Welcome to the definitive guide to real estate crowdfunding for 2023 (and beyond).
This is the comprehensive article we really needed when we first considered investing our hard-earned cash into commercial real estate deals alongside people we’ve never met.
So fasten your seatbelt and let’s dig in!
Why Listen to What We Have to Say?
Because we’re just like you. We work hard, we play hard, and we do our best to save and invest for the future. We invest in the stock market, single- and multi-family homes, private companies, and even cryptocurrencies. We’re also day and swing traders. But the investment vehicle we like the best is real estate crowdfunding.
We discovered crowdfunding about six years ago, and since then we’ve funded more than 35 deals on multiple crowdfunding platforms and with many different sponsors. We also participate in a few “direct” crowdfunding deals (meaning managed by the sponsor instead of a crowdfunding platform).
Our goal with this article (and others on this site) is to help people decide if crowdfunded real estate investing is right for them. For some, crowdfunding might be the perfect way to invest in commercial real estate deals. Others may wish to enter the real estate investment market in other ways.
Table of Contents
Introduction to Real Estate Crowdfunding
In the dynamic world of real estate investing, a new player has emerged, revolutionizing how we think about property financing and real estate investing: Real Estate Crowdfunding.
But what exactly is real estate crowdfunding? Real estate crowdfunding is a modern, digital approach that allows individual investors to dive into the property market and build a real estate portfolio, even with limited capital. As an innovative blend of traditional real estate investment and the power of online crowdfunding platforms, this method offers a unique opportunity for both seasoned investors and beginners alike.
In this comprehensive guide to Real Estate Crowdfunding, we’ll delve deep into the intricacies of real estate crowdfunding, its benefits (the pros and cons), and how you can leverage it on your investment journey.
Whether you want to diversify your investment portfolio or explore new avenues in the real estate market, this article is your go-to resource.
Note – This is not a beginner’s guide to real estate investing or a comparison of crowdfunding vs. traditional investing. Nor do we cover the basic pros and cons of real estate. This study focuses on how and why one might invest in crowdfunded real estate.
What is Real Estate Crowdfunding?
Real estate crowdfunding is a contemporary property investment approach that harnesses the power of collective capital. At its core, crowdfunding allows you to pool your resources with others to invest in real estate opportunities, typically through an online platform.
This method democratizes the real estate investment landscape, allowing individuals to participate in ventures previously out of their financial reach.
Traditionally, real estate investments required significant capital, often limiting opportunities to wealthy individuals or institutional investors. However, with the advent of crowdfunding platforms, even those with modest savings can stake a claim in a property or development project.
The History of Real Estate Crowdfunding
The concept of pooling resources to achieve a common goal is not new. However, the fusion of this age-old idea with modern technology gave birth to what we now recognize as real estate crowdfunding.
The Early Days: Traditional Syndication
Before the digital age, real estate syndication was the norm. This process involved a group of investors coming together to finance a property venture. While effective, it was often limited to local networks and required significant capital, making it exclusive to the affluent or those with strong connections.
The Crowdfunding Boom: Enter the Internet
The early 2000s saw the rise of crowdfunding platforms like Kickstarter and Indiegogo, primarily focused on arts and innovation projects. The success of these platforms showcased the potential of online crowdfunding, setting the stage for its application in real estate.
The JOBS Act: A Game Changer
In 2012, the U.S. government passed the Jumpstart Our Business Startups (JOBS) Act, which allowed for the general solicitation of private investments, paving the way for platforms to publicly advertise and attract a broader range of investors.
Rise of Real Estate Platforms
Soon after the JOBS Act was passed, real estate crowdfunding platforms like Fundrise, RealtyMogul, and CrowdStreet emerged. These platforms democratized property investment by offering access to a range of crowdfunding opportunities and allowing individuals to invest in real estate projects for as little as $500.
How Does Real Estate Crowdfunding Work?
Here are the steps to participating in real estate crowdfunding investments.
