Ultimate Guide To Real Estate Crowdfunding: What Is It And Where Can I Invest?

If you’ve always wanted to add real estate to your investment portfolio, but have either lacked the capital necessary to invest in individual properties – or to handle the management responsibilities that go with it – you’ll want to explore the potential of real estate crowdfunding.

Real estate crowdfunding provides small investors an opportunity to participate in sophisticated, high income commercial real estate projects. And in much the same way as mutual funds, you can invest in a portfolio of real estate investments with very little money.

But before you go jumping in with both feet, there’s much to know ahead of time. Real estate crowdfunding is fairly new, having come about only since the passing of the JOBS Act in 2012. Though investing in commercial real estate is certainly not new, investing in real estate through crowdfunding definitely is.

This guide will help you understand the basics of real estate crowdfunding. But you’ll need to do your due diligence research on any platform you choose to work with, as well as the specific investments you’re interested in funding.

What Is Real Estate Crowdfunding And How Does It Work

Real estate crowdfunding is peer-to-peer financing for real estate. One party comes to the platform to get funds to create or improve on a real estate project, and another comes to invest capital with the expectation of a high return on his or her investment.

A large number of real estate crowdfunding platforms have been launched in recent years. But unlike other investment types, there’s little standardization. Each works in its own specific market niche, and uses its own unique investment methodology. That means there are plenty of investment options for you, but you also need to be fully aware of what you’re stepping into.

With some investments, you’re taking a direct position in a project. That may be a share of ownership in an individual property, or investment in a trust or limited liability corporation that invests in one or more projects.

With still other platforms, you may be investing in a private real estate investment trust (see “Terms to be Familiar With” below for an explanation of these trusts), which will hold investment positions in many different properties.

Diversification is a major reason for investing with real estate crowdfunding. It’s an opportunity to get away from a portfolio of all paper assets (stocks and bonds), and add a “hard asset” to the mix.

But real estate crowdfunding is also an opportunity to earn above average returns on your investment. The typical platform pays double-digit returns, which can be paid out as regular distributions, or in the form of capital appreciation at the end of the investment term.

What’s more, you can participate in real estate crowdfunding with a relatively small investment. Some platforms require only $1,000 or less. And you can do it all online, through real estate crowdfunding websites.

The Accredited Investor Requirement

Since real estate crowdfunding involves investing in complex real estate transactions, many platforms require you to be an accredited investor to participate.

The Securities and Exchange Commission (SEC) defines accredited investors as follows:

• earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
• has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

Accredited investor status requires the investor to be either high income, high net worth, or both. The requirement attempts to limit investment in real estate crowdfunding to more sophisticated investors. More particularly, it focuses on investors who are in a position to absorb the losses that are inherent with complex real estate transactions.

Real estate crowdfunding often involves investing in transactions centering on large commercial projects, like multifamily apartment buildings, office buildings, warehouses, industrial space, and retail shopping space.

Not only are these investments unlike single-family real estate (as well as stocks and bonds), but each investment is unique. That is, there’s no standard crowdfunding project. One might involve providing short-term financing for renovations, while another might be taking an equity position in a shopping center.

In those situations, an investor must have both an understanding of the risks, and the financial wherewithal to sustain potential losses. As well, due to the long-term nature of many of the deals, investment may require tying up your money for many years.

Not all real estate crowdfunding platforms restrict participation to accredited investors. But it is typical with more complicated funding arrangements. Still, several crowdfunding platforms do offer investment participation by non-accredited investors, and others offer investments for both types of investors.

The Different Types of Real Estate Crowdfunding

There are three primary types of real estate crowdfunding investment structures:

Equity. This type of investment involves an actual ownership in the real estate project. In most cases, as an individual investor, you’ll be investing a fixed dollar amount into the equity position held by the crowdfunding platform. The platform itself can either own a building outright, or participate in a joint venture with other investment groups. Equity arrangements offer an opportunity for both ongoing income and capital appreciation on your investment.

As a general equity investor, your risk is higher than it is for preferred equity and debt investors. Since both will be paid ahead of you, the potential to lose part or all your investment is much higher.

Preferred equity. When your investment is preferred equity, you’ll receive both regular income and capital appreciation when the investment pays out. Since you’re in a preferred position, you’ll receive payments ahead of regular equity holders. The combination of both regular income and capital appreciation often results in higher returns than you’ll get on debt investments, and even regular equity investments.

