What is real estate crowdfunding investing?
In the past, private real estate investing was a wealth-creation engine for huge institutional investors (like the Yale Endowment), millionaires and billionaires. And it's generated amazing 9.6%+ long-term returns with less volatility than the stock market. But for years ordinary investors couldn't access this investment class because it was too expensive.
Real estate crowdfunding changed all of this. It allowed individual investors to pool their money with other investors, and invest at a fraction of the previous cost.
And by making real estate investing cheaper, it also made it safer. Now investors can reduce risk by diversifing into hundreds in different cities. They can also diversify across numerous strategies and asset types instead of being stuck in only one or two. And the properties are managed by an experienced professional (if the investor does their homework right). So unlike do-it-yourself landlording, crowdfunding requires no management work and is completely passive.
How does real estate crowdfunding work?
The investor goes to crowdfunding sites, where they see many different real estate deals from different companies (called "sponsors").
Each deal includes a pitch describing what the deal is about and the projected returns. Total projected returns vary from as low as 6-7% for conservative deals to as high as 300-400% or more for aggressive deals. Part of the return generally comes from quarterly distributions of income to the investor (often ranging from 5% to 11%). Many deals also have 2nd part: a large payout at the end when the sponsor sells the property (hopefully for profit). Deals may be anywhere from 6 months or as long as 10 years or more.
If the investor likes the deal, they sign the legal contract ("subscribe") and deposit their money. Then it's pooled with the other investors and the sponsor uses the money to implement the deal.If all goes well, the investor receives their payments and everyone is happy. (Or maybe not. See next section for more info.)
Is real estate crowdfunding a good investment?
It can be. Real estate, like the stock market, has been one of the primary wealth creation engines for high net worth individuals for decades. Numerous millionaires and billionaires have substantial real estate portfolios.
And at the same time, real estate's also been the cause of wealth destruction as well. Like all other types of investing and there are no guarantees. The sponsor may be unsuccessful in implementing the pitched strategy and the investor can lose some or all of their money.
Conservative due diligence can greatly reduce this risk, but can't eliminate it completely. For this reason, you should never invest money in real estate that you cannot afford to lose.
Is real estate crowdfunding legal?
Yes. The concept of pooling investor money to invest in real estate has legally existed for decades, and was called "syndication". But before 2012, it was limited to friends and family, and not allowed to be online.
That changed with the Jumpstart Our Business Startups (JOBS) Act. The first change was in April 5 of 2012 when the law was passed. This made it legal for high net worth individuals (called accredited investors), to invest online for the first time.
(Accredited investor have either $1 million in net worth, or earned at least $200,000-$300,000 per year for the last two years, depending on filing status).
But the SEC dragged its feet in implementing all portions of the law for everyday investors. Finally, on May 17 of 2016, they implemented Title III, which allowed all investors (called non-accredited investors) to participate online. (This is also sometimes called regulation A+)
At that point, real estate crowdfunding investing became "legit" for all investors.
So which ones can I invest in?
If you are non-accredited, you have to limit yourself to the non-accredited offerings only.
How to pick? (non-accredited)
How are real-estate crowd funding sites legally structured?
Accredited investor sites:
Sites/companies using this are not allowed to market to the general investor public, and can only do so if you are accredited and they have a previous relationship with you. So crowdfunding sites who use this part of the law usually require you to go through a 30 day waiting period before they will show you their investments.
Most 506b sites are not required by law to verify an investor is accredited. So usually you just sign an affadvit claiming you're accredited, and that's it.
(This is the part of the law that old school syndications also use to function under).
This is the new part of the law enabled by the JOBS act. Since they are allowed to market to the general investor public (as long as they are accredited), there is no 30 day waiting period and you can see the investments right away.
506c sites are required by law to verify that investors are accredited. This can be inconvenient and may require you to send tax/bank statements, net worth statements or a letter from your attorney/accountant certifying your status. Many sites require the investor to reaffirm themselves every quarter or so which is a recurring pain.
Non-accredited investor sites:
These function under Title III which is sometimes called regulation A+. This allows them to market to any investor in the general public. So there is no 30 day waiting period and you can also see the investments right away.
How do real estate crowdfunding companies make money?
Every site is different.
Some of them charge the sponsors (the people listing the investments) a fee. They may charge a fixed price (say $30,000). They may charge a servicing charge for each investor who signs up (subscribes) to the deal. Or they may charge a back-end "promote" and take a share of the profits. There are some sponsor friendly platforms that don't charge sponsors at all.
Some of them charge investors a fee. Again they may charge a fixed price, or a yearly servicing charge (like 1%). Or they may not charge investors at all.
Some of them originate their own deals (meaning they are the sponsor themselves). When they do, they usually take additional fees for doing things like management, purchasing the property, selling it, etc..
You can see and compare the sponsor and investor fees on the different platform, using our site-by-site feature comparison matrix.
What are the best real estate crowdfunding sites and investments?
Choosing the wrong one can be an expensive mistake. But how do you pick?
Our deep reviews are the answer. We interviewed support staff, account reps, principals. Then we interviewed other investors to see if they lived up to the hype or not. And then we waded through pages of investment documents and site contracts. Here's the results:
How to pick? (non-accredited)
How do I learn the basics of real estate investing?
Definitely not from the crowdfunding sites,who often water down and skew their education to promote their own offerings.
We recommend sticking to sources that avoid conflicts of interest by agreeing to make no money from their educational materials. We have legally committed to this, including avoiding all money for advertising, referring investors, and more in our Code of Ethics.
We invite you to check out our 100% free step-by-step tutorials for beginner, intermediate, and advanced investors.
Where can I get help doing due-diligence on specific deals?
First, we recommend learning the basics from our step-by-step due diligence guides:
Then you can get help on your specific deal in our private investor club. Here you can learn from others, and brainstorm points of inquiry that you probably missed on your own. The club also has member-only analysis articles, and hundreds of thousands of $ of discounts and specials. Membership is free, but requires verification.