- Platform Selection – Investors begin by choosing a reputable online real estate crowdfunding platform. Real estate crowdfunding sites offer access to various real estate projects seeking funding. Those just getting started with real estate crowdfunding should create accounts on and review several real estate crowdfunding sites.
- Project Selection – Investors browse through a variety of real estate projects and review the available information about each deal (e.g., the project concept, type, size, location, projected returns, timelines, risk level, etc.).
- Investment – Once they identify a promising project, investors contribute a specified amount towards the project’s funding goal.
- Project Development – As the project progresses, investors receive updates from the project sponsor or platform and can track their investment performance.
- Returns – Upon the project’s completion or after a specified period or milestone, investors receive their share of the profits from rental income, property appreciation, or the sale of the property.
That’s it! These are the steps to becoming a real estate investor and gaining access to commercial real estate projects. Crowdfunding is a great way to enter the real estate market without having to invest in residential (single-family) real estate projects.
Types of Real Estate Crowdfunding Deals
Crowdfunding in real estate has opened the door to many investment opportunities, from commercial skyscrapers to cozy vacation rentals. For those new to this investment avenue, understanding the different types of deals available can be crucial in making informed decisions.
Equity vs. Debt Investments
From a 10,000-foot view, there are two overall categories available to investors: Equity Investments and Debt Investments.
|Equity Investments||Debt Investments|
|Description||Investors purchase a share or equity stake in a property or development project.||Investors act as lenders to the real estate developer (project sponsor) and earn interest on the loan.|
|Risk||Typically higher||Typically lower|
|Returns||Typically higher. Returns come from rental income and appreciation.||Typically lower. Returns come from the interest paid on the loan.|
|Duration||Generally, a longer-term investment, ranging from 3 to 10 years.||Generally, a short-term investment, ranging from several months to a few years.|
Personal Note – We prefer equity over debt investments for two reasons:
- The land and existing buildings collateralize some of our capital, and
- We are looking for long-term returns, not short-term cash flow
Asset (Property) Classes
Crowdfunded real estate investing offers a plethora of investment opportunities across various asset classes, including:
- Residential – Single-family homes, townhouses, condos, and other properties meant for individual or family habitation.
- Multi-Family – Properties designed to house multiple separate families in different units, such as apartment complexes.
- Hospitality – Hotels, motels, resorts, bed and breakfasts, and other short-term rental properties. Sit-down restaurants also sit in this category.
- Industrial – Warehouses, factories, R&D / flex spaces, and other facilities designed for manufacturing, storage, or distribution.
- Office Space – commercial properties designed for business operations ranging from small offices to large corporate buildings.
- Retail – Shopping centers, malls, standalone shops, and other properties designed for commercial retail purposes.
- Other – Diverse properties like self-storage facilities, life science buildings, data centers, etc.
All of these asset classes except for residential properties are considered types of commercial real estate investments.
Personal Note – We tend to favor the multi-family, hospitality, industrial, and “other” asset classes as they offer a combination of strong returns and easy diversification. We’ve funded a few office space deals with mixed results, mostly due to COVID-19. We may revisit this category in a few years.
Funds or Individual Deals
Some crowdfunding real estate sites offer investors access to pooled multi-asset investment funds or eREITs (electronic Real Estate Investment Trusts), while others provide individual crowdfunding investments only.
Accredited vs. Non-Accredited Investors
The U.S. Securities and Exchange Commission (SEC) established the accredited investor designation to protect investors from exposure to financial risks they don’t understand. This standard is intended to keep those without sufficient financial means or expertise from making high-risk investments.
Per SEC guidelines, accredited investors are individuals who:
- Have a net worth of more than $1 million (excluding their primary residence) OR
- Earned an annual income of more than $200,000 individually or $300,000 with their spouse or partner for the last two years and expect to make the same or more in the next year
Some real estate crowdfunding platforms only accept accredited investors, while others cater to accredited and nonaccredited investors.
