If you want to diversify your investment portfolio, crowdfunding real estate is one way to do that. Let’s learn more about real estate crowdfunding and platforms that you can add to your investment needs.
Earning passive income is one of the best ways to boost your finances and help you achieve financial freedom. If you are serious about reaching your goals, you need to find ways to enhance and update the passive income methods of your investment strategies.
Many investment opportunities offer passive income, but which one should you consider? What form of passive income earning should you make?
Let me introduce you to real estate crowdfunding. This method will fix your passive income needs.
What is Crowdfunding Real Estate?
Most likely, you’ve heard about crowdfunding and how you chip in with your hard-earned money to fund another person’s creative or entrepreneurial vision.
However, it cannot be lumped with websites like Kickstarter or Go Fund Me. Crowdfunding real estate may be less generous, but it’s more practical and can provide you something more than bragging rights when your “investment” succeeds. You take care of your own financial goals when investing in real estate crowdfunding, giving you back passive income.
Real estate investing has been a rich people’s game throughout history. Most opportunities were only for the rich and the wealthy or professionals making institutional investments, such as hedge funds, pension funds, and university endowments.
But times changed.
In brief, the 2012 JOBS Act slashed a lot of red tape surrounding the securities industry, opening the door for real estate businesses to raise money for their projects through crowdfunding platforms. As a result, individual investors gained a new way to add private equity (meaning not traded on the public markets) real estate to their investment portfolios.
How Does Crowdfunding Real Estate Work?
There is a misconception that crowdfunding real estate is like a group of landlords working together and sharing the responsibilities of owning property. For example, finding dependable tenants, repairing leaking ceilings, or fixing the plumbing at all-night hours.
Real estate crowdfunding is basically a pool of individual investors contributing a percentage of the total funding for a real estate project. It is a way for investors to access projects they may otherwise be unable to afford.
Many different types of properties are available for investment. Commercial properties include apartment buildings in growing metros, new lab space for the life sciences industry, or hotels in the country’s most traveled regions.
How Does Investing In Real Estate Create Passive Income?
You have read what passive means when it is compared to the active responsibilities of, say, landlords who deal with tenant complaints or plumbing issues. But how about the income part? Where does it come in?
Depending on the business plan of the deal you invest in, there are two ways real estate investments generate passive income.
The first is with ongoing distributions (sometimes a literal check in the mail!) paid to investors by the firm behind the deal. It is more likely in properties with strong tenants and steady monthly rents—for example, an apartment building or an office complex.
The second is via a share of the property’s final sale price, particularly when properties are undergoing major renovations or under construction.
Investing always involves risks: the project may underperform, or a calamity may strike the project site, and you lose your initial investment. That’s why you should always research any potential investment and evaluate if it will work for you and your portfolio.
What Are the Pros of Real Estate Crowdfunding?
When it comes to investment, finances are the most significant challenge on our end. But property crowdfunding is an excellent alternative to raising funds. Here are some benefits you can get when you invest in real estate crowdfunding:
One of the perks people like is portfolio diversification.
Diversifying your portfolio means lowering the risks of your particular investment by distributing the risk to different investments. If you fail with one of your investments, your real estate investment portfolio will be spread to various assets.
Accessibility To Funds
Unlike other investments, investing in real estate gives you more access to funds.
Before, private real estate investments were only available to people who had at least $1 million in liquid financial assets and had the money for capital and connections needed to access investments. With the law changing and the rise of online crowdfunding websites, these high-net-worth investors are no longer required to invest in real estate.
Another advantage of real estate crowdfunding is geographic diversification, and this is essential because multiple areas of the real estate market have different performances.
Investing in various real estate markets can save you from obtaining a negative return on investment (ROI). Investing in one location tends to have a downturn, and your money will be affected. While investing in real estate crowdfunding, you’ll have other options.
Real estate crowdfunding is considered a great passive investment than traditional real estate investments like direct ownership. With crowdfunding real estate investments, you are investing with a third-party real estate developer who will do the work for you.