Debt. The crowdfunding company provides financing for real estate sponsors. Your investment will represent a share of that loan, which is not unlike peer-to-peer lending, like that offered by Lending Club and Prosper.

The loans you invest in are for a fixed term, and pay a certain interest rate. Your investment income then is limited to interest income during the term of the loan. The loans tend to be lower risk than equity investments, but there’s no opportunity for capital appreciation.

Real Estate Crowdfunding Terms To Be Familiar With

If you plan to invest in crowdfunded real estate, there are a few terms you need to be aware of.

Real estate investment trust (REIT)

This is something like a mutual fund for real estate. Rather than holding stocks, the trust holds several or many real estate investments. They’re common investment types with real estate crowdfunding platforms. Though REITs are often publicly traded, like mutual funds, the ones used by real estate crowdfunding are usually private.

REITs often pay higher dividends than other types of investments, because they are required by law to distribute at least 90% of their income to shareholders. And since real estate investments involve depreciation – which is a non-cash expense – REIT dividends have tax advantages.

Income distributions

These can represent interest paid on debt investments, or net rental income on equity investments. They’re usually paid to investors on either a monthly or quarterly basis.

Capital appreciation

When you invest in an equity position, there’s potential for the value of the investment to increase. When it does, you’ll share in that appreciation when the investment finally pays out. (This benefit is not available on debt investments.)

Sponsor

Crowdfunding organizations usually invest in projects sponsored by real estate developers and other investors. These are the actual sponsors of the underlying investments, which crowdfunding invests in through debt or equity positions.

Commercial property

This is generally any type of real estate other than single-family, 1 to 4 family owner-occupied properties. It can include office buildings, large apartment complexes, retail space, and warehouses. These are typically the types of investments real estate crowdfunding platforms invest in.

Fix-and-flip

These are properties, which can be small residential, in which a sponsor will purchase for renovation and quick resale. Some crowdfunding platforms specialize in this type of investment.

Mezzanine loan/debt

Though we’re not going to discuss this term in this guide, it’s a common term in the crowdfunding space. It’s financing that’s secondary to a primary loan, and is generally used to finance commercial property expansion.

Vetting

This is similar to underwriting. The crowdfunding platform evaluates both the real estate investment and the sponsor in an effort to project both risks and returns. For example, they may perform an analysis on the particular location and market sector of the property itself, while also evaluating the creditworthiness and financial strength of the sponsoring parties.

The stronger the vetting process, the less risk there is in the investment. Since there are so many different investments available in real estate crowdfunding, platforms often select only a very small percentage of those presented.

The Benefits Of Real Estate Crowdfunding

Adding real estate provides greater diversification to your portfolio

The typical investments portfolio includes stocks and bonds. But since those two asset classes often move in tandem, they may not offer sufficient diversification. Adding real estate can increase that diversification, because it often moves in the opposite direction of paper assets. It’s entirely possible real estate can be increasing while paper assets are in decline.

Diversifying your real estate holdings

One of the limitations of real estate investing is the size of each individual investment. You can tie up all your money in one or two properties. But with real estate crowdfunding, you can spread your money across several deals, and even industry sectors or geographic locations.

Real estate has outperformed stocks

Between 1972 and 2018 equity REITS outperformed the S&P 500 11.62% to 10.53%. That seemingly small difference of “just” a little over 1% can make a huge difference over the long term. For example, over 20 years, $10,000 grows to $74,064 at 10.53% (the return on the S&P 500). But it grows to $90,122 at 11.62% over the same space of time. That’s a difference of more than $16,000.

You can invest with as little as $500

Real estate is a capital-intensive investment, excluding small investors.

Some real estate crowdfunding platforms, however, enable you to invest with $500 or less!

Investing in real estate once reserved only for the wealthy

Real estate crowdfunding opens up investing in commercial properties, like shopping centers and office buildings, as well as multifamily apartment complexes, to small investors. This is often the most profitable type of real estate investing.

You don’t have to get your hands dirty

If you own an individual property, you’ll be responsible for leasing, collecting rents, maintenance and repairs. But real estate crowdfunding is like owning stocks and bonds – while you have a piece of the ownership, you’re not involved in the management details.

Regular income distributions

Many real estate crowdfunding deals offer income distributions on a monthly or quarterly basis.

Income plus capital appreciation

Some investments also offer the potential for capital appreciation, in addition to regular income distributions. This is similar to a growth and income stock or mutual fund, except it involves real estate.