Benefits of Real Estate Crowdfunding
Crowdfunding offers real estate investors a wide range of benefits compared to traditional investments, such as private or commercial real estate, stocks, bonds, mutual funds, ETFs, commodities, and checking and savings accounts. The most noteworthy benefits include:
Low Investment Minimums
Traditionally, real estate deals required substantial capital, making it a playground for the affluent or institutional investors. However, with real estate crowdfunding, even individuals with modest savings can participate in deals by investing as little as a few hundred dollars.
While certainly not guaranteed, real estate crowdfunding offers the potential for higher returns than many other investments.
Instead of committing substantial capital to a single property or project, crowdfunding allows investors to spread their funds across multiple properties or developments with relatively low minimum investments. This allows investors to diversify their real estate holdings across various markets, property types, and geographic regions.
Personal Note – We take our portfolio diversification very seriously. We track our exposure by platform, sponsor, geography, asset type, and deal type (e.g., new construction vs. renovations), and we’ll walk away from seemingly great opportunities if they don’t fit our diversification requirements.
Additional real estate crowdfunding benefits include the ability to generate passive income, the ability to participate in specific real estate crowdfunding opportunities, reduced risk through property collateralization, limited correlation to the stock market, access to prospective real estate investments normally available to institutional investors only, tax advantages, and access to third-party research, insight, and due diligence.
Personal Note – We are big fans of the third-party research offered by the crowdfunding platforms. We urge you to take advantage of these tools and educate yourself on market trends and opportunities.
Risks and Challenges of Real Estate Crowdfunding
Navigating the world of real estate crowdfunding can be an exciting journey, filled with the promise of new opportunities and the thrill of potential returns. But, just like any adventure, it has its twists and turns.
Before we dive deep into the landscape, let’s take a moment to chat about some of the risks and challenges you might encounter along the way. After all, being well-prepared is the best way to enjoy the journey!
Higher Risk than Some Investments
Let’s talk about the spectrum of investment risk.
At one end, there are ultra-safe investments like savings accounts and treasury bills where your money sits quietly and earns a modest return. T-bills are even backed by the U.S. government, making them a very low-risk investment.
On the other end, there are high-risk ventures where the potential gains are as dizzying as the potential losses. Examples include cryptocurrency, high-yield (junk) bonds, and IPOs.
Real estate investments, including crowdfunded deals, fall somewhere in between, offering a combination of solid returns with limited risk and volatility. But make no mistake … crowdfunded real estate projects are not guaranteed. Losses can and will happen.
Lack of Liquidity
Unlike stocks or bonds which can be quickly and easily sold on public exchanges, real estate investments don’t offer the same immediate access to your capital. Instead, when you invest in a crowdfunded property, your capital may be tied up in that project until it reaches completion or hits a specific milestone. In some cases, your money may be unavailable for 3 to 5 years or longer.
Some crowdfunding platforms offer no access to invested funds, while other platforms allow investors to withdraw their investments at any time but may charge fees for the privilege.
In the benefits section above, we mentioned that real estate crowdfunding deals offer passive income. In other words, crowdfunding investors are typically not burdened with the day-to-day management of their properties as they would be in private real estate projects.
However, the flip side of passive investing is that investors have little (if any) control or vote in how their money is spent.
For example, imagine a deal involving the construction of a 150-unit apartment building at a cost of $140,000 per unit. During the project, the developer might decide to build only 120 units but spend more money per unit. Regardless of whether this was a good or bad decision, the crowd investors had no say in the matter.
Personal Note – We like the passive nature of these investments. However, sometimes sponsors make field decisions that hurt our bottom line. For example, we invested in a multi-family renovation project where the inexperienced sponsor took out an expensive short-term loan to cover some cost overages. This loan drained the deal of much of its cash flow and profit.
Additional Risks and Challenges
The additional cons of real estate crowdfunding include the fact that fees may impact returns, the need for knowledge and research to choose the proper investments, the possible lack of transparency or disclosure by the platform provider or sponsors, the potential impact of future regulatory changes, and the risk of platform or sponsor insolvency.
