How to Use Real Estate Crowdfunding to Create Passive Income

Real estate crowdfunding, also known as real estate crowdsourcing, offers a way to invest in real estate without getting your hands dirty.

With as little a $500 or $1,000, you can be on your way to earning passive income from real estate.

But is real estate crowdfunding a good investment? Here’s what you should know before signing the dotted line.

real estate crowdfunding
copyright AlexLMX / bigstock

What is real estate crowdfunding?

Real estate crowdfunding uses small investments from many people to buy real estate or fund development. Real estate crowdfunding platforms work much like well-known consumer websites such as GoFundMe.

Both types of platforms raise money from a large pool of people. But real estate crowdfunding isn’t a donation. Instead, it’s an investment that can pay dividends and produce long-term growth of capital.

In 2012, the Jumpstart Our Business Startups Act, also known as the JOBS Act, loosened rules for business fundraising. Regulation D governs how real estate fundraising can be used and who can take part.

Rule 506(c), a new rule of Regulation D, now allows companies to advertise private investments. However, Rule 506(c) also restricts some investments to accredited investors based on income or net worth.

Real estate crowdfunding platforms use 506(c) qualified investments paired with private real estate investment trusts (REITs) to bring passive real estate income to a broad spectrum of investors.

Regulation A+ allows the latter which opens the private market for smaller investors but limits the pooled investment to $50 million.

How does real estate crowdfunding work?

Real estate crowdfunding platforms use investor money in several ways. Some investments may target real estate purchases (equity) while others may target real estate debt financing.

It isn’t uncommon to find you’re invested in a mix of both if you choose a REIT. Many platforms use REITs to make investments accessible to nearly everyone.

When you buy shares in the REIT, you earn dividends and may also see capital appreciation over time. As the assets owned by the REIT go up in value, share prices also rise.

The share price is best viewed as a long-term gain. Dividends, however, can produce passive income almost immediately. You then have the option of reinvesting your dividends or taking your earnings as cash.

You can’t buy much real estate for $500 or $1,000 on your own. Investment real estate crowdfunding platforms pool your money with money from other investors.

The pooled investment may then buy a portfolio of diversified real estate projects. These may include physical buildings as well as loans.

You get the benefits of owning real estate without the worries of finding deals, finding tenants, or fixing leaky faucets. Expect some annual fees to pay for these services if you own an equity deal, but these are usually a small percentage.

Higher returns than other investments

Fundrise, the largest real estate crowdfunding platform, boasts annualized returns of over 12% in recent years. However, as with most investments, there are no guarantees.

fundrise projected returns
source: fundrise.com

Both principal and future dividends may face risks in a market downturn. To be fair, these same risks also exist in traditional stock investing.

Think of real estate crowdfunding as a way to diversify instead of just buying stocks and funds. For example, you might commit 20% to 30% of your investment money to crowdfunded REITs.

If the stock market takes a tumble, that part of your savings may be sheltered from the fallout.

Generate passive income

Strong dividends attract investors who want to build passive income. REITs have a long history of healthy and reliable payments.

Depending on which platform you use and which package you choose, dividends may be paid monthly or quarterly.

You can reinvest your dividends in the early years to enjoy larger dividend payments in the future. Alternatively, you can take the cash as you go.

Diversification by design

With traditional real estate investing, most investors start with one property. In many cases, this strategy works out fine. But with so many unknowns, spreading your money out among many assets is safer.

Crowdfunded REITs don’t invest in a single unit. Most REITs own multiple units or even multiple properties and may even own some loans. You’ll enjoy the increased safety of diversification because of the way REITs invest.

Invest for the long term

Before jumping in, it’s important to know that your money may be tied up for a while. Often, you’ll have to make a commitment of 5 years or more. When compared to publicly traded REITs. You lose some liquidity with real estate crowdfunding.

However, if you owned single properties you bought on your own, you’d face a similar challenge. There’s no quick way to sell without paying a price.

How much money can you make crowdfunding real estate

Long-term growth combined with monthly or quarterly dividends makes crowdfunding real estate an attractive option.

A recent study measured average returns at 11% or more, although this amount can swing higher or lower year-to-year. At 11% average annual return, here’s how your investment might perform.

