Is Crowdfunding Real Estate Worth the Investment?

Buying affordable properties in growing areas and renting them out to tenants is a fast way to accumulate wealth. You get the benefit of cash flow from rental payments and enjoy the benefits of price appreciation. But like homeownership, rental properties require maintenance and upkeep, plus the upfront capital needed for a down payment. Being a landlord can be a full-time job, especially if you have high turnover in your tenant base. 

If you don’t want the hassle of property management and related endeavors but still want to reap the benefits of real estate investing, crowdfunding may be the way to go. Real estate crowdfunding allows investors to get their hands in the cookie jar on great properties without breaking the bank. 

Real Estate Crowdfunding Explained

Crowdfunding is just a reinvention of the investment pool, one of the oldest concepts in money management. Consider how a mutual fund works. Investors pool money into a fund which then buys a variety of securities based on an index or manager’s selections. Each individual investor doesn’t have enough capital to buy all the securities in the fund, but when they pool their money together, a wider variety of assets can be accessed.

Real estate crowdfunding works in much the same way. A real estate crowdfunding firm might have a portfolio of properties open to investors of all different sizes. Potential investors can vet the properties in the portfolio and choose to put a relatively small amount of capital down to get in on the rental income and property appreciation. 

For example, a crowdfunding firm might have a multi-family apartment building open to new investors. The investment minimum could be as low as $10,000 and this entitles the investors a share of the rental cash flow and appreciation of the property. An investor using a crowdfunding firm won’t need to worry about finding and keeping tenants, managing rent and bills or fixing faulty equipment.

Real Estate Investing Pros and Cons

Real estate investing isn’t for everyone. When considering an investment in real estate, whether an outright purchase or facilitation through a crowdfunding site, be sure to consider the pros and cons. New real estate investors need to understand how equity in property differs from equity in publicly traded companies. Here are a few things to keep in mind when debating real estate investments.

Pros

Here are the pros for real estate investing:

• Real estate provides real diversification. When investing in capital markets, the securities tend to move in lockstep. Sure, tech stocks might beat returns on banks for a period of time or large-cap companies might outperform small-cap firms. A rising tide lifts all boats and that might be reassuring during bull markets, but a market crash brings all stocks down, regardless of sector or weight. Real estate is separated from the stock market and the value of homes and buildings doesn’t fluctuate like publicly traded securities.
• Cash flow and equity appreciation: A property owner who rents out to tenants gets two different types of financial windfalls. First, the owner gets cash flow from rental payments, which can be used to cover the cost of the mortgage, taxes, and maintenance. Sure, unexpected expenses can pop up and property owners are required by law to make sure their rentals are up to standard and code, but rental cash flow is a great perk. Additionally, if you’re an owner, you’ll be the beneficiary of any price appreciation in the property. 
• Consistency: Rental payments come in every month when you have a rental property. The peace of mind that comes with consistent, unfluctuating cash flow pushes many investors into the real estate market. Stocks and bonds can be volatile, but a rental property will usually provide the same income each month.

Cons

As with anything, there are some cons to real estate:

• Real estate investments are illiquid and expensive to sell. Real estate can be a lucrative asset class, but unlike liquid assets like stocks, it might be hard to access your funds if you really need them. Most crowdfunding real estate companies have a lockup period for investors and property owners need to jump through a lot of hoops to get their buildings listed, marketed, and sold. If you think mutual fund managers charge excessive commissions and fees, wait until you meet the mortgage brokers.
• Property buyers have incomplete information. Buying real estate can be a nerve-wracking experience because sellers always have much more information than buyers. Unlike a stock or mutual fund, you can’t easily access the price history or see what it looks like under the hood (or under the floor in this case). The property seller knows about storm damage, the age of the pipes and plumbing and all the other little details that make property ownership tedious. Buying real estate usually involves a few surprises — be sure to inspect and research each property before making an investment.

Best Real Estate Crowdfunding Platforms

Potential investors have more options than ever when it comes to real estate crowdfunding, including some firms that allow access to non-accredited investors. Here are a few of our favorites:

Should You Invest in Real Estate Crowdfunding?

Real estate crowdfunding is a great way to get access to property markets if you’re limited in time and capital. You won’t get the returns of outright ownership, but you can avoid the hassle of day-to-day management and upkeep. Plus, you won’t need to put down a large down payment. 

However, while crowdfunding lowers barriers of entry, it doesn’t mean everyone should jump right into the real estate market. Real estate investments are very illiquid and if you’re uncomfortable tying up money for time periods that measure in years, you might be more at home buying equities on the public markets. 

Real Estate Investments for Everyday Investors

The advance of crowdfunded real estate firms has opened the doors for more and more investors to enter the market. Real estate used to be the realm of only the wealthiest investors — those who had the cash to fund the initial costs and hire people to maintain the properties.

But now real estate investors no longer need huge bank accounts or accredited status. For as little as $5,000 to $10,000, you can add real estate to your portfolio and diversify a bit of wealth away from the public markets. Just be sure to vet all your properties thoroughly before investing. Bad real estate deals are much tougher to get out of than bad stock trades.