Unlike traditional investments, you will be required to spend more time managing the property and ensuring that it is developed on time. It means that you will bear all of the associated risks.
Investing in traditional real estate typically involves a large amount of money. However, when it comes to crowdfunding real estate investment, you have the opportunity to invest in small amounts because it has small investment size requirements.
Crowdfunding platforms allow aspiring investors to invest with a minimum of $500. No more worrying about having tens or hundreds of thousands of dollars for you to invest.
What Are the Cons Of Real Estate Crowdfunding?
The most notable disadvantage of real estate crowdfunding is that it is considered an illiquid investment, and these investments are not easily sold for cash if the need arises. A buyer will have to line up for the property you have invested in, taking considerable time and possibly causing the property’s value to drop gradually.
Lack of Control
Investing in real estate crowdfunding will not be an easy process compared to the traditional ways of raising funds. Also, not all projects that apply to crowdfunding platforms get onto them. Real estate crowdfunding may not be for you if you want to have control over your investments.
Penalties For An Early Exit
A real estate crowdfunding site has set a minimum term before you can exit your investment. If you wish to withdraw your investment during a phase, you will have to wait for someone who will buy your share. Aside from that, you may face penalties for an early exit.
How Can I Invest in Real Estate Crowdfunding?
You need not do the heavy lifting and google “how to invest in real estate crowdfunding,” don’t: I’ve already done it for you.
- Best US real estate crowdfunding platform: CrowdStreet
- Best European crowdfunding platform: EstateGuru
- Best crowdfunding real estate for beginners: Fundrise
- Best REIT option: DiversyFund
Best US Crowdfunding Real Estate Platform
Fees: 0.50% to 2.5% for CrowdStreet funds but other fees may apply.
Minimum investment: $25,000
Accredited investors only? Yes, the crowdfunding real estate platform is for accredited investors only.
CrowdStreet is the nation’s biggest online real estate investing platform, and it connects accredited investors directly to institutional-quality real estate across the US. Starting in 2014, they’ve earned a reputation for working with best-in-class real estate firms.
Since its establishment, 560+ deals worth more than $2.6 billion have been invested by CrowdStreet Marketplace investors, who earned $360 million in distributions. Among their recent deals include renovating a hotel next to the Utah Jazz NBA team’s home, a new life sciences lab space in Boston, and an apartment building along Nashville’s famous music row.
Pros Of CrowdStreet:
- Their online marketplace, where users can compare and review real estate investment projects, is easy to navigate.
- The amount of information about each deal’s business plan and real estate firm is impressive.
They host a webinar with the real estate firm behind the project for every deal. You can check it out to learn more before deciding to invest, and there’s even a live Q&A session!
Cons Of CrowdStreet:
- You need to create an account to read all the details.
- The initial investment of $25,000 is too high for many.
If you’re ready to learn more, get started today by creating your account for free at CrowdStreet.
Best European Crowdfunding Platform – EstateGuru
Fees: 2% fee for secondary markets, 35% fee for early withdrawal.
Minimum investment: €50
Accredited investors only? No, anyone over 18 years old and who has a bank account in European Economic Area (EEA) member states can invest with EstateGuru, as long as they can pass the Know Your Customer (KYC) checks.
EstateGuru is one of Estonia’s leading European Real Estate Crowdfunding platforms that mainly funds business property loans. That means all the platform loans always come with a property to make it safe for investors’ assets.
EstateGuru has been multiplying and has become one of the largest P2P investment sites in Continental Europe. To date, over €130 million has been lent. EstateGuru has a good lending track record, and investors have achieved more than 12% average returns thus far.
EstateGuru primarily lends to developers and business owners in the P2P sites.
Pros Of EstateGuru:
- All loans are secured.
- Higher liquidity with a secondary market (the loans’ resale marketplace)
- Risk assessment is excellent
- Easy sign-up and fast money transfer
- Large loan volume and no investment fee
Cons Of EstateGuru:
- The secondary market is not free to use, and they are charged a 2% fee for early withdrawals
- Not suitable for short-term investments
- Limited options for diversification
- Restricted auto-investment tools for small portfolios
- It is time-consuming to build up an extensive, diversified portfolio.
