{"id":145085,"date":"2022-10-08T14:22:33","date_gmt":"2022-10-08T20:22:33","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=145085"},"modified":"2023-08-08T15:40:51","modified_gmt":"2023-08-08T21:40:51","slug":"real-estate-crowdfunding","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/real-estate-crowdfunding","title":{"rendered":"What is Real Estate Crowdfunding and How Does It Work?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC9017075817&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Are you looking for a new, innovative way to diversify your portfolio that\u2019s popular with investors of all demographics in both residential and commercial sectors? If so, then real estate crowdfunding may be perfect for you.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">According to&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.polarismarketresearch.com\/industry-analysis\/real-estate-crowdfunding-market\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Polaris Market Research<\/span><\/a><span data-preserver-spaces=\"true\">, the global real estate crowdfunding market was $10.78 billion (USD) in 2021. That number is expected to increase by a compound annual growth rate (CAGR) of 45.6% from 2022-2030, and you\u2019ll soon see why!&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In this post, we\u2019ll explore:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">What is real estate crowdfunding<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">How crowdfunding works in real estate<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">The benefits and drawbacks of real estate crowdfunding<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Types of real estate crowdfunding<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">How to get started in real estate crowdfunding<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let\u2019s get started.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What is Real Estate Crowdfunding?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">In crowdfunding, a large group of people each contribute a small amount of funds to raise a lot of money. Real estate crowdfunding is no different, except instead of raising funds for a new board game or invention, you\u2019re funding real estate projects.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How Crowdfunding Works in Real Estate<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Although digital crowdfunding has been around since 1997, when the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.finra.org\/investors\/alerts\/crowdfunding-and-jobs-act\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">JOBS Act<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;passed in 2012, it expanded crowdfunders\u2019 ability to advertise their efforts. Since then, crowdfunding has skyrocketed in popularity. Companies can raise money without giving up control to venture capitalists. Instead, they can simply offer their investors equity in their venture.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It only makes sense that real estate investing and crowdfunding would cross paths. Historically, real estate is usually considered the most favored and consistent long-term investment strategy. These days, crowdfunding is one of the most popular investment opportunities around.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Although real estate crowdfunding is still a new concept, many investors see its potential. Real estate crowdfunding lets you diversify your investment portfolio and breaks down some barriers for investments most people couldn&#8217;t access before, such as luxury high-rises or certain types of commercial real estate.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Like real estate investment trusts (REITs), there are tons of crowdfunding opportunities and niches to choose from. Also, like REITs, crowdfunding is a form of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">passive investing<\/span><\/a><span data-preserver-spaces=\"true\">, so the only effort required on your part is choosing a crowdfunding opportunity to invest in.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Benefits of Real Estate Crowdfunding<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">In addition to being a great source of passive income, let\u2019s dive deeper into the benefits of crowdfunded real estate investments. Here are the main ones:<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Portfolio diversification<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Crowdfunding lets you diversify your real estate portfolio. Instead of investing in a single property, you can spread your funds across multiple investments, minimizing risk.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example, Jeremy invests $50,000 in a single investment property, while Maria invests $50,000 across five different properties. If both lose 20% in a single property, it costs Jeremy $10,000, but it\u2019ll only cost Maria $2,000, which could be offset by the success of one or more of her other properties.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Geographic expansion<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Geographic diversity can be as important as portfolio diversification. The real estate market is in constant flux, and multiple areas can perform differently.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.austinchamber.com\/blog\/04-18-2022-job-growth-unemployment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Austin, Texas<\/span><\/a><span data-preserver-spaces=\"true\">, has experienced substantial growth and a thriving housing market since the pandemic began.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.eastvillagemagazine.org\/2021\/07\/12\/flints-housing-crisis-predates-recent-crises-according-to-report-by-um-flint-professor\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Flint, Michigan<\/span><\/a><span data-preserver-spaces=\"true\">, on the other hand, not so much. The more markets you can enter, the less risk you\u2019ll assume.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Low buy-in<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many people think they need tons of capital to break into the real estate market. That\u2019s no longer true. Some real estate crowdfunding platforms, like&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fundrise.com\/acq-plus\/start?utm_medium=podcast&amp;utm_source=biggerpocketsonthemarket&amp;utm_campaign=podcast-biggerpocketsonthemarket-2022&amp;utm_content=all\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Fundrise<\/span><\/a><span data-preserver-spaces=\"true\">, let you start investing for as little as $10. That\u2019s great news for newer real estate investors who want to get their feet wet or those who don\u2019t have tens or hundreds of thousands of dollars of liquid capital at their disposal.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Increased accessibility<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">As previously mentioned, the JOBS Acts broke down barriers, and now everyone has access to a variety of crowdfunding platforms\u2014each with its own niche. Some specialize in apartment buildings, while others focus on commercial real estate investments or mixed-use developments. When it comes to real estate crowdfunding, your passive income options are as abundant and diverse as the crowdfunding websites themselves.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Build loyalty<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you want to start a campaign instead of investing in one, crowdfunding is a savvy way to prove a project\u2019s financial viability. There are always real estate investors looking for a new property to support. Perfect your pitch and create a landing page with compelling information about your project, including why you chose it and its profit potential.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">After you secure your funding, your contributors will want it to succeed. If you can maintain clear communication and deliver positive results, your investors will likely want to work with you again\u2014and tell their friends. You\u2019ll also gain valuable feedback, which can help you improve your processes during future endeavors.