Real Estate Crowdfunding: An Introduction

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This is an advertisement. We have partnered and are compensated by RealtyShares. RealtyShares is a funding platform who has partnered with North Capital Private Securities (NCPS), member FINRA/SIPC. Private securities on the RealtyShares platform are offered through NCPS. Private investments are highly illiquid and are not suitable for all investors. Neither RealtyShares nor NCPS makes any recommendations or provides advice about investments.

This article has been updated to reflect the Securities and Exchange Commission’s new regulations affecting non-accredited investors and equity crowdfunding that went into effect via the JOBS Act (Title III) on March 16, 2016.

What is crowdfunding?

Crowdfunding as a broad subject can perhaps best be described as “raising money via relatively small contributions from a large number of individuals.” Widespread adoption of social media and general internet use made crowdfunding a viable way to raise money in the early 2000s, and the concept really roared into the public view with the advent of companies like Kickstarter raising millions, then billions, for various “projects”—anything from somewhat laughable “projects” like making a potato salad or pirate pancakes to worthwhile ideas like a refugee-led radio station.

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What’s the Difference Between Crowdfunding on Kickstarter and Equity Crowdfunding?

The mechanism of equity crowdfunding is basically just as simple as that of the more widespread crowdfunding seen on Kickstarter. Similar in many ways to Kickstarter, a platform such as RealtyShares finds investors who need to raise capital for various projects. RealtyShares then provides a description of the project, pro formas, and other relevant information, and numerous investors get to decide whether or not they want to back that particular project. (To learn more about RealtyShares, click here.)

There is only one significant difference between equity crowdfunding and the type of crowdfunding you see on Kickstarter:

Individuals who back equity crowdfunding projects expect a return on their investment, while individuals that back projects on Kickstarter expect at most a small “reward” when the project is completed.


Related: 3 Things You Need To Know About Crowdfunding Real Estate Investments

If you were one of the folks who donated to the potato salad project on Kickstarter, you probably weren’t expecting to get that money back—and you definitely weren’t expecting to get any interest. There is an obviously different expectation from the investor who puts $5,000 into a commercial real estate deal through a crowdfunding platform. The former is just looking for a bite of potato salad, while the latter is seeking financial gain.

As with any investment, investing in crowdfunding comes with a level of risk. Investors should never bank on a certain level of return—and should never invest more than they can spare to lose. In fact, the SEC has put certain regulations on how much money non-accredited investors can place into equity crowdfunding to protect these investors. (Read more about regulations here.)

What Are the Benefits and Risks of Equity Crowdfunding?

Crowdfunding is not some new mode of investing that will magically produce outsized returns from your living room. It requires knowledge and research just like any other form of investing, and it includes risks just like any other form of investing.

Crowdfunding does, however, offer some significant advantages over other forms of real estate investing:

  1. Crowdfunding is a great resource for investors looking to diversify in several real estate projects, as they can go through dozens of deals and invest relatively small amounts of money in each. Assuming the investor has done their due diligence on the crowdfunding portal and can trust the information provided, they can screen deals in minutes. Outside of crowdfunding, it’s fairly difficult to invest small amounts of money (amounts between $5,000 and $25,000) in dozens of real estate projects.
  2. Crowdfunding also helps the investor who needs to raise capital. The guy who is looking to raise $1 million in equity financing previously would have had to approach wealthy investors one by one and try to get large contributions from each. Through crowdfunding, the capital seeker can give the financials and other relevant information to a crowdfunding platform just once and have hundreds or thousands of investors exposed to the investment.

With these advantages come a few disadvantages:

  1. Equity crowdfunding projects are subject to fees. The structure of these fees varies from company to company, but it is important to understand that the investors will pay in some form or other for the collection and presentation of pertinent financial data from those seeking to raise money, while the individual seeking to raise capital will pay for the platform’s access to investors. These fees in their varying forms will absolutely need to be factored into analysis contributing to any decision to invest or to raise money via crowdfunding.
  2. The concept of equity crowdfunding is still relatively new. Often, successful and experienced commercial real estate developers will repeatedly go back to their same sources of private funding over and over again to raise money for their projects. These experienced investors might have little trouble raising capital due to their excellent track records and have little need for new platforms like crowdfunding. This could potentially result in some less experienced investors being among the early adopters who use equity crowdfunding to raise money.