Examples of Our Recent Crowdfunding Deals
Now that we’ve covered the good and the bad, we thought we’d highlight a few real estate crowdfunding deals we recently funded.
In general, we’ve done extremely well with our crowd investments, but as you’ll see below, even the best-sounding deals can fail.
Deal #1 – Mixed-Use Development in South Florida
This project involved the new construction of a mixed-use development including a combination of rental units and retail stores.
We were attracted to this deal for these reasons:
- Experienced Sponsor – Lead developer in > 30 projects in 7 states with more than $1B in assets
- Location – Fast-growing metropolitan area with lots of companies and jobs
- Lack of Competition – Very few similar rental properties in the area
- Amenities – The building would provide many amenities for tenants
|IRR (Internal Rate of Return)||20%||28%|
|Duration||3 Years||Less than 2 Years|
Notes – In this project, the construction was completed ahead of schedule and the building was sold earlier than anticipated.
Deal #2 – Conversion of Hotel in Ohio
This project involved the conversion of an existing but unused hotel into an elderly care facility including an assisted living area and a memory care center.
We were attracted to this deal for these reasons:
- Experienced Sponsor – Extensive background in the renovation of similar projects since 1975
- Location – The project had strong support from the community and local residents
- Lower Risk – Conversion of an existing building (hotel) meant reduced construction cost and risk
- Demand – High demand for senior housing due to the general aging of the population
|IRR (Internal Rate of Return)||28%||-100%|
Notes – This project failed because of labor shortages in the healthcare industry (resulting in higher staffing costs) and reduced demand for assisted living facilities due to COVID-19.
While not yet confirmed, we expect a total loss of our investment.
Deal #3 – Conversion of Retail Space in Pennsylvania
This deal involved the conversion of a large vacant retail space into a climate-controlled and automated self-storage facility.
We were attracted to this deal for these reasons:
- Experienced Sponsor – Developed > 1.5 million square feet of self-storage in the last few years
- Location – Highly visible location with lots of nearby traffic and housing
- Focus – Self-storage is a recession-resistant asset class
- Lack of Competition – Very few self-storage units nearby
- Design – Plan was for tenants to drive into the building and directly in front of their rented units
|IRR (Internal Rate of Return)||22%||72% (not a typo)|
|Duration||4 Years||1 Year|
Notes – The project duration included the construction period, the time needed to find tenants and achieve strong occupancy, and some time to find a buyer.
In this case, the sponsor was approached by the buyer before the construction was completed.
The Best Real Estate Crowdfunding Platforms
Once you’ve decided to invest in real estate through crowdfunding, you’ll need to choose one or more platforms to use. The list below includes six of the top real estate crowdfunding platforms.
- ArborCrowd – offers multifamily development and acquisition opportunities with a minimum investment of $25,000. Specializes in highly curated opportunities designed to deliver attractive risk-adjusted returns.
- CrowdStreet – offers a wide range of commercial real estate deals with varying investment minimums (typically $25,000). This platform has launched nearly 500 deals and raised almost $2B to date.
- EquityMultiple – focuses on commercial real estate deals with investment minimums of $5,000 or more, and brings a strong emphasis on due diligence and risk assessment.
- Fundrise – offers both residential and commercial real estate deals and a minimum investment of only $10. Also offers eREITs (Funds) to nonaccredited investors.
- RealtyMogul – offers commercial real estate opportunities with a wide range of minimums. Emphasizes its rigorous underwriting process and deal due diligence program.
- Yieldstreet – offers real estate and alternative investments (e.g., art and legal finance) with minimum investments of $1,000.
Personal Note – We have active real estate investments on many of these crowdfunding platforms.
Frequently Asked Questions About Real Estate Crowdfunding
Is crowdfunding a good way to invest in real estate?
