In the last year, real estate crowdfunding has exploded as an alternative asset class that you can use to invest in real estate online.
While there’s a lot of hype around the subject, it doesn’t necessarily mean that real estate crowdfunding is a good investment opportunity. As with most topics in life, there are clear pros and cons.
I’m going to go into some of the benefits and drawbacks of this type of crowdfunding, particularly for investors.
If you’re looking to get a great ROI on equities or real estate-backed debt investments, then you absolutely need to hear what I’m going to be sharing in this post.
In addition, if you’re one of those types of investors that LOVES doing your homework before entering a deal, then I think you’re gonna find my free real estate investing course to be particularly practical.
You can access the course for free with this link.
I take you step-by-step through the differences between the major platforms, along with debunking some of the confusing jargon out there, like “crowdfunded REITs.” It’s a great resource if you’re new to the industry.
Now, let’s get into whether or not real estate crowdfunding is a good investment for you!
1. Are You an Accredited or Non-Accredited Investor?
First, we need to determine which class of investor you fall into. It’s pretty simple.
You only fall into the class of an “accredited investor” if your net worth exceeds $1 million (excluding your house) or you earned $200,00o or more in the previous two years, with reasonable expectation that you will earn that much in the future.
There are some differences in this definition if you’re married, but basically you need to be a high net worth individual.
If you don’t fall into this category, then you’re considered to be a “non-accredited investor.” This means that you can’t gain access to special investment opportunities. Basically, you can’t afford to take a massive risk in the eyes of the law.
It’s important to identify which category you fall into because it will affect which platforms you can invest on and which real estate opportunities you’ll have access to. Below, I’ve given you an example of several platforms and which class of investor they’re open to.
- Non-Accredited Investors: Fundrise, Realty Mogul
- Accredited Investors: Realty Shares, PeerStreet
Aside from strict legal requirements, there are also many other points to keep in mind before investing through one of these marketplaces. I’ll be discussing more below.
2. How Much Liquidity Do You Need?
When I first got started writing about this topic, most investments on real estate crowdfunding platforms were highly illiquid. This means that it’s not very easy to transfer your investment into cash.
A common stock is very liquid. If you want to trade your equity in for cash, all you have to do is sell your shares on the publicly traded stock market.
Almost all of the investments that we’ll be talking about are either privately traded or outright illiquid. There may be opportunities in the future to redeem your shares, but that’s up to the individual platform and/or real estate firm.
When it comes to traditional real estate crowdfunding opportunities, which are only open to Accredited Investors, you’ll likely get a chance to cash in on your investment when the property is sold or through quarterly distributions.
Debt-based investments, like on Peerstreet, will operate similar to a loan on LendingClub or Prosper. It’s a short-term loan that’s backed by the actual real estate. This is a fixed-income style investment.
In short, don’t expect the same degree of liquidity as the stock market. However, you’ll gain access to investment opportunities that can outperform the stock market.
3. How Much Control Do You Need?
One of the great things about this new industry is that you can have a high degree of control over your investments. At the same time, this can also be a drawback, as I’ll explain below.
Unlike a publicly traded REIT, you can actually decide which individual properties to invest in on many of these websites. You can look into the properties, ask questions, and at the end of the day, be able to say that you own a bit of an actual property.
While most real estate crowdfunding platforms WILL have a vetting and due diligence process, it doesn’t guarantee that every opportunity is going to be a home run. You have to put in a little bit of the work to sort out the good deals from the bad.
If you’re an active investor, you’d love hearing this. It would be like music to your ears.
But, if you’re a passive investor, it could sound like A LOT of work. Maybe it would just be easier to throw that extra cash into an index fund, eh?
Thankfully, some of the leaders in this space, like Fundrise, have come to remedy this problem. They’ve taken steps to make the investment process much easier.
Rather than having you sort through all of the properties, they will take the time to curate the types of assets that are inline with your goals.
Then, they’ll assemble a portfolio that is unique to you. These include:
- Supplemental Investing
- Balanced Growth
- Long-Term Growth
They also draw from different real estate regions across the United States, comprising the west coast, the east coast, and the mid-west.
I think this is a great option if you don’t want much control over your portfolio. In the coming years, I can see more and more platforms offering this type of model.
4. The Honest Drawbacks
Now that I’ve laid the foundation and you clearly understand which investment class you fall into, along with some of the inherent properties of these asset classes, let’s talk about some of the honest drawbacks of real estate crowdfunding.
I want to be VERY clear that this new industry isn’t for everyone. Consider the following:
- Less liquidity (for the most part): There are exceptions, as I’ve indicated above, but for the most part you’ll experience less liquidity.
- Minimum Investment Amounts: Unlike the stock market, where you can buy a stock for as little as $10, there is a minimum investment amount on most real estate investing sites. This ranges from $1,000 to $5,000.
- Zero Management Input: When you do a fix-and-flip or own a multi-family complex, you have complete say over the management of the property. On these platforms, you’re simply providing capital.
- Lack of Information: I’ve found that platforms tend to do okay with their education center, but it’s not enough. That’s why I write this blog. To educate people like YOU. Join my new free course if you want the best info out there on this subject.
Of course, I strongly believe that this is an excellent opportunity for MANY investors out there. This is one of the reason I took so freakin’ long to write my book, Real Estate Crowdfunding Explained.
I’ll dive into some of the benefits in the next section.
5. The Profitable Benefits
I’m a practical guy. I think a strategy is worth pursuing if it’s profitable.
One of the best parts about this whole new industry is that you’re gaining access to investment opportunities that were previously hidden behind closed doors.
Now, because of the power of the internet, you can invest in properties around the USA without actually physically being there.
Pretty cool, eh?
Consider the following:
- Higher Returns: Almost every platform that I’ve written about experiences high returns. You can’t guarantee that obviously, but do a little bit of homework and you’ll see their past performance. These are selective investments.
- Less Costs (Technology): Since you’ll be using state of the art technology, you’ll typically be experiencing less costs than a traditional investment. You must check the individual platform, however.
- Cash Flow: Depending on the platform, you can receive monthly or quarterly cash flow distributions.
- Diversification: You don’t have to put all of your money into one property. You can spread it out across many different investments. In addition, the newer tools will do this for you.
I might be a “bull” when it comes to this industry, but I’m actually a conservative guy. Unless you manage an institutional fund, I don’t think you need to put massive quantities into real estate crowdfunding to reap the rewards.
Actually, I believe that some of the opportunities that we’ve been talking about can become a strong pillar in a larger portfolio which also includes stocks, bonds, ETFs, and more.
I hope that you’ve found this breakdown to be helpful and that you’ve learned a bit more about this new asset class.
To get quickly up-to-date on the best practices for investing in real estate opportunities, take two seconds to enroll in my new free course.
You can use this link to access the free real estate crowdfunding course.
I don’t know how long I’ll keep this up, so make sure to join ASAP!
I’m considering creating a premium course in the future.
