Wondering what you can expect for real estate crowdfunding returns? You’re not alone. The first thing most investors want to know before getting into crowdfunded real estate is the returns they can expect to earn on their investment.
We’ll look at how returns are earned for various real estate crowdfunding deals, the timeframe you may be required to keep your capital invested and the average historical returns on some of the most popular real estate crowdfunding platforms.
How Real Estate Crowdfunding Returns Are Earned
There are several different investment strategies used in real estate crowdfunding opportunities, so the way the return on investment (ROI) is earned varies depending on the type of investment and the strategy being used. Here we'll look at the differences between equity and debt crowdfunding.
Perhaps the most common type of crowdfunded real estate investment is equity crowdfunding. With equity crowdfunding, each investor purchases a share of equity in the project.
Cash-on-Cash Return: One way investors receive a return on their investment with equity crowdfunding is through the cash flow the property generates from the rental income. The deal sponsor typically distributes the cash flow (profits) generated from the investment each quarter after the property expenses, operating expenses and debt service is paid for.
Appreciation: With investment properties, such as commercial real estate, property values are tied to the net operating income (NOI) the real estate produces and the returns that investors expect based on risk and market condition.
The values of this type of real estate appreciate when the NOI increases and the overall risk decreases. Many real estate crowdfunding sponsors achieve this by making improvements to the property, increasing rents and getting higher quality tenants or longer-term leases.
Equity: Most real estate deal sponsors launch crowdfunding campaigns to raise the capital for the down payment needed to acquire or develop the property and finance the rest through a traditional lender.
Over time, as the rental payments are being used to pay the debt service on a property, the principal balance is reduced and the equity increases. When the property eventually sells, the payoff balance on the mortgage is less than what was borrowed on the property so the proceeds from the sale are higher.
Internal Rate of Return: In a typical equity real estate crowdfunding deal, investors will receive a cash distribution each quarter during the investment term then receive a larger payout once the property sells and the returns from the appreciation and equity build are realized.
The internal rate of return (IRR) is the total returns realized annualized over the entire holding period.
For example, say you invest $25,000 into a deal that paid a cash distribution of 5% for 5 years then was sold at the end of the 5th year.
Over the 5 years you received a total of $6,250 in cash distributions, then received a payout of $43,750 when the property sold ($25,000 equity you contributed plus profit from appreciation and equity).
Your total return on the investment would have been $25,000. Divided by the 5 years you held the investment, the realized IRR would be 20%. Even though most of the return was realized at the end of the investment, the IRR is averaged out over the total investment term.
Equity Multiple: Another way returns are calculated with real estate crowdfunding is with an equity multiplier. This is calculated by dividing the total dollars received from the investment by the total capital invested.
For the example above, this would be $50,000 / $25,000 = 2.0x equity multiple.
Investing in a real estate crowdfunding debt offering generates returns in a different way than equity deals. Instead of owning equity in a project, investors are basically lending money to an investor or developer on a deal.
Returns on a debt investment is usually earned through interest payments made on the loan. Just like a bank earns interest on money it lends, investors receive interest on money they lend through debt crowdfunding.
What is The Typical Investment Term on Real Estate Crowdfunding Investments?
It’s important to understand that real estate is an illiquid investment. Investors can’t simply sell their shares when they need cash like they can with stocks. Money that’s invested in a real estate crowdfunding investment will be tied up until the sponsor either sells or refinances the property.
Most crowdfunding deals have terms between 5 and 10 years. This gives the deal sponsor enough time to increase the revenue and property value, build equity in the asset and sell it for a profit.
Depending on the deal, investors may have to wait a few years to even start receiving any cash distributions. This is often the case with crowdfunded development deals. It may take 2 years for the developer to complete the construction, then another year to lease the property up and start receiving rental income.
The cash returns may even start small during the first couple of years of the holding period while the property is being renovated and increase as more units are leased and rents increase.
Debt crowdfunding investments often have shorter terms since the loans are usually used as a bridge loan to finance construction or until long-term financing can be obtained. These deals may have terms as short as 6 months but are often 1 to 2 years.
Average Real Estate Crowdfunding Returns By Platform
Below we’ll look at the average historical returns from some of the most popular real estate crowdfunding platforms. It’s important to understand that these returns are based on investments that have been fully realized, meaning the property was sold or refinanced and the investors received their final distributions.
Historical performance on CrowdStreet is reported as of March 2022:
|Total deals funded||629|
|Average equity multiple||1.49x|
|Average hold period||2.7 years|
The historical performance reported on EquityMultiple as of January 1, 2022:
|Capital invested||$329 million|
Historical performance reported by RealCrowd as of November 15, 2021:
Sponsors of real estate offerings who have featured their investments on the RealCrowd marketplace have reported a weighted average realized IRR of 25.65% across 54 individual exited investments that have been reported to RealCrowd as of 11/15/2021.
Historical performance reported by Groundfloor as of Q3 2021:
|Total loans repaid||1,582|
Historical real estate fund performance reported by Origin Investments as of February 2022:
|Total closed funds||4|
|Total realized deals||38|
Managing Risk vs Return
While offerings with the highest target returns may be the most appealing, they may not always be the best investments. A project’s return is typically directly tied to the project’s risk. Higher-risk investments usually offer higher returns, but come with a greater chance of a complete loss if the project doesn’t work out as planned.
Lower risk investments typically come with lower returns, but the chances of realizing those returns is greater.
A good example is comparing a value-add opportunity where a real estate company is raising capital to purchase an apartment building that has 80% and is in need of major renovations with an apartment building less than 5 years old that’s receiving market rent and has 98% occupancy.
The value-add opportunity has a lot of room to increase rents and significantly increase the property value. However, a lot has to go right in order for it all to work out. The renovations have to be completed within the planned budget and timeframe, or the project may run out of money, and investors either have to put in more capital or the bank loan may not get paid.
The newer apartment building doesn’t have much room to raise rents or increase the property value because it’s already maximizing its income potential, so the potential returns won’t be as high. However, there’s not nearly as much that can go wrong so the risk to investors is less.
It’s important to consider your overall investment goals and risk tolerance when choosing a real estate crowdfunding investment. All investments have their risks, so it’s important to manage those risks carefully.
The Bottom Line on Real Estate Crowdfunding Returns
Real estate crowdfunding returns can be quite attractive if you’re careful about choosing the right investment offerings and the platform you invest with.
Crowdfunding platforms like the ones discussed in this article have thorough due diligence processes to minimize the risks their investors are exposed to while offering investments with the highest potential returns.
Frequently Asked Questions About Real Estate Crowdfunding Returns
How much money can you make from real estate crowdfunding?
The investor returns on a real estate crowdfunding investment vary greatly depending on the risk involved and the term of the investment.
Equity crowdfunding investments on reputable platforms, with terms of 5 or more years, have an average IRR of over 17%.
Shorter-term real estate crowdfunding investments have average returns in 10% to 12% range.
Can you lose money with real estate crowdfunding?
While the top real estate crowdfunding platforms are highly selective of the deals they put on their site and have a vigorous due diligence process, real estate crowdfunding is still considered a high-risk investment. Although it’s rare, some investments can result in a partial or total loss for investors.
This is why it’s important to have a diversified portfolio and only invest with reputable investment platforms.
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