Crowdfunding has become a huge trend over the past two decades. From its inception in 1997 to the passing of the JOBS Act in 2012, crowdfunding has grown from a niche, online resource to a multibillion-dollar industry. It covers everything from funding personal projects on Kickstarter to giving charitable contributions on YouCaring. It’s even spilled over into the world of real estate investing, which begs the question – can you crowdfund real estate?
The short answer is yes. The long answer is a bit more complicated. RE crowdfunding services offer investors a way to invest in real, tangible properties for a low price point. They sound great on paper, but is crowdfunding real estate a good idea? More importantly, can crowdfunded real estate be used as a reliable and consistent way to build wealth?
We explore these questions and more below. Keep reading to learn about crowdfunding and real estate. If you’re an experienced real estate investor who needs a commercial bridge loan, call us today at 855.505.LEND.
What is Crowdfunded Real Estate & How Does it Work?
Crowdfunded real estate is exactly what it sounds like – a way for individuals to use technology and small amounts of money to collectively invest in real estate. While the minimum amount needed to invest varies from platform to platform, it can be as low as several hundred dollars or as much as several hundred thousand.
The types of investments also vary widely. Some platforms focus on commercial property like apartment buildings and complexes, shopping centers, freestanding office buildings, storage spaces, and more. Others focus on single-family investment properties and even residential mortgages. Still others offer mixed portfolios.
This type of crowdfunding works on the idea that if many individuals invest a small amount of capital, collectively larger amounts of money needed by developers can quickly be raised to complete their projects. Real estate crowdfunding also offers hobby investors a chance to add property to their portfolios they normally wouldn’t be able to afford.
The rise in crowdfunding real estate has been largely driven by these hobby, or novice, investors. While there has been interest and support from more established players, and even Wall Street, the boom in RE crowdfunding is mostly driven by these small transactions. They do add up though. It’s estimated that Fundrise, the most popular crowdfunding platform, filed for IPO at the start of 2017 and raised $14.6 million in funds in a single day.
Is Investing in Real Estate Crowdfunding Worth it?
Many real estate crowdfunding services promise rates of return that exceed those of traditional REITs – often claiming to offer up to an 11% ROI. However, these rates are not typical for all users, and single-digit returns are much, much more common.
In addition, these crowdfunding platforms may hold investments of lower quality than those held by REITs. While this higher risk may mean a higher reward, it also means that if a project fails, investors could lose their entire investment.
There is quite a bit of small print to be aware of also. RE crowdfunding platforms have very high management rates compared to traditional REITs and commercial real estate investments. Some investors pay up to 4.5% in expense ratios, which can lead to razor-thin margins and even net losses. Most other REITs, in contrast, have expense ratios well-below 1%.
Smart Traditional Investments are a Better Choice
If you have money to spare, and you’re thinking about investing in a real estate crowdfunding platform, think again.
You’ll be better off with a traditional real estate investment, like purchasing a commercial property and managing it yourself or investing in a well-chosen REIT. While the barrier to entry for these investments is higher, they are overall a higher quality. You also gain the security that comes from working with other experienced investors, rather than a large number of enthusiasts.
This brings us to the issue of securing funding for your commercial real estate investment. You need to find a lender with the experience, capital, and loan terms that work for your particular investment. You need to find Lionshare Lending.
With a four-decade track record of excellence, Lionshare’s private money lending team has what it takes to get you the financing you need. More importantly, we focus on creating long-term client relationships through a quick and seamless loan process. This keeps our clients happy and their projects a success. Call us today at 855.505.LEND to get started.