Real estate crowdfunding allows investors to pool funds together to invest in property. Crowdfunding has become a popular way to invest in real estate, and gain exposure to an alternative asset class without owning property directly.
Adding real estate to a portfolio can increase diversification while creating a potential buffer against inflation. Real estate crowdfunding platforms make it possible to invest in commercial and residential properties online, with potentially low barriers to entry. But accredited and nonaccredited investors (retail investors) are subject to different rules.
How Real Estate Crowdfunding Works
Real estate crowdfunding platforms seek out investment opportunities and vet them before making them available to investors. The platform then enables multiple investors to fund property investments at lower amounts than the actual property would cost. The minimum investment varies by platform, and might range from a few hundred dollars to upwards of $5,000.
Real estate investors then gain a proportional share of the profits. Depending on the nature of the investment, investors may see interest payments, rental income, or dividends. If a property is sold or assets are otherwise liquidated, investors could also see a profit.
Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.
Real Estate Crowdfunding Examples
Investors can join a real estate crowdfunding marketplace and browse investment options, which may include:
• Individual residential properties
• Retail space
• Office buildings
• Warehouses and storage facilities
• Multifamily housing
• Real estate investment trusts (REITs)
• Real estate funds
Rather than concentrating capital in a single piece of property, real estate crowdfunding allows investors to distribute their capital among different types of properties. If you’re interested in how to invest in real estate in a hands-off way, crowdfunding can help you do it.
Crowdfunding Explained
What is crowdfunding? In simple terms, it’s the act of raising money from a crowd or pool of investors.
Crowdfunding is possible through Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. The Act’s purpose was to make it easier for small businesses to raise funds following the fallout of the 2008 financial crisis.
The Securities and Exchange Commission (SEC) subsequently adopted a series of rules allowing crowdfunding to be applied to real estate investments.1,2
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Crowdfunded Real Estate for Accredited and Nonaccredited Investors
Today, accredited and nonaccredited (retail) investors can invest in crowdfunded real estate, but there are different rules for each.
Accredited Investors
An accredited investor, according to the SEC, is someone who:
• Has a net worth exceeding $1 million, not including the value of their primary residence, OR
• Had income exceeding $200,000 annually ($300,000 for married couples) in each of the two prior years and expects the same level of income going forward, OR
• Holds a Series 7, Series 65, or Series 82 securities license
Investors who meet the qualifications to be accredited in the eyes of the SEC may invest any amount in crowdfunded real estate.
Nonaccredited Investors
Retail investors who don’t meet the criteria for accredited investors may be limited in how much they can invest in any Regulation Crowdfunding offering in any 12-month period. If either your income or net worth is less than $124,000, during any 12-month period you can invest up to $2,500, or 5% of your income or net worth, whichever is greater.
If both your income and net worth are $124,000 or higher, during any 12-month period you can invest up to 10% of your annual income or net worth, whichever is greater (not more than $124,000 total).
Advantages and Disadvantages of Real Estate Crowdfunding
Here’s a closer look at how the potential benefits and drawbacks of this alternative strategy compare.
Pros
Holding crowdfunded real estate in a portfolio can offer potential advantages:
• Minimum investments may be as low as a few hundred dollars.
• Crowdfunded property investments may yield above-average returns for investors who are comfortable with a longer holding period and highly illiquid assets.
• Investors have flexibility in choosing which type of property investments they’d like to fund, based on their goals and risk tolerance.
• Direct ownership isn’t required, which means there’s no need for investors to get a mortgage, come up with down payment funds, or deal with the headaches of managing a rental property.
• Nonaccredited investors are not shut out of crowdfunding real estate, thanks to SEC rulemaking, but are subject to other restrictions.
Cons
While there are some attractive features associated with real estate crowdfunding, there are some things investors may want to be wary of:
• Real estate crowdfunding platforms may charge hefty fees, which can detract from overall investment earnings.
• Generally speaking, crowdfunded real estate is illiquid since you’re meant to leave your capital in the investment for the duration of the holding period.
• Taxes on real estate gains can be complicated, as the dividend portion is typically taxed differently than profit from sales of properties. You may want to consult a professional.
• Returns are not guaranteed, and properties may underperform as market or economic conditions change.
• Nonaccredited investors are limited in how much they can invest in crowdfunded real estate by SEC regulations (see above).
Real Estate Crowdfunding Platforms
Online platforms allow investors to crowdfund real estate with a relatively low minimum investment amount. A typical minimum investment is $10,000 though some platforms allow investors to get started with $500 or less.
When comparing platforms that crowdfund real estate, it’s helpful to consider:
• Minimum and maximum investment thresholds
• Range of investment options
• Investment holding periods
• Fees
• Investment performance
• Vetting and due diligence
It’s also important to look at whether a platform works with accredited or nonaccredited investors. The best real estate crowdfunding platforms thoroughly vet properties before making them available to investors, have low minimum investment thresholds, and charge minimal fees.
How to Get Started
If you’re interested in real estate crowdfunding you’ll first need to decide how much money you’re comfortable investing. How much of your portfolio you should allocate to real estate investments can depend on:
• Your age and time horizon for investing
• Investment goals
• Risk tolerance
• Risk capacity, meaning how much risk you need to take to reach your goals
There’s no magic number to aim for. Some investors may be comfortable allocating a larger portion of their portfolio to alternative investments like real estate while others may prefer to limit their allocation to 5% or 10% instead.
Once you’ve got an amount in mind you can move on to researching real estate crowdfunding platforms. Remember to look at whether platforms work with nonaccredited investors if you don’t yet qualify for accredited status.
The Takeaway
Real estate crowdfunding offers an exciting opportunity to expand your portfolio beyond traditional stocks and bonds. You might consider this option alongside REITs, real estate funds, or real estate stocks if you’d like to reap some of the benefits of property investing without having to purchase a rental unit or a fix-and-flip home.
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FAQ
How would earnings from real estate crowdfunding be taxed?
Owing to the complexity of real estate-related tax rules, you may want to consult a professional. Crowdfunded real estate investments can produce income in the form of dividends or interest, both of which are taxable at the dividend rate. Generally, any profits you clear when exiting would be treated as capital gains, and the holding period determines whether the short- or long-term rate applies.
Would real estate crowdfunding be considered a high-risk investment?
Real estate crowdfunding is risky, as interest rate fluctuations or changing market and economic conditions can affect outcomes. If you’re weighing real estate vs. stocks, remember that the two have little correlation to one another. Holding real estate in a portfolio can help balance risk and provide some protection against market volatility.
What is the difference between an accredited and nonaccredited investor?
An accredited investor satisfies one of three requirements established by the SEC, based on net worth, income, or securities licenses they hold. A nonaccredited investor does not meet these requirements and is generally considered a retail investor. A nonaccredited investor is subject to limits on how they may invest in crowdfunding opportunities.
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