It’s up to individual investors to weigh these pros and cons when making the decision to invest or raise money via crowdfunding. It is also important to note that risk comes with putting your money into any investment, crowdfunding included. While many investors enjoy solid returns from crowdfunding, experiencing losses and preparing for potential downturns in the market are simply realities of real estate (or any other type of) investing.

Who Can Use Crowdfunding Right Now?

In the spring of 2016, the Securities and Exchange Commission (SEC) put new regulations in effect, opening up a whole new world of investments to non-accredited investors. Signed into legislation in 2012, the JOBS Act required the SEC to write new rules, and the equity crowdfunding portion of the act applying to non-accredited investors (Title III) became effective March 16, 2016.

Previously, only accredited investors were granted reasonable access to equity crowdfunding. It is estimated that accredited investors (generally those with an annual income of $200,000/year for the past two years or a net worth of $1 million or more, excluding primary residence) make up less than 10 percent of the population, meaning the vast majority of ordinary people were excluded from any equity crowdfunding investments.

With the advent of Title III, more investors can enter the crowdfunding (and real estate) space. Investing in most commercial property usually involves a very large amount of money. These amounts are so large that I would feel the need to put in an enormous amount of research, preparation, networking, and legal background work before I could commit to buying an apartment complex or large mixed use building, even if I could get great seller financing terms. While the crowdfunding market is still far from a free-for-all marketplace, new changes allow investors have the opportunity to put attainable amounts of money—often as little as $5,000—into equity crowdfunding investments, including commercial real estate.

Related: How to Use Crowdfunding to Finance Your Commercial Real Estate

Use the comments section to weigh in:

  • Have you used equity crowdfunding?
  • Would you be interested in pursuing the option?
  • Do you see any other advantages or drawbacks to crowdfunding that I didn’t mention here?

Let me know your thoughts, and let’s discuss!

About Author

Scott Trench

VP of Operations at, Scott is also a licensed real estate broker/agent, real estate investor managing 8 units in Denver, CO with a partner, a house-hacker, and personal finance nerd. His book, “Set for Life” (published through BiggerPockets Publishing) thoroughly details a step-by-step journey to early financial freedom for full-time workers earning median incomes and starting with little or negative net worth. When he’s not helping full-time workers move toward early financial freedom, the 26-year-old can be found playing rugby, biking, or skiing.


  1. Scott – I agree with a fair amount of what you have written but would add some additional points you may not have considered. I am an accredited investor, and participate in crowdfunding through both Realty Shares and Realty Mogul, as well as private placements both as a LP and in some cases a member of the GP’s carried interest. So while I wouldn’t hold myself out to be the ultimate expert, I can speak with some background as both an investor and as one who has participated in setting up investments. Here are my thoughts:

    * When we (meaning those of us who create investment vehicles) start the process of setting up a private placement, we look at the size in $ of the investment vehicle we want to create (project or fund) and the number of investor relationships we want to manage. In most cases, the SEC cutoff of 100 investors for the most common exemption works as a reasonable and convenient limit for the number of investor relationships that it makes sense to manage. So, if the target is $10M, the minimum investment size will probably be 100k, and your target investor will be a high net worth (but not ultra high net worth) individual. If you want to raise $100M, then you will be looking at 1M for minimum investments, and targeting ultra highs and institutional investors. And so on. The point being, if the SEC were to suddenly change its rules and raise the limit on number of investors for an exemption from filing, or decrease the net worth level of accredited investors, or allow alternate qualification via an exam – it doesn’t automatically follow that these sort of investments would suddenly open up to those with a lower net worth. I suspect the minimum investment requirements would probably stay about the same – it’s the business model that has evolved and has worked fairly well.
    *In a similar vein, I’d also note that there are SEC regs that allow up to 35 non accredited investors to participate in a PP; however most funds/LP’s don’t file under that clause for the reason that I mentioned above – the amount of money raised relative to the administrative and relationship burden isn’t worth it. Better to chase a few more bigger accounts.
    *As you noted, crowdfunding vehicles such as RealtyMogul and RealtyShares do provide a valuable service by allowing investors to allocate their capital over a broader range of types, geography, and managers – I certainly have tried to take advantage of it an am impressed with what Jillian at RM and Nav at RS have accomplished in a short time. If these platforms became available to investors with lower net worth due to changes in regs as you advocate, I suspect that you would find some opportunities that would fit what you are looking for. However (there’s always a however), I have noticed recently that investment minimums are creeping up – 20k minimums and even 40k are not uncommon. I suspect, although I can’t prove it, that this is at least in part a result of institutional capital starting to notice these platforms and take an increasing position.

