Real estate crowdfunding has quickly grown as an alternative investment option for everyday investors seeking to diversify their portfolios. With real estate crowdfunding, investors come together through an online platform to fund commercial real estate opportunities.
Traditional real estate syndication has always been exclusive to high-net-worth individuals due to high minimum investments and deal sizes. Real estate crowdfunding lowers these barriers, allowing smaller investments from individual investors. Know more about real estate syndication vs crowdfunding here.
What is Real Estate Crowdfunding?
Real estate crowdfunding works much like crowdfunding in other areas like Kickstarter. Individual and institutional investors come together through an online platform to fund a real estate opportunity. Investors provide capital in exchange for a share of the income generated by the project, similar to equity investing. Real estate crowdfunding platforms screen potential deals and perform due diligence before presenting opportunities to their networks of accredited and non-accredited investors.
How Does It Work?
Real estate crowdfunding platforms allow individual investors to pool their money to fund commercial real estate projects that would otherwise be out of their reach. Developers and sponsors list their real estate projects on crowdfunding platforms. These platforms screen the projects, perform due diligence, and present opportunities to their network of investors. Individual investors can then make relatively small investments through the platforms’ websites. Their funds are aggregated and passed along to the developers to finance a project, such as buying a property, developing a new building, or funding a real estate loan. In return, investors receive equity in the project or a share of the income it generates.
Types Of Real Estate
There are two primary ways for investors to participate in real estate crowdfunding: debt investments and equity investments.
- Debt investments involve lending money to commercial real estate buyers or developers in exchange for interest payments on the loan. The potential returns from this kind of crowdfunded real estate investment are often lower but also carry lower risks.
- Equity investments allow investors to purchase an actual ownership stake in the investment property. They then earn a share of the rental income and profits generated by the property. Since investors are sharing in the actual performance of the property, equity investments have the potential for higher returns but also carry more risk.
Risks And Strategies
While real estate crowdfunding gives individual investors access to high-yield commercial real estate investments, there are also risks involved. Returns are not guaranteed and real estate projects can run into delays, budget issues, and lower-than-expected lease rates. Diversifying among multiple projects and funds can help mitigate some of these risks. Nevertheless, real estate crowdfunding has become an attractive alternative for investors seeking opportunities outside of the stock market. By pooling the resources of many, real estate crowdfunding platforms have opened the doors of commercial real estate to a new generation of investors.
The Future of Real Estate Crowdfunding
Real estate crowdfunding has grown rapidly in recent years but still makes up a small fraction of real estate investment. As more people discover the benefits of real estate crowdfunding and platforms expand their offerings, this sector is poised for huge growth in the coming decade. For small investors, real estate crowdfunding provides an exciting new opportunity to invest in an asset class that was previously only available to the very wealthy.