Crowdfunding Meets Real Estate Investing

In recent years crowdfunding has emerged as an alternative way to finance everything from business startups, investment ideas, philanthropy, personal donations and even real estate investments.

The concept of crowdfunding, which refers to the practice of raising small amounts of money from a large pool of people, has been around for a considerable amount of time. However, the current proliferation of online crowdfunding websites emerged after the congressional Jumpstart Our Business Startups (JOBS) Act of 2012. In 2016, Title III of the JOBS Act allowed equity crowdfunding, so long as the certain criteria are met:

  • Use of an online intermediary;
  • Must be a U.S. entity;
  • Disclose certain financial information, including an audited prospectus;
  • Fulfill reporting requirements; and
  • Raise funds from both accredited and non-accredited investors, subject to income or net worth requirements.

The Real Estate Crowdfunding Market

It is estimated that the U.S. real estate crowdfunding market reached $1.5 billion in 2015, representing a meager 0.3% of all real estate finance transactions and underscoring the tremendous upside for this business model. In fact, the global real estate crowdfunding business grew by 150% in 2015 and an estimated 40% in 2016, according to

How Real Estate Crowdfunding Works

Typically, an online portal offers investment opportunities in a variety of real estate assets, which have been analyzed, vetted and deemed as viable investment offerings by the crowdfunding company. Individuals can sign-up and invest in any of the offerings with a relatively small amount of money. Some real estate crowdfunding websites offer investment opportunities for as little as $1,000 per project. Investment projects can include rental homes, apartment complexes, retail stores, commercial buildings, etc. In a way, real estate crowdfunding is similar to buying stock in a large company.

In return for your investment, cash flows are periodically distributed among owners of the property. Investors may also sell or refinance out of a property.

Benefits of Real Estate Crowdfunding

  1. Overcome Stringent Lending Requirements:  After the real estate crash of 2008, financial institutions were forced to tighten their lending requirements so as to prevent a recurrence of the lending practices that fueled the unreasonable property valuations that precipitated the crash. As a result, many individuals started to find it difficult to invest in real estate. The emergence of crowdfunding has helped countless investors overcome the stringent lending requirements of traditional financial institutions, including paperwork, appraisals, inspections, etc.
  2. Lower Barriers to Entry:  Traditional real estate investments require sizable financial commitments, including a down payment, property taxes, insurance, maintenance and repairs (operating costs). Crowdfunding helps lower the financial commitment/risk needed to invest in a real estate project by requiring a minimal financial commitment. In a recent interview, an executive with a major real estate crowdfunding company recently explained that his company helps “democratize” real estate investing.
  3. Diversification:  Because real estate is a big-ticket item, most individuals are only able to invest in very few properties. With crowdfunding, investors are able to spread their money across different property types, geographic regions and asset sizes.

Risks of Real Estate Crowdfunding

  1. Fraud:  Because online crowdfunding is a relatively new concept, there’s a real possibility of fraud, including misrepresenting investment offerings or misappropriating funds.
  2. Taxes:  Tax laws governing the ecommerce environment are not yet clearly defined.
  3. Online Hacking:  As with any online interaction, your personal and financial information is subject to possible compromise resulting from hacking and online scams.

Differences Between REIT’s and Crowdfunding Entities

  1. Property vs. Portfolio:  With most real estate investments trusts (REIT’s), you are investing in a real estate portfolio. In crowdfunding models, however, you get to select the exact property/project that you want to invest your money in.
  2. Fees:  Fees are typically higher for REIT’s.
  3. Exchanges: REITS are traded on public exchanges.

Real Estate Crowdfunding Companies (partial list)

iFunding:  Allows investors to pick different real estate projects to invest in for as little as $5,000.
Realty Mogul:  Commercial real estate investing.
Acquire Real Estate: Minimum investment of $5,000.
PeerStreet:  Cofounded by a cofounder of Google Analytics.
CrowdStreet :  Commercial real estate offerings.
Alphaflow:  Invest as little as $1,000.
RealCrowd:  Commercial real estate investments.
Fundrise:  Allows investors to pick different real estate projects to invest in for as little as $5,000.
Prodigy Network:  Individuals invest as little as $10,000 in a project. However; the total portfolio must consist of $20,000 in assets.