$1,000
at 11%
S5,000
at 11%
$10,000
at 11%
$20,000
at 11%
3 years$1,367$6,838$13,676$27,352
5 years$1,685$8,425$16,850$33,701
10 years$2,839$14,197$28,394$56,788

Part of the annual return represents dividends. If you don’t need the income now, you can reinvest to earn more later. In some years, your investment may also earn higher returns.

Types of real estate crowdfunding investments

The types of real estate crowdfunding follow the “capital stack” often referred to in the industry. Debt has the most security; debt must be paid.

Preferred equity and common equity are further away from the cash flow in the capital stack. This means there may be more risk.

  • Debt: Some crowdfunding platforms focus exclusively on debt and earn interest on real estate loans. Other platform may offer a mix of debt investments and equity investments.
  • Preferred equity: Preferred equity is next above debt in the capital stack. Preferred equity investors get paid after debt investors but before common equity investors. This structure is similar to stocks, where both preferred and common stocks may be available.
  • Common equity: Furthest away from the cash flow for a project, common equity is paid last. Common equity investors have the lowest claim on assets and face the largest risk if a project fails.

Pros and cons of real estate crowdfunding

real estate crowdsourcing
source: Sushiman / bigstock

There’s no such thing as a perfect investment for everyone. Here are some pros and cons to consider.

Pros

  • Small initial investment: Many opportunities have minimum investments as low as $500 to $1,000.
  • Diversification: If you choose a REIT or a fund, you can diversify automatically in several projects. You can also shelter part of your investment capital from the ups and downs of the stock market.
  • Outsized returns: Successful projects may offer annual returns of 15% or more.
  • Shielded from market fluctuations: Publicly traded REITs are affected by broad market moves or sector news. Non-traded or private REITs don’t change value daily.

Cons

  • Illiquidity: Expect to make a 5-10 year commitment. There may not be an easy way to access your money in the short term.
  • Earnings risk: Earnings can change and it may take some time before there are any earnings at all.
  • Delayed dividends: For equity deals, you may have to wait until renovations are complete or until they find tenants.
  • Reduced tax breaks: Depreciation may not pass through the same way. Instead, expect to pay taxes on dividends, even if reinvested.
  • Multiple state taxes: You might pay state income taxes on earnings in another state.

Crowdfunding real estate sites cater to 2 types of investors

  • Accredited investors: Some platforms grant access to accredited investors. In the US, an accredited investor has a net worth of $1 million or more — excluding their primary residence — or has an income of $200,000 per year. For married couples, the income requirement is $300,000 per year.
  • Non-accredited investors: Many crowdfunding platforms now cater to non-accredited investors. These products usually take the form of REITs and provide a way to invest in real estate for as little as $500. SEC rules limit investment amounts by non-accredited investors.

Real estate crowdfunding platforms

In most cases, real estate crowdfunding is a long-term commitment. It’s important to choose a platform carefully. Consider returns over a period of several years if available.

Also, study the details of each platform or the specific investment you’re considering. Some platforms and individual REITS focus on dividends.

Others offer a more balanced mix of dividend returns and capital gains. Some may even focus on specific buildings. Identify your goals first because there may not be an easy way to change strategy later.

Fundrise

fundrise crowdfunding platform
source: fundrise.com

A leader in real estate crowdfunding, Fundrise offered its first online investment in 2012. With over 500,000 members now, you’ll find support and answers to your questions through several online forums and other resources.

Fundrise focuses on transparency and the company offers a wealth of information for new investors. A high-tech approach to real estate investing reduces overhead and increases returns. However, there are still some fees that can affect your earnings.

The company offers investment plans starting as low as $500 and its Starter Portfolio has become the most popular choice for new members.

fundrise investing plans
source: fundrise.com

Fundrise offers free upgrades to 1 of 3 core plans. These allow you to focus your investment based on your long-term goals. For example, one plan provides supplemental income.

A second plan offers balanced investments that provide both dividends and long-term growth. A third plan mainly targets long-term growth.

Projected performance for all 3 plans are similar, with total returns ranging from 9% to over 10%.