    So, short version, you can blame the regulatory bodies for keeping these kind of investments away from younger/smaller investors, but in my experience it is more complex – even if regs were not an obstacle, operational issues of managing investor relationships and market forces driven by institutional investor strategies will have a larger say in whether or not these kind of opportunities are truly accessible.
    John B

    • Scott Trench

      John – Thanks for your in-depth and experienced feedback! I get what you are saying about managing relationships. This is the fundamental issue in raising money – folks expect a return, and they expect to hear from the business about how they are focused on making money for the equity shareholders.

      This is why public companies are required to release quarterly and annual statements and why companies think long and hard before going public or offering equity to others at all!

      Instead of making the relationship problem more difficult, it is my belief that crowdfunding will make things much easier when it comes to managing relationships between the company and the investors!

      Think about it – the main focus of the seekers of capital will be to manage ONE relationship above all else – the relationship with the crowdfunding portal. The investors – same thing. Communication between the business and the investors takes place in large batches through the portal, with the potential of making things much more efficient and effective. You are no longer dealing with the 10 $1M accredited investors, you are dealing with 1,000 $1,000 investors that you communicate with all at once. Those investors have to carefully and diligently vet the portal – and then they can put some faith into the individual investments depending on their risk/reward tolerance. It’s ONE relationship to manage on each end instead of hundreds or thousands that might become overwhelming.

  2. Drew Cifrodelli

    Hi Scott and John,
    That was very well written by both of you. I wonder if there is a way to pool small investors could join together into a fund that could be invested at the next level up? This would provide smaller number of relationships to manage while generating enough capital to be profitable for the money managers to be bothered managing. Perhaps their could be a maximum allowable investment amount for the primary investor “average Joe”. The maximum would be a form of protection for the average Joe.

    Perhaps the maximum amount could be based on the average of your last three years tax returns and current pay stubs, like they do when you are applying for a loan to purchase a home.

    The government claims that the median household income for the nation was $50K in 2012. In New Jersey you need to have a $65K household income to have a $150K mortgage, in an “Average” neighborhood. That puts you in a two bedroom one bath flat, if you have saved 3.5% to put down (approximately $5K). Does it make sense that these people could take that same $5K and invest it in Real Estate via crowd funding?

    Now all be need is a another government program to encourage sub prime investments in crowd funding and we can have the next real estate bubble! LOL
    Drew Cifrodelli

    • Scott Trench

      Drew, I understand where you are going from the perspective of wanting to protect investors from scams, scumbags, and sleaze. But I think that those maximums should be determined by the portals and businesses themselves, NOT uncle Sam. It should be up to me to determine how much I want to allocate to any single invesment.

      As a personally radical thinker on this subject, I hold the belief that I could easily go and gamble an unlimited amount – my entire net worth and then some – at the local casino. Why shouldn’t I be allowed to put those funds towards an investment of my choosing elsewhere?

      • Drew Cifrodelli

        Hi Scott,
        I’m a supporter of small government, so I’m not advocating that the government increase their involvement. So I think we are in agreement. The reason that people are allowed to gamble is that the government collects such a large percentage of the money, so it’s profitable for the government. Let the government tax your investments in crowdfunding like they do gambling and BANG you’ll see how fast it becomes OK. LOL

        • Scott Trench

          Haha! Interesting point – I tend to prefer to try to take the more positive mindset that the government is more interested in stimulating growth over the long term – in that sense Crowdfunding might be much better for increasing overall tax revenue than gambling even if it i just taxed like other capital gains. But then this discussion becomes super philosophical..