Yes (in our opinion). Crowdfunding gives more people access to real estate investments by eliminating the need for large amounts of capital. Also, crowdfunding let’s people invest in individual deals or funds and diversify their portfolios by spreading the risk across multiple projects and real estate properties. This is a great way to start investing in real estate without the funding requirements or hassles of private real estate investments!
Is real estate crowdfunding a scam or a Ponzi scheme?
No. Contrary to some misconceptions, crowd real estate investing is a legitimate investment avenue that leverages the collective power of multiple investors to fund real estate projects.
How risky is real estate crowdfunding?
Crowdfunded real estate investments are riskier than some investments (e.g., savings accounts and treasury bills) and less risky than others (e.g., cryptocurrencies).
In many cases, the deals are collateralized by the properties themselves, which reduces risk. Also, crowd real estate investing allows investors to diversify, which also reduces risk.
No matter what, investors should only invest money that they can afford to lose.
Are these investments guaranteed or protected?
Typically, no. These types of investments are not guaranteed in any way.
How do I make my first investment?
First, sign up with a crowdfunding platform. Then, look through the available deals and conduct appropriate research. Finally, make your investment. It’s just that easy.
How much money do I need to get started?
That depends on the platform you choose. For example, the minimum investment on one leading platform is only $10 (using a taxable account). On the other hand, some platforms require minimum investments of $10,000 or more.
Can I invest retirement money in real estate crowdfunding projects?
Perhaps. While most crowdfunding platforms allow investors to use retirement money, not all retirement plans allow real estate investments.
Do I need to be an accredited investor?
No. Some crowdfunding platforms and deals are open to nonaccredited investors, but accredited investors have access to more opportunities.
What returns should I expect from real estate crowdfunded deals?
Your actual returns will depend on many factors, including the crowdfunding platform you use, the types of investments you choose, and the specific deals you’ve funded.
Conservative deals may offer annual returns as low as 5 – 6%, while aggressive deals (with higher risk) can potentially offer annual returns of 25% or more.
We have participated in dozens of crowdfunded real estate projects in the last six years, and the average annual return across our portfolio is ~ 19%.
How long do these deals take?
Once again, the answer depends on the platforms you use and the investments you make. Some debt deals take only a few months, while some equity deals (e.g., large commercial real estate projects) last 5, 7, or even 10 years.
Some platforms and deals allow investors to withdraw their invested capital and profits at any time (often for a fee), while others return money (and profits) to investors only after the property sells.
Personally speaking, most of the deals we’ve funded last between three and five years.
Can I get my money out immediately if I need to?
Perhaps. Many crowdfunded real estate deals are illiquid, which means your funds will not be available until the end of the project (except for distributions). However, some platforms offer options that allow investors to withdraw funds before project completion.
Make sure to read the details carefully before you fund real estate investments.
How can I choose the right real estate crowdfunding platform?
There are many factors to consider when choosing your real estate crowdfunding sites, including each platform’s:
- Track record
- Available crowdfunding options (for diversification purposes)
- Number of available crowdfunding real estate investment opportunities (deals)
- Minimum investment requirements
- Accreditation requirements
- Risk vs. reward attitude (do they prioritize safety or high returns)
- Due diligence process (how they evaluate current or prospective deals and sponsors)
- Quantity & quality of information provided about each deal
- Fees and costs
- Online features and usability
To mitigate platform risk, investors should consider distributing their investments across various real estate crowdfunding platforms.
Do I need to use a real estate crowdfunding platform to invest?
No. It is possible (and often advantageous) to invest directly with project sponsors. However, this may increase the associated risk. Those new to real estate investing or experienced in private real estate deals only should consider working through a reputable crowdfunding website.
Personal Note – We’ve invested directly with several sponsors, but the bulk of our crowdfunding is routed through online platforms.
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The information on this website is for educational purposes only. Hybrid Mike, LLC does not offer investment advice or brokerage services of any kind. Furthermore, we are not recommending that website visitors buy or sell any particular product, service, or investment. Website visitors should conduct their own due diligence before making any investments.