The Risks of Real Estate Crowdfunding

Investments are long-term

When you invest in real estate crowdfunding, you may be tying your money up for several years. It’s a long-term investment, not a trading strategy.

Investments are not liquid

Not only do you tie up your money for a long time, but in most cases you’ll be unable to cash-out early. Though some platforms do offer an opportunity to redeem your investment position early, it’s usually limited and may involve financial penalties. And there are generally no public exchanges where you can buy and sell investment positions. This isn’t the crowdfunding platforms being mean, but rather the consequence of the long-term nature of real estate investments.

Investment principal and income are not guaranteed

Much like stocks, you can lose money with real estate crowdfunding investments. A deal can have less than promised results, or even go completely sour. You may lose some or all your initial investment, as well as promised returns.

Capital calls

These are a possibility with high-level real estate investments, which is why many require investors to be accredited. They can happen when the sponsor of an investment requests additional capital from the investors to continue or complete the deal. Some crowdfunding platforms specifically exclude capital calls, so you’ll need to investigate all the details of any you invest with.

Investments are not standard

With stocks and bonds you’re typically investing in multibillion-dollar companies, who are listed on national exchanges, and rated by third-party sources, like rating agencies. No such structure exists around real estate crowdfunding investments. A deal involves a single property, that has unique characteristics and structure compared any other investment offered.

How Much Should You Invest in Real Estate Crowdfunding?

Even though the returns on real estate crowdfunding are often in double digits, the risks should never be underestimated.

Just as is the case with stocks, you could lose some or all your investment. A position taken in real estate crowdfunding must be made with this assumption.

Many financial advisors will recommend limiting your total real estate crowdfunding position to no more than 10% or 15% of your total portfolio. That will enable you to participate in potentially higher returns, while also limiting losses.

That’s just the general rule of thumb. If you’re investing in individual deals, which have a much greater potential to go bad, your position should be limited to a single digit percentage. You can go with a higher range if you’re investing in a REIT or some other type of real estate fund that diversifies among several properties.

No matter what, never invest more in a real estate crowdfunding platform than you can afford to lose. There’s no FDIC equivalent insurance behind these investments.

The Best Real Estate Crowdfunding Platforms

Below are six real estate crowdfunding platforms that have been reviewed on this site. They’re also six of the most popular platforms in the industry. As you’ll see from the summary reviews below, each has a unique way of operating.

Some restrict activities to accredited investors, while others are open to all investors.

Some invest in large, commercial projects, while others handle single-family residential properties. There are those that offer direct investment in individual property deals, and others that work with funds or REITs.

You, as the investor, can choose a crowdfunding platform based on whatever type of real estate investment you feel most comfortable making. We’ve also provided summary criteria so you can match the offerings and investment requirements between each of the platforms.

Comparison Of Fundrise Vs. DiversyFund Vs. Realty Mogul Vs. Rich Uncles Vs. Groundfloor  Vs. PeerStreet Vs. Equity Multiple Vs. FarmTogether

Here’s a look at out top best real estate crowdfunding and investing websites. In each mini review we’ll discuss some of the important points for each that you need to be aware of. Let’s dig in.

Fundrise

Fundrise offers three different investment strategies – supplemental income, balanced investing, and long-term growth. They advertise historical annual returns of between 8.7% and 12.4%.

They offer eREITs (electronic REITs) and eFunds (electronic funds). eREITs are similar to mutual funds, and are invested in commercial real estate designed primarily to generate income. They’re not publicly traded, but they do give you the ability to redeem your shares through a quarterly redemption program. eFunds also invest in commercial real estate, and are oriented more toward growth.

Fundrise summary:

• Minimum investment: $500
• Accredited investor requirement: No
• Management fees: 1.00%
• Properties invested in: Commercial
• Investment structures: Equity and debt
• Income distributions: Quarterly dividends on income funds
• IRA accounts: Yes
• Better Business Bureau rating (on a scale of A+ to F): A+
• Bible Money Matters Rating: 9.0/10

Read our full Fundrise review here.

DiversyFund

DiversyFund provides investors with the ability to diversify some of their holdings into commercial real estate.

DiversyFund is different from most other real estate crowdfunding platforms in that their REIT actually owns the properties held in the trust. They buy, manage – and when necessary – sell properties in the trust. Because of this direct involvement, DiversyFund is able to make the REIT available to investors free of any investment fees.