  3. Bradley Bogdan

    I do wonder who the SEC is seeking to protect with restrictions on accredited investors. Sites like Prosper and LendingClub allow unaccredited investors plenty of opportunity to lose their money on bad loans and offer a similar amount of data on the borrowers that sites like RealtyShares and RealtyMogul do, though its somewhat an apples to oranges comparison. I’d love the opportunity to invest at a $5k or $10k level in a project, or at an even smaller level for people’s flips, perhaps in a much more Prosper or LC-esque marketplace, as RM and RC strike me as places not designed for smaller loans (though they do have them), but more the multi-million dollar projects.

    • Scott Trench

      I agree wholeheartedly with your comment Bradley. Thanks for the support. I think that LendingClub and Prosper have already demonstrated the viability of this concept and that there is plenty of opportunity to open up other markets through similar approaches like crowdfunding.

  4. I’m sure there is a securities lawyer out there who can give a better answer, but I believe LC and Prosper notes are SEC registered securities, so your purchase of a loan, or a fraction thereof, is similar to purchasing a share of stock in that regard. However, this is a level of administrative burden that is way above and beyond what most real estate developers who are looking for investors are willing to undertake; but it makes sense for the peer to peer platforms due to their scale (similar to a REIT, whose shares are also registered securities and thus available to the public). Also, while LC and Prosper have successfully navigated Federal waters with the SEC, convincing state securities regulators has been more difficult, with something like a third of the states prohibiting them from marketing in their jurisdictions.

    • Scott Trench

      Awesome information John! I learned a lot from this. The bottom line seems to be that there are two hoops to jump through before you can take new investing marketplaces to the investing public:

      The Feds
      The States

      I somehow took the naive approach that the states would kind of fall into step behind the feds if the SEC relaxed the rules that make crowdfunding inaccessible currently. There is every possibility that many states would actually prohibit it or otherwise negate the SEC’s impact.

  5. margaret smith on

    Hi Scott- I am a private lender, focusing on financing rehabbers, landlords, and flippers, so my comments are from a lender’s perspective rather than an SEC base.

    I love this clarification of the different types/levels of investment- and the wonderfully educated comments too. As far a de-regulation, though, I still get back to: If you have only $5-10,000 to invest somewhere- why would you ever gamble it on a something you read that was posted on some unregulated internet site? Those of us with investing experience and education under our belts know– the 1st rule of investing is Due Diligence! Most people have no clue what that means, or how to do it. One can certainly state that making such a decision based on what strangers choose to post is NOT a base for good investment decisions. If crowd funding becomes less regulated-
    Watch out, everyone– Here comes an army of incompetents, wannabe’s and outright scammers!! You may only lose $5,000- but it may be the only investment you have. I smell financial disaster in the air for many, many good people! Ask one question- Would you let your mama do it? I think NOT!!!

    • Scott Trench

      Margaret. Thanks for you comment – I believe that you are presenting the view that currently prevents investors from taking part in crowdfunding. The view is that it is the government’s job to protect me from scammers, incompetents, and wannabes.

      I believe that it is my job to make my own determination on the validity of internet commenters. For example, I routinely look to the BiggerPockets forums and blog posts when determining my real estate strategy, who to invest with, and who to work with. BiggerPockets is an unregulated internet site, and though we constantly and diligently moderate every post that exhibits signs of scammers, there is still plenty of information that slips through the cracks. It is up to me to decide which information and individuals are valuable to me and my business.

      Would I let my parents invest in crowdfunding? My parents might laugh in my face if I told them what to do with their money – one party has a lot of money and the other has very little… they know it is their decision to invest their money how they please and who the heck am I to give them investment advice???

  6. Excellent post Mr.

    Excellent post Mr. Trench. I’m like great, so this is how you bring the people who have some real experience to the table. My only question would be, can you get in any trouble simply pooling money on joint ventures and what’s the difference?
    Sorry, 2 questions, and exercising my ignorance out in the open for all to see to boot.

    • Scott Trench

      Gary – it looks like you might have had some technical difficulties posting this thread, so forgive me if I miss the full intent of your questions:

      As far as getting in to trouble by pooling money, there are a plethora of ways to get into issues with partners, investors, businesses, and the law – that’s why such massive regulatory bodies exist to regulate these situations! I’d invite you to check out my Accredited Investors article from about two weeks ago to learn more about why the government makes it difficult for non-accredited investors to access certain types of smaller, privately held securities.

