real estate investors usually take months just to sell. It’s much easier with crowdfunding.
Invest in multiple locations – Real estate crowdfunding platforms help you invest in several properties across your country. Their websites will show recent listings from around your area.

Cons of real estate crowdfunding

Your returns go up and down – Your investments respond to numerous factors. For example, tenants might not pay rent on time. As a result, your returns may dip for a month.
You rely on a company – You don’t know if your platform will go bust in the long term. If it happens, someone else will take over the business. You might lose money as a result.
The platform’s fees could lower your returns – Your crowdfunding site might charge you too much. That’s why you should check it before investing.
It’s a new option – The crowdfunding space is fairly new. No one knows for sure what will happen to real estate crowdfunding in the long run.
You don’t control the property – It’s the downside to having the platform manage things on your behalf. The company might handle your investments poorly. Sadly, all you could is sell them to cut your losses.
You don’t see the property in real life – You’ll have to depend on the website’s information. You can’t drop by the property yourself to check. You’ll just have to hope your investment isn’t having a lot of problems.
It’s hard to pull out your investments early – You might have to wait for someone else to buy your share before you could exit. Moreover, the site may have penalties for it.

How do I start investing?

You only need a few minutes to start with a real estate crowdfunding site. We’ll show you how it typically goes. We used Fundrise’s process as an example:

Sign up – Create an account using the website or the smartphone app.
Choose an account level and plan – This changes the required minimum investment. Fundrise provides a questionnaire to recommend the best investment plan.
Receive a portfolio – The site will choose your investments based on your profile.
Manage your account – Open the dashboard to see how your investments are doing.
Earn money – Later, the site will send returns to your linked bank account. Fundrise lets you reinvest dividends automatically as they build up.

We used Fundrise often as an example. Still, there are other sites out there, such as Patch of Land. Do your due diligence before using a real estate crowdfunding platform.

Why should I invest?

There are many reasons why people invest in anything. See the typical reasons below. Check if they apply to your current situation:

Building wealth – Some people buy assets because they see their value increasing in the long run. It’s a usual approach to the stock market and other options.
Protecting against inflation – Some items allow people to preserve their purchasing power. For example, some folks turn their money into bullion coins. They’re made with metals that usually aren’t affected by the price increases from inflation.
Preparing for retirement – The long-term yields may help in your later years.
Helping someone else – Real estate crowdfunding lets regular folks help a property. Their investments may help attract buyers and renters.

Final thoughts

Real estate crowdfunding helps regular folks invest in real estate. With around $500, you could gain from a property’s growth. Please check the potential risks before you start.

We kept talking about real estate investment platforms from the US. Yet, other countries have theirs too. For example, the Philippines has Flint as its first platform.

You should check other investment options, though. Specifically, you may want to start with cryptos. Despite the recent crash, it’s doing fine now. Some banks now see it as a real asset.

Like crowdfunding, you don’t need a lot to start. You could buy parts of the cryptos at low prices. The prices change often, but don’t worry. It has a bright future ahead!

Learn more about real estate crowdfunding

Is real estate crowdfunding a good investment?

Right now, people may earn a lot from it. Even better, they could start with a few hundred bucks. Still, crowdfunding is a bit new. It’s hard to know how it would turn out in the long run.

How much can I invest in crowdfunding?

Start by choosing a real estate crowdfunding site. Then, create an account and select payment options. Check the available listings, then place a deposit.

How much money can you make with real estate crowdfunding?

You may earn around 8.7% to 12.4% every year, depending on how much you invested. It’s a relatively new industry, though. It’s hard to predict how much you’ll earn in the long term.