DiversyFund

DiversyFund offers deals to both accredited and non-accredited investors. However, the company offers REITs with a minimum as low as $500.

diversy fund investing plans
source: diversyfund.com

DiversyFund sets its sights on multifamily properties, but don’t expect to find a portfolio of sagging duplexes. Luxury condos, student housing, and massive apartment complexes are among DiversyFund’s projects.

You’ll also find projects centered in growth areas like Texas and California. Unlike some competitors, DiversyFund doesn’t charge broker fees or platform fees.

There’s no guarantee that this strategy provides greater long-term returns. However, it makes your investment easier to understand.

DiversyFund sidesteps many extra costs by purchasing and managing real estate internally, cutting middleman expense.

Realty Mogul

Realty Mogul focuses on deals that already have lease commitments in place or that already have high lease rates. Ground-up construction projects without a ready market are risky and can take years to get off the ground.

Instead, Realty Mogul focuses on projects that already have the makings of success. With Realty Mogul you have 2 primary investment options.

realty mogul investment plans
source: realtymogul.com

For investors worth over $1 million or who have a qualifying income, Realty Mogul offers direct investments in select projects. In this case, you become part owner. For other investors, Realty Mogul provides REITs.

Although the minimum investment is higher than you’ll find with some other platforms. Expect to invest at least $5,000 to get started.

Prodigy Network

prodigy network crowdfunding platform
source: prodigynetwork.com

Prodigy Network is based in New York, but has attracted investors from 42 countries and throughout the US.

Early projects included 5 upscale properties, including buildings on Park Avenue and Wall Street. The largest of these, The Assemblage located on Park Avenue, raised nearly $90 million in funding.

Chicago is next on the list as Prodigy Network moves west in search of development deals. The Standard Hotel and Old Town Residences, a planned luxury apartment development, are open to investors now.

Both projects expect a 7% annual return with an estimated holding period ranging from 4 to 7 years.

Prodigy Network’s deals differ from many competitors. Don’t expect diversified investments or REITs. Instead, you’re investing directly in solo projects. Completed projects have had a $10,000 minimum investment.

PeerStreet

peer street crowdfunding platform
source: peerstreet.com

Many platforms focus on physical properties, although some offer a mix that include real estate loans.  PeerStreet focuses on the latter and has a streamlined process that identifies deals.

You can choose your investment according to a risk profile or even choose single investments you find interesting.

Yields with PeerStreet are often on par with those you’ll find with peer-to-peer lending networks. However, there’s one big difference.

PeerStreet’s loans are backed by real estate. With peer-to-peer lending networks, there’s a bigger risk of losing your entire investment.

With real estate as collateral, borrowers have more incentive to pay and investors enjoy more security. Expect to invest at least $1,000 to get started with a commitment of 6 to 24 months.

Crowdstreet

crowd street crowdfunding platform
source: crowdstreet.com

Since starting in 2014, CrowdStreet has funded hundreds of projects with the help of over 100,000 investors. Deals favor accredited investors and individual projects often have a minimum investment of $25,000.

However, CrowdStreet also offers REITs, which have a lower minimum of $5,000 to $10,000 — or even as low as $1,000. For example, CrowdStreet’s Impact Housing REIT is open to all with a low $1,000 minimum.

Depending on how much you can invest, you can choose between funds or individual deals. You can even have CrowdStreet design a custom portfolio for you based on your goals. As with other platforms, expect to make a commitment of 5 to 10 years.

RealCrowd

real crowd crowdfunding platform
source: realcrowd.com

If you’re an accredited investor, RealCrowd offers a unique selection of deals. Apartments are common amongst projects but you’ll also find commercial real estate projects.

These might include day care or assisted living facilities. Hotels and shopping centers round out the mix.

Expect to invest $25,000 to $100,000 depending on the project you choose. Current investments focus on apartment buildings and complexes in leading markets like Texas, Florida, California, and New York.

Patch of Land

patch of land crowdfunding platform
source: patchofland.com

Another platform catering to accredited investors, Patch of Land is a lending company at heart. When you invest with Patch of Land, you’re earning interest on loans for hand-picked properties.

Patch of Land prides itself on transparency. All the underwriting information you need to make an informed lending decision is available to investors.