You can expect a 7% preferred return before DiversyFund receives any profit split. Then investors earn 65% of the cash flow profits above the 7%. Once investors have made 12% per year, any remaining profits are split 50/50 between investors and DiversyFund.

DiversyFund summary:

• Minimum investment: $500
• Accredited investor requirement: No
• Management fees: None
• Properties invested in: Commercial
• Investment structures: Preferred equity
• Income distributions: Annual dividends on income funds
• IRA accounts: Yes
• Better Business Bureau rating (on a scale of A+ to F): N/A
• Bible Money Matters Rating: 9.0/10

Read our full DiversyFund review here.

Realty Mogul

Realty Mogul invests in commercial real estate, including apartment buildings, and office and retail space. They offer both private placements and REITs.

Private placements are for accredited investors, and allow you to select individual property investments. REITs are available for non-accredited investors. Realty Mogul pays regular income distributions, then principal and any capital appreciation at the end of each investment term.

Realty Mogul summary:

• Minimum investment: $1,000
• Accredited investor requirement: Yes on private placements, no for public REITs
• Management fees: 1.00% to 1.50% per year
• Properties invested in: Commercial, multi-family
• Investment structures: Equity, preferred equity, debt
• Income distributions: Monthly or quarterly
• IRA accounts: Yes
• Better Business Bureau rating (on a scale of A+ to F): A+
• Bible Money Matters Rating: 9.0/10

Read our full Realty Mogul review here.

Modiv

Modiv invests your money in commercial real estate through prepackaged REITs. They invest using a strategy called triple net leases, where the tenant not only pays the rent, but also the property taxes, insurance, and maintenance. They also rent to high-quality tenants, such as Walgreens, Dollar General, Starbucks, and McDonald’s.

One of the advantages Modiv has is that you can reinvest your monthly dividends. An even bigger one is that they have no annual management fees.

Modiv summary:

• Minimum investment: $5 to $500
• Accredited investor requirement: Depends on the REIT
• Management fees: None
• Properties invested in: Commercial, student and multi-family
• Investment structures: Equity
• Income distributions: Monthly
• IRA accounts: On select REITs
• Better Business Bureau rating (on a scale of A+ to F): A+
• Bible Money Matters Rating: 9.5/10

Read our full Modiv review here.

Groundfloor

Groundfloor has perhaps the lowest minimum investment of any real estate crowdfunding platform, as well as no management fees. They also differ from the competition in that they primarily provide short-term financing for residential property flips. This gives you an opportunity to invest in a very profitable play on residential real estate, but without the risks normally associated with it.

If Groundfloor has a negative, it’s that it doesn’t pay regular distributions. But that’s due to the short-term nature of the financing. Still, the platform claims 10% average investment returns.

Groundfloor summary:

• Minimum investment: $10
• Accredited investor requirement: No
• Management fees: None
• Properties invested in: Residential property flips
• Investment structures: Debt (short-term, 6-12 months)
• Income distributions: N/A
• IRA accounts: Yes
• Better Business Bureau rating (on a scale of A+ to F): A-
• Bible Money Matters Rating: 9.0/10

Read our full Groundfloor review here.

PeerStreet

Peerstreet offers investors an opportunity to participate in real estate debt investments. You’ll have an opportunity to select the specific investments you want to participate in. The platform doesn’t make direct loans to borrowers, but rather acts as a secondary market for existing financing. Loans are made on single-family properties, which can be rentals or fix-and-flip transactions.

Loans run for 36 months or less, and much as is the case with peer-to-peer lending platforms, you can invest in slices of individual loans (called “notes”) with a single investment. One of the big advantages PeerStreet offers is that its loans pay interest distributions twice each month.

PeerStreet summary:

• Minimum investment: $1,000
• Accredited investor requirement: Yes
• Management fees: 0.25% to 1.00%
• Properties invested in: Small residential (single family)
• Investment structures: Debt (six to 36 months)
• Income distributions: Interest paid twice monthly
• IRA accounts: Yes
• Better Business Bureau rating (on a scale of A+ to F): D+ (Rating is based on a single complaint to which PeerStreet did not reply)
• Bible Money Matters Rating: 7.0/10

Read our full Peerstreet review here.

FarmTogether

FarmTogether is an online real estate crowdfunding platform that allows you to invest specifically in farmland properties.

Based in San Francisco, California, the company has been operation for several years and has over $1 billion invested in farmland through their platform.

When you invest in farmland via FarmTogether, you’re not taking direct ownership of farmland, but rather you’re investing in shares of the limited liability company that owns each tract of land.