  7. Stephen G.

    Thank you for this post! I was recently wondering about some of the details involved with different crowdfunding ventures.

    However, this brings up another question (as you’ve briefly touched upon it in your article):

    If people have no problem dishing out dollars for a potato salad on Kickstarter (which will bring them no returns), then why would they not do the same for someone else’s real estate investment?

    Please correct me if I’m wrong, but if I post a prospect in hopes of raising money for a RE investment on a site like Gofundme, wouldn’t I be able to keep all the proceeds? In theory, since this site is more of a fundraising/donation platform, wouldn’t I be able to do this without worrying about the SEC?

    I understand that it would be a lot more difficult convincing someone to donate cash for someone else’s investing benefit, however, my point goes right back to the potato salad analogy…

    • Scott Trench

      Stephen, I think that the concept of Crowdfunding is seen almost as a charitable donation in some of these cases. It is my belief that most projects on Kickstarter are funded simply because a lot of good people want to help dreamers realize their passions. In the case of the potato salad guy, to me that seems like a farce. The only reason that I personally can conceive of to donate the $50,000th dollar to the potato salad project (who’s goal was to raise $10) is because I think it is just so absurd that $49,950 was already backed and want to be part of the news and comedy….

      I’m not going to find it nearly as silly and entertaining to donate to someone’s fix and flip project in most cases. I’m sure there will be the wild outliers that you suggest, but to me that seems like a weak argument in opposition to crowdfunding.

  8. willie morales

    HI Scott,

    Good Article

    To me, I’m learning about real estate everyday, reading articles or listening to BiggerPockets, etc. It seems to me that the little guy with hardly any networth gets the shaft because of the SEC. If they feel they must protect the small investor then give us a test of our real estate knowledge and ask us questions about Noi, or cap rate etc. It should be my choice if I want to invest in a project or not. I’m willing to take that leap, I want to invest in real estate so give us a chance I can read a financial statement and make up my mind and ask questions or get a mentor to help me.

    Thanks Scott.

  9. Alex Morstadt

    Hi Scott

    Great Article! I have invested in Lending Club for 3 years and I have enjoyed investing with that platform and done very well.

    The SEC should certainly change its rules to allow younger, yet diligent investors. I liked your point about the casino. Or we could go out and have 30 credit cards. But in providing opportunities to invest they have massive regulations?

    I live in Hawaii and would love to invest more out of state, but since I work full time, it makes it much harder.

    • Scott Trench

      Thanks Alex! I love the concept of lending club and need to put some money in there as an experiment one of these days. I think that type of business model could easily be applied to the subset of private companies that currently funnel opportunities to accredited investors first, making everyone better off.

  10. Stephen Bjorgan

    Thank you for the post, Scott. You bring up a great issue. And that is that there are limited opportunities for the 99% who want to passively invest in real estate or any other venture outside of publicly-traded companies.

    In this case, the Internet is changing things for the better.

    For example, there are two other vehicles for unaccredited investors to participate in investments and those are through the federal JOBS Act and through various states’ Direct Public Offerings.

    The JOBS Act is an IRS work in progress, the detailed guidelines of which are languishing “somewhere” in that bureaucracy.

    For a Direct Public Offering, however, there are state policies in place in at least, California, Colorado, Massachusetts, and Louisiana which allow one to raise money from unaccredited investors with considerably less paperwork and expense than an IPO requires.

    These states take advantage of intrastate federal offering exemptions to $5 million per offering . There are also possibilities to solicit funds via interstate offerings (Rule 504) but those are “limited” to $1 million per offering, I believe.

    The opportunity here is for Internet-based intermediaries to match investors (buyers) with credible offerers (sellers). In a similar vein, this is what happened in the travel industry: you had a lot of potential clients (travelers) being offered a dizzying array of products (plane tickets, rental cars, hotels) from a bunch of specialized firms (American, Budget, Hilton). Then came intermediaries (Orbitz, Travelocity, Priceline) that bundled your trip and ultimately, provided the appropriate level of guidance between buyers and sellers which streamlined the entire trip transaction for the rest of us who couldn’t afford travel agents or didn’t have personal assistants.

