Investing in real estate is becoming increasingly more difficult for everyday people due to the high cost of building and purchasing properties. Large down payments of upwards of $50k are needed for many modern properties, while maintenance costs are also increasing. Projects like apartment buildings and hotels can even cost tens of millions of dollars, and are increasingly having to be put on hold due to the high upfront investment needed.
That said, there is a lot of money still to be made from real estate. Renting out property offers a more secure long-term return than most other forms of investment, and there is the added potential for a property to appreciate in value. Building property to sell can also be hugely profitable.
Crowdfunding aims to be a solution to this. Instead of a single person or company funding an entire real estate project, multiple investors are able to share out the upfront costs – and share out the returns. This makes property investment more accessible for everyday investors, while also helping to fund more real estate projects.
How does crowdfunded real estate investing work?
Crowdfunded real estate projects are typically advertised online. A minimum investment is required by each investor (which in some cases can be as low as $1000). Once enough people have invested to reach the target, the project can get underway – which could include purchasing, building or developing a property.
As an investor in the crowdfunding pool, you will be required to pay a percentage towards ongoing costs (usually equal to the share that you invested upfront). For example, if you contributed 5% of the down payment, you will have to pay 5% of ongoing costs. However, you will also be entitled to a 5% share of any returns.
What are the pros of crowdfunded real estate investment?
Crowdfunded property investing has many clear benefits including:
- Lower minimum investment: Whereas most real estate projects require investing tens of thousands upfront, investors may be able to contribute as little as £1000 upfront.
- Share of property investment returns: You get to share the returns that a property makes over the years. This share percentage is equivalent to whatever you put in.
- Easier funding for larger projects: Those who are looking for funding to help pay for large real estate projects no longer have to rely on VC firms and angel investors. Crowdfunding makes it easier to look for funding help as you don’t have to demand as much money from individual investors.
What are the cons of crowdfunded real estate investment?
There are also potential downsides to consider when getting into real estate crowdfunding:
- A more complex means of funding: Property investment is already quite complex without throwing crowdfunding into the equation. Those in charge of crowdfunding schemes will need to make sure each investor contributes their fair share and is equally paid their share in returns. This could come with challenges such as investors not paying or wanting to pull out.
- Lower returns: Because each investor only owns a small share, the returns you make are likely to be lower. If a property is charging $1500 rent and you have a 5% share, you will only take home $75 each month.
- Potential for loss: Real estate ventures can go wrong. There could be surprise issues with a property that result in expensive repair bills. Tenants could stop paying rent, resulting in investors having to pay the mortgage.
How can investors get involved in crowdfunded real estate investment?
Real estate crowdfunding opportunities can be found advertised on social media or through specialist real estate crowdfunding platforms. A few examples of platforms that specialise in real estate crowdfunding include:
- Realty Mogul
- Fundrise
- Groundfloor
- EquityMultiple
- Diversyfund
- Crowdstreet
- CityVest
All of these platforms have different methods of operating, including different fees and investor requirements. Some are geared more towards fundraisers, while others are geared more towards investors. It’s worth taking your time to research different platforms and different crowdfunding opportunities to get the best deal. Try to look beyond the deposit and consider what you will be paying in the long run. You should also research into who is organizing the crowdfunding project, as well as looking into their success with any previous projects.
Crowdfunded real estate investment is still a fairly new concept and there have been a few changing laws within its short time in existence that have changed the way people get involved. For example, before 2020, those who were non-accredited could not take part in crowdfunding activities – whereas now they can. It is important to pay attention to changing laws as they could affect your investment.
