How to Use Crowdfunding to Invest in Real Estate

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Contributor, Benzinga
Updated: August 10, 2022

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In years past, if you wanted to do a real estate deal, there was basically one way to get it done: Scrimp and save for years to come up with enough capital to convince a bank that you’re a good enough credit risk for them to loan you a ton of money. Then you (or your real estate agent) would search high and wide for a property you want to buy. After that, you had to hope and pray the property appraised for the purchase price and then you finally got your loan. That was the old way. Now, thanks to the advent of crowdfunding, there is an entirely new way to get the funds you need to close a real estate deal. 

What is Crowdfunded Real Estate?

Imagine for a moment that you come across a great real estate deal, but you don’t have the money to close it. Instead of going to a bank, you gather 50 of your friends and family together to pitch them about the opportunity to buy a small piece of a real estate investment opportunity you identified. Each of them makes a contribution and hopefully, those contributions add up to enough money to purchase the real estate deal you’re pitching.  

Then, whoever contributes to the deal gains an equity share based on their individual contributions. Once the deal closes and the profits are made, you divide the spoils and distribute them to your partners based on their individual contributions. This is the very definition of real estate crowdfunding. 

Real estate crowdfunding sounds like a new idea, but in fact, it’s actually an old concept. When a company sells stock to raise funds for a new project, that is basically crowdfunding. Before large commercial banks began doing real estate lending in the ’20s and ’30s, crowdfunding was how lots of people bought real estate, too. The difference is that now, online crowdfunding platforms allow you to reach potential investors all over the world as opposed to just friends, family and people in your immediate circle. 

Investing in People and Projects

Real estate crowdfunding offers investors a lot of potential benefits. One of the biggest is the diversity of investments available on crowdfunding platforms. Almost everyone realizes that buying single-family homes and selling them at a profit is a great way to build wealth through real estate. But for many years, the larger real estate projects that generated residual income for investors were almost entirely out of reach for small investors. 

This is because financing for commercial projects is not insured by the federal government the way many home loans are. What that translates to for investors is a maximum 15-year loan term and no federally subsidized programs that allow them to close on deals with as little as 3% down on a 30-year insured loan. That meant larger down payments and larger monthly payments, which effectively froze out regular investors like you from being able to get income property or buy into any real estate aside from single-family homes. 

This is where real estate crowdfunding comes in. Crowdfunding allows investors to buy into a wide range of real estate investments, many of which would normally be out of their reach. Examples of the kind of investments you find on crowdfunding platforms include, but are not limited to, the following:

  • Apartment buildings
  • Retail commercial projects such as strip malls and storefronts
  • Buying notes and mortgages
  • New construction
  • Mixed-use projects (residential and commercial projects in the same building)
  • New home developments
  • Renovation projects that banks won’t lend money on
  • Golf courses
  • Hotels
  • Industrial parks
  • Warehouses

Crowdfunding Invites all Investors

As discussed above, crowdfunding is not a new concept. It’s been around for a long time. Real estate investment trusts (REITs) for example, use investor funds to buy property for the REIT to buy, sell and manage at a profit. This is basically crowdfunding. The difference between most REITs and real estate crowdfunding platforms is investor accreditation. 

Investor accreditation means that before you can make an investment, you must meet a minimum net worth threshold. The point of accreditation is to ensure that all the investors have enough money to absorb a potential loss of capital on their investment. It’s a great idea in theory, but the secondary effect of an investor accreditation requirement is that it locks a lot of regular people out of the club. 

Crowdfunding is different because it invites all investors. Most crowdfunding platforms offer a range of investments that are available to both accredited and nonaccredited investors alike.  Additionally, crowdfunding investments are offered under several different government regulation classes, including Regulation A, Regulation CF and Regulation D

The crowdfunding investments that are classified under government regulation offer investors a higher level of security and transparency than they might get from buying into a strip center in their hometown. 

Who Benefits From Real Estate Crowdfunding

Crowdfunding has benefits for both investors and property owners. The aim of crowdfunding is to raise funds for real estate investments that might not match the typical profile of a property that a bank would lend money on. For example, when it comes to apartment buildings and multiunit commercial spaces, most banks are very hesitant to lend money to any project that’s not 100% occupied. 

This makes sense for the bank. After all, they want to lend money out with the least risk possible. But for the owner of the apartment building or commercial spaces, it means they can only sell their building to an all-cash buyer. Or at least, that’s what it meant before the advent of real estate crowdfunding platforms. That’s why real estate crowdfunding is a huge potential benefit to an owner of a distressed asset that can’t be sold with the assistance of financing because of its high vacancy rate.

Another benefit of real estate crowdfunding is for everyday, nonaccredited investors. Real estate crowdfunding allows them to participate in the kind of high-reward investments they have historically been locked out of because of a lack of accreditation and/or enough money to make the investment on their own. Add that to the fact that you can invest as much — or as little — as you want into a crowdfunding opportunity, and what you have is a great way to get into real estate investing without getting in over your head.  

Other types of businesses can also benefit hugely from real estate crowdfunding. An investor — or a company — who buys notes is typically limited to the opportunities in their area or referral business. Crowdfunding offers them the chance to buy notes or invest in properties outside of their geographic area. Additionally, the business owners of a commercial center that’s being sold may be able to use crowdfunding to actually buy equity in their rented property and stop being renters. 

Benzinga’s Best Crowdfunding Platforms

If you’ve got the itch to jump into crowdfunding, but don’t know where to begin, you’re in the right place. You can find a list of Benzinga’s top-rated crowdfunding platforms below. 

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  • CityVest
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    Best For
    Accredited Investors
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    securely through CityVest's website
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    Must be accredited investing a minimum of $25,000.

  • Fundrise
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    Best For
    Beginner real estate investors
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  • Groundfloor
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    Best For
    Non-accredited Investors
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    securely through Groundfloor's website
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  • Streitwise
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    Best For
    Small Account Real Estate Investing
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    securely through Streitwise's website
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  • First National Realty Partners
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    Commercial Real Estate Investors
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    securely through First National Realty Partners's website
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Bottom Line on How to Use Crowdfunding to Invest in Real Estate

Real estate crowdfunding is not a new idea. Investors have been pooling money to buy real estate for decades. However, the difference with real estate crowdfunding is that now you can link up with like-minded investors from all over the country (or the world) to make real estate deals that have historically only been available to well-heeled or accredited investors. The advent of real estate crowdfunding platforms also allows you to look at deals in emerging markets outside of your geographic area. If you’ve been wanting to make a real estate investment, but you lack the capital to buy a property all by yourself, or you want to look at investments in other places without travelling there for due diligence, real estate crowdfunding might be the perfect option for you.

FAQ’s

Can you lose money with real estate crowdfunding?

Yes. Every investment, from stocks and bonds to a crowdfunded real estate deal, carries the potential for loss. With that said, real estate investments are typically less unpredictable than stocks. Crowdfunding also allows you to invest a lot less money into a particular project than you would have to pledge to buy it outright. So, although there is certainly the potential to lose money on a crowdfunded real estate deal, you can spread the risk around while you avail yourself to investments with high upside.

How much money can you make from crowdfunding real estate?

This is a bit of a trick question. It’s like asking, “How high is high?” The amount of money you make from doing a crowdfunded real estate deal will depend on several factors. Chief among them is how well your investment performs in relation to how much money you put in. Many crowdfunding platforms offer a prospectus on the properties in the portfolio, which should give you some idea of the potential returns you’ll be looking at if the investment pans out.

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