Best Crowdfunding Real Estate for Beginners – Fundrise
Fees: Asset management fee of 0.85% and an advisory fee of 0.15%, but other fees may apply.
- $10 minimum for Starter Portfolio.
- $1,000 minimum for the Basic plan.
- $5,000 minimum for the Core plan.
- $10,000 minimum for the Advanced account level.
- $100,000 minimum for Premium account level.
Accredited investors only? No, investments are open to nonaccredited investors.
Established in 2010, Fundrise is one of the leading, most reliable, and most prominent real estate crowdfunding sites currently on the market.
Fundrise is the first company to successfully bring crowdfunding investments into the real estate market. The most recent figures showed that, in 2019 alone, Fundrise made over $1.1 billion worth of equity and debt investments. Now that’s big!
Open to nonaccredited investors, Fundrise makes investing possible for nearly anyone who wants to put their money in private real estate. They also offer the lowest minimum and have a plan that starts at $10.
Pros Of Fundrise:
- Easy to navigate
- Open to all investors
- Return potential
- Low investment minimum
- Individual Retirement Accounts (IRA) available
Cons Of Fundrise:
- Highly illiquid investment
- Fees can be challenging to understand
- Investments that require investor due diligence
Here’s our detailed Fundrise review so you can learn more about the platform’s services at a glance.
Best REIT Option – DiversyFund
Fees: 2% assessment management fee per year: other charges may also apply.
Minimum Investment: $500
Accredited investors only? No, investments are open to accredited and nonaccredited investors.
DiversyFund is a real estate crowdfunding platform offering private commercial real estate investments to nonaccredited investors. Unlike any other platform that lets you trade on your own, DiversyFund is entirely automated.
DiversyFund provides investors with a non-traded Real Estate Investment Trust (REIT). DiversyFund growth REIT is also open to both accredited and nonaccredited investors.
The fund targets investing in large amounts and adds multi-family opportunities of 100+ units around the US markets. They aim to generate Internal Rate Returns (IRRs) of 10% to 20% over a five-year investment cycle.
Moreover, DiversyFund REIT has the lowest direct investor fees in the industry, and it does not have management or broker fees.
Pros Of DiversyFund:
- Low minimum investment
- No need to be an accredited investor
- DiversyFund owns and manages the properties.
- Allows for hands-off investment in commercial-grade real estate
Cons Of DiversyFund:
- Income is directly paid out, so no passive income
- High developer fees
- Unable to choose among commercial projects
- Limited investment choices
You can check out our full DiversyFund review to learn more about the platform.
Crowdfunding Real Estate: The Verdict
Real estate crowdfunding provides all investors with an excellent and exciting opportunity to expand their investment portfolio potentially. This is done through increased exposure to residential and commercial properties. Through this method, investors can fully maximize the potential for passive income.
Like any form of real estate investment, it is important to do your research, consider different possibilities and alternatives, and compare the strengths and weaknesses of each company before signing any contract. There will always be a risk of loss in any type of investment, so we advise caution. The method has potential but is not risk-free.
To realize financial freedom, you need to make an effective investment strategy. Through the power of passive income from your real estate crowdfunding, your vision of financial independence will become a lot clearer.
Founder of Spark Nomad, Radical FIRE, Journalist
Expertise: Personal finance and travel content
Education: Bachelor of Economics at Radboud University, Master in Finance at Radboud University, Minor in Economics at Chapman University.
Over 200 articles, essays, and short stories published across the web.
Experience: Marjolein Dilven is a journalist and founder of Spark Nomad, a travel platform, and Radical FIRE, a personal finance platform. Marjolein has a finance and economics background with a master’s in Finance. She has quit her job to travel the world, documenting her travels on Spark Nomad to help people plan their travels. Marjolein Dilven has written for publications like MSN, Associated Press, CNBC, Town News syndicate, and more.