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Drawbacks of Real Estate Crowdfunding<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">No investment is perfect, nor is it for everyone. Real estate crowdfunding is still new, so despite the many crowdfunding platforms around, none of them can boast decades of success. Here are a few cons of real estate crowdfunding:<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Illiquid investment<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Crowdfunding is typically considered an illiquid investment. In other words, it\u2019s not easily sold. In order for you to sell your stake in an investment, someone needs to buy it. This process can take a long time and could impact the value of the property you\u2019re invested in.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Investment limits<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">The JOBS Act broke down barriers but also set limits for nonaccredited investors. Due to the risks involved, the law states that you can only invest up to $2,200 or 5% \u201cof the lesser of your annual income or net worth\u201d during a 12-month period if either is less than $107,000.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If both are more than $107,000, you can invest up to 10% of whichever is less during a 12-month period, but you can\u2019t invest more than $107,000.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If your annual income is $120,000 and your net worth is $100,000, you can only invest $5,000 (5% of $100,000) during a 12-month period.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Accredited investors aren\u2019t bound by these limitations.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Lower returns<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Real estate crowdfunding typically yields a lower return than what you would receive through more active investments in real estate. The developer or operator you\u2019re investing with gets their cut for the work they do, and your return often accounts for that. Even so, successful real estate investments still bring decent returns, especially in equity investments.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Less control<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">As a passive investor, the developer or operator makes decisions on your behalf. If you want to have more influence on your investment, consider real estate investments that are more active, like&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/the-ultimate-guide-to-short-term-rental-properties\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">short-term rentals<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;or&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/how-to-flip-houses\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">house flipping<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Taxes and fees<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Real estate crowdfunding platforms typically charge management or advisory fees. You\u2019ll also have to pay taxes on the dividends you receive.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Types of Real Estate Crowdfunding Opportunities<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">There are two main options for crowdfunding: equity investments and debt investments.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Equity investments<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Equity investments give you an equity stake in a property, which basically makes you a shareholder. In equity investing, you\u2019ll earn money based on the property\u2019s rental income minus the fees charged by the real estate crowdfunding platform. You\u2019ll also receive a share of the property\u2019s appreciation value if it\u2019s sold.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Equity investors can see higher returns (sometimes comparable to that of a short-term rental owner), and you can deduct expenses come tax season. However, equity investments are also riskier, and their holding periods typically range from 5-10 years.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Debt investments<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Debt investors are basically the lenders for the property. Like lenders, you\u2019ll receive a steady, fixed return based on how much you\u2019ve invested and the interest rate of the mortgage loan. You\u2019ll also have priority during payouts over the property owner.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Debt investors make a lower ROI than their equity counterparts, but they also assume less risk. Since debt investments are usually for development projects, they have shorter holding periods. However, you may also be subject to higher fees, and your returns are capped.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How to Get Started in Real Estate Crowdfunding<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Crowdfunding platforms are easy to find online, but finding a promising real estate project isn\u2019t as simple. Here are a few tips to consider when doing your research:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Know your preferences<\/span><\/strong><span data-preserver-spaces=\"true\">: Are you more interested in equity or debt investments? In residential or commercial real estate deals? Which types? In what areas?<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Investment amount<\/span><\/strong><span data-preserver-spaces=\"true\">: Determine how much you are comfortable investing and how much you can invest based on the JOBS Act. If you qualify as an accredited investor, prepare any documentation you\u2019ll need to prove it.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Compare websites<\/span><\/strong><span data-preserver-spaces=\"true\">: Crowdfunding sites have varying fee structures, terms and conditions, investment opportunities, and more.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Read reviews<\/span><\/strong><span data-preserver-spaces=\"true\">: Look for comments and feedback from other investors and what they have to say about a specific site or service.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Investment portfolios<\/span><\/strong><span data-preserver-spaces=\"true\">: Look for platforms that can prove their previous successes when handling the type of investments you\u2019re interested in.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Solid backing<\/span><\/strong><span data-preserver-spaces=\"true\">: Look for sites with strong capital venture backing. You want to ensure the platform you\u2019re using is credible and will be in operation for a long time.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Holding periods<\/span><\/strong><span data-preserver-spaces=\"true\">: Compare the length of holding periods and determine how comfortable you are with them.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Consult a tax professional<\/span><\/strong><span data-preserver-spaces=\"true\">: Ask your accountant about the potential tax impact of an investment.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Also, don\u2019t hesitate to check our&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/search\/topics?term=real+estate+crowdfunding\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">forums<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and see what the real estate investment pros have to say about crowdfunding investment opportunities. You\u2019ve got a wealth of knowledge at your fingertips! Are you ready to get started as a real estate crowdfunding investor?<\/span><\/p>\n\n\n","protected":false},"excerpt":{"rendered":"<p>Are you looking for a new, innovative way to diversify your portfolio that\u2019s popular with investors of all demographics in both residential and commercial sectors? If so, then real estate [&hellip;]<\/p>\n","protected":false},"author":613625,"featured_media":145086,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7363,7119],"tags":[],"class_list":["post-145085","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-reits-passive-investing","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145085","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613625"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=145085"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145085\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/145086"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=145085"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=145085"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=145085"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}