The company also invests alongside individual investors, so you can take comfort in knowing a team of professionals are also betting their money on Patch of Land’s deals.

Deals fund quickly — often in just minutes — so, you can start earning soon after you make your investment. A minimum investment of $5,000 applies and Patch of Land refunds your money in the unlikely event that a deal isn’t fully funded.

How does real estate crowdfunding compare with other real estate investments?

Crowdfunding differs from other real estate investments but each type has its pros and cons.

Real estate crowdfunding vs. property ownership.

With crowdfunding, the risk is shared (as are the rewards). However, with traditional real estate investing, all the risks and rewards belong to one buyer or a smaller group of buyers.

Tax treatment also differs in many cases. However, while crowdfunding may sacrifice some tax benefits, the risks are often smaller.

Real estate crowdfunding vs. real estate ETFs

Arguably, you pay a price for easy trades. ETFs are popular which can drive up ETF prices as well as their underlying assets.

Real estate crowdfunding investments usually don’t trade at all, which means you won’t pay a premium for easy trades. Instead, you make a long-term investment and can put more money to work because there’s no liquidity premium.

Real estate crowdfunding vs. REITs

Similar to ETFs, publicly traded REITs often trade at a premium. The advantage of buying either real estate ETFs or REITs is that you can purchase these through common brokers and can sell at any time.

Crowdfunded investments sacrifice liquidity but can often offer stronger returns without stock market volatility.

Common questions about real estate crowdfunding

highrise buildings under construction
source: mariakray / bigstock

How do I start crowdfunding real estate?

The first step is to learn the pros and cons of each platform. You’ll also need to decide how much you can invest.

If you just want to gain some exposure and learn about real estate crowdfunding, look for platforms with a low minimum investment and a solid track history.

You may also want to consider how you can access your money. Fundrise, for example, offers a 90-day satisfaction guarantee.

Is real estate crowdfunding profitable?

Any investment can go down in value but many real estate crowdfunding platforms have already built a solid track history. One leading platform has consistently returned 8% to 12% on average since 2014.

What is a real estate crowd fund?

Real estate crowdfunding is a way to pool money and gain access to investments that may not be accessible otherwise. Often, real estate projects require millions in funding. Crowdfunding provides access to funding through smaller investments.

Can you use real estate crowdfunding to buy a house?

Real estate crowdfunding differs from traditional ways of buying real estate. The crowdfunding company you choose locates investment opportunities which may be physical properties or even loans to other real estate investors.

How much can I invest in real estate crowdfunding?

Limits apply to non-accredited investors. For people with earned income lower than $100,000 per year or who have a net worth below $100,000, crowdfunding investments are limited to $2,000, although a separate limit based on net worth may apply.

For other investors, the SEC limits investment to 10% of your net worth or 10% of your income, whichever is lower.

Is real estate crowdfunding legal in the US?

Yes. The JOBS Act passed in 2012 cleared the way for real estate investors to invest through crowdfunding. However, SEC rules may dictate how much you can invest.

How much does real estate crowdfunding cost?

With some platforms, you can get started for as little as $500. Each platform has its own fee structure, which helps pay management expenses and other investment-related costs.

Is investing in real estate crowdfunding long term or short term?

Real estate crowdfunding is best viewed as a long-term investment. In most cases, you’ll find restrictions on access to your money that can last for up to 5 years or even longer. Dividends may be paid monthly or quarterly, however.

Do you have to pay taxes on real estate crowdfunding?

Yes. The tax structure for crowdfunding real estate investors differs from that of direct real estate investors. Both capital gains and dividends (earnings) from your investment are taxable.

Bottom line

Real estate crowdfunding spans a wide gamut of investment types. Accredited investors can gain access to preferred equity and earn fixed rates.

Non-traded REITs open the market to smaller investments while often paying returns higher than you’ll find elsewhere. Like all investments, do your due diligence before investing and never invest more than you can afford to lose.

While there are some strong names in the real estate crowdfunding space, some companies have already folded and others may not perform as well as hoped.

Caveats aside, today’s crowdfunding platforms offer a way to get started with little risk and then scale into a larger investment by reinvesting dividends.

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