    The analogy goes further: think Uber, AirBnB, Redfin, Zillow, ZipCar, etc.

    It’s been a generation in the making but Isn’t it about time that the traditional 1% of the investment community was also disintermediated such that the rest of us can profit from something more than that which an interest checking account offers?

    I’m trying this out with a California real estate deal. I’ll post a follow-up soon.

  11. Scott Trench

    Stephen – thanks for the awesome comment full of fantastic information. I agree with you on the potential and necessity of bringing investment opportunities to the rest of the population.

    One interesting point you brought up that I only briefly touched on in the article is the idea of intra-state crowdfunding. I am extremely excited about the states taking action on their own and mentioned some of the states that offer intra-state crowdfunding options (including my own Colorado). The problem with intra-state only investing is that in most cases, the following must all be true:

    The investors must all be in-state
    The investment must be in-state
    The project managers must be in-state

    When it comes to crowdfunding, the point is to mass market deals to the entire internet community. While intra-state crowdfunding is an awesome step in the right direction, the fact that it is so new, and the fact that it lacks the potential to scale due to the three factors listed above mean that growth is painfully slow in a lot of cases – why would I as a business owner go through this process to raise money in-state when I can much more easily go to more traditional sources of financing?

  12. Mark Lenox

    That’s a good read, Scott; thank you. It is a pity that the SEC keeps it so only the wealthy can benefit, but not much of a surprise.

    It’s people like you and I that scratch our heads and wonder what god made them the arbiter of who should be accredited or not. Once again, our wonderful Government picking winners and losers and reminding us we’re not smart enough to take such risks on our own.

  13. Cornelius Charles

    Great article Scott. I think this is my favorite one from you thus far.

    Quick question and forgive me if I missed it somewhere. I saw a lot of discussion about unaccredited investors investing their money into equity crowdfunding, but what about the opposite? Are there any sites where unaccredited investors can post a rehab project, for example, and try to get funding for this project? Are there regulations against that? Thanks.

    • Scott Trench

      Cornelius – thanks for the support.

      In response to your question, there are two types of clients that crowdfunding portals need to attract to be successful:

      Accredited Investors
      Companies/Individuals with high quality deals

      The latter group do not have to be accredited investors necessarily to RAISE money via crowdfunding. That said, bad deals or investor losses can crush the credibility of a crowdfunding portal very quickly – and it’s already an ultracompetitive industry. Many of these portals have strict criterion for their investment deals, which might make it difficult for you to raise money from them, unless you are a seasoned investor with a strong track record.

  14. Francisco Feliz

    Hi Scott,

    Thank you very much for taking the time to explain this very intriguing topic. I am a newbie to the real estate investing game, and I am currently researching everything I need to do to get into my first deal. Of course, one of the areas to consider is financial, and I came across this topic, when researching alternative sources of financing.

    I couldn’t quite pick it up from your article because you seemed to focus on the investor side of the equation, but I am wondering if the actual real estate developer (the one raising capital from these accredited investors (as per SEC rules)) has to also be an accredited individual himself? Or can I as a non-millionaire newbie with a good deal consider this a viable tool to help me (even partially) fund my first fix and flip?

    Looking forward to your reply and continued help. Thanks so much.

    • Francisco Feliz

      @Scott Trench, It looks like my reading only 60% of the comment thread led me to miss that my question was somewhat answered above my post. I still wonder how certain it is that I, as a non-accredited developer, can raise via these platforms, but I guess we’ll have to see with the specific criteria and such that probably vary by site. Thanks.

  15. Bryan Hancock

    Nice article Scott.

    In the weeds there is a lot more to it than what is presented above, but this is a great overview. Some of the dynamics you mention in the article will change as time wears on. I think that the marketplaces will largely get replaced in favor of underwriting experts and promoters using their own software to present projects under the own brand.

    One note for future articles…..the word “Portal” has a legal meaning that is tied to Title III. Everything that has to do with a website is commonly referred to as a “platform” so as to not confuse the issue.

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