FarmTogether aims to have annual returns of between 8%-15%, including yearly cash payouts of between 3%-9%.

Farmland is a true alternative investment, one that is an actual physical commodity and that is an uncorrelated asset. It often maintains it’s value while stocks, bonds and real estate show sharp drops.

In fact, Seeking Alpha discussed in a recent article how farmland has outperformed every other major asset class, including stocks, since 1972.

One of the few downsides to investing in this platform is that while the returns are good, it is not a very liquid investment. You’ll likely need to hold the investment for 7-10 years, and you do need to be an accredited investor to participate.

• Minimum investment: $10,000-$25,000
• Accredited investor requirement: Yes
• Management fees: Annual fee of 1.00% + intake fee of between 0.5% and 1.0% of your investment.
• Properties invested in: Farmland
• Investment structures: Debt (7-10 years)
• Income distributions: Quarterly, semiannually or annually from rent payments. Distribution of proceeds from land sold.
• IRA accounts: No
• Better Business Bureau rating: N/A
• Bible Money Matters Rating: 9.0/10

Read our full FarmTogether review here.

EquityMultiple

EquityMultiple is another platform that enables you to invest in individual real estate projects. This is a higher risk approach, which is why investors are required to be accredited.

Investments are in commercial real estate, and are offered by real estate operating companies and lenders. The company claims only 5% of the investments it reviews are made available to investors, due to very strict vetting requirements.

Distributions depend on the structure of the underlying real estate investment, though they usually occur either monthly or quarterly

EquityMultiple summary:

• Minimum investment: $5,000
• Accredited investor requirement: Yes
• Management fees: 0.50% to 1.00% + 10% of investor profits
• Properties invested in: Commercial
• Investment structures: Equity, preferred equity, debt
• Income distributions: Monthly or quarterly on debt and preferred equity
• IRA accounts: Yes
• Better Business Bureau rating (on a scale of A+ to F): A+
• Bible Money Matters Rating: 8.0/10

Read our full EquityMultiple review here.

Cadre

Cadre is a real estate platform that has been around since 2014 and allows you to invest in individual real estate projects, or in what they call Cadre Funds, which have diversified real estate holdings. Investors are required to be accredited as this is a higher-risk investment.

Due to very strict vetting requirements, Cadre doesn’t have a lot of available investments at any given time. They focus more on quality investments rather than quantity.

Cadre has transacted on real estate with a total value of nearly $4.7B since they launched, and they have an impressive return of 18.6% per year.

Cadre summary:

• Minimum investment: $25,000
• Accredited investor requirement: Yes
• Management fees: 1-2% upfront fee, 1.50% to 2.00% annual fee + percentage of investor profits
• Properties invested in: Commercial
• Investment structures: Equity
• Income distributions: Monthly or quarterly on debt and preferred equity
• IRA accounts: No
• Better Business Bureau rating (on a scale of A+ to F): A+
• Bible Money Matters Rating: 9.0/10

Read our full Cadre review here.

Final Thoughts On Real Estate Crowdfunding

Real estate crowdfunding is a way to add sophisticated real estate investments, like commercial property, to an otherwise paper-based portfolio. The major advantage is that many of these platforms provide returns that are superior to stocks and bonds.

But they also add an important level of diversification. A real estate crowdfunding portfolio of well selected investment properties can continue to provide positive returns when paper assets are in decline. It can also be a way of providing growth without leaving you completely dependent on the performance of the stock market.

There’s no question that real estate has been one of the top investments of the past 100 years. The best returns have gone to wealthy individuals, who have been in a position to take advantage of large, sophisticated commercial projects. But real estate crowdfunding has democratized that process. At least on platforms that don’t require accredited investor status, small investors can participate in these returns with a very small investment.

Just be careful to do your research on any crowdfunding platform you plan to invest with. Do the same with the specific investments, whether they’re individual properties or REITs. Finally, limit your overall exposure. Invest no more than 10% to 15% of your portfolio in real estate crowdfunding. And make sure you have plenty of more traditional investments, like stocks, bonds, and cash, to maintain adequate balance in your portfolio.

Reviews Of Real Estate Crowdfunding Investing Sites

• Fundrise Review
• DiversyFund review
• Realty Mogul Review
• Modiv Review
• Groundfloor Review
• Peerstreet Review
• EquityMultiple Review
• FarmTogether Review
• Cadre Review