What is real estate crowdfunding? Is it good for business?

Real estate crowdfunding is becoming a go-to option for property investors. Especially, for those who are aiming to diversify their financial portfolio, but lack the resources to move their investments to the next level. But what is real estate crowdfunding? And, how has it revolutionized real estate investing? And, why are investors of all ages and interests jumping on board? 

Here, you can learn what crowdfunding in real estate means and how it can help you grow your financial portfolio. 

So, what is real estate crowdfunding?

Crowdfunding is when interested investors put their money into a collective pool along with other investors. This pooled money is then used to back real estate investments – both residential and commercial properties. These real estate opportunities might involve developing new housing, retail, or office spaces. Or, buying a share of existing properties.

Simply put, crowdfunding is a way to pool money from multiple investors to fund large-scale real estate projects. It allows individuals to invest in properties without needing to purchase the entire property themselves. 

Now the next question is, where can potential investors check for different investment opportunities? Investors use online platforms to browse and select real estate projects. They can then contribute funds to these projects. In return, they receive a share of the profits generated, such as rental income or proceeds from a sale.

However, keep in mind that while many online platforms are open to all investors, some require you to be an accredited investor. 

What are the most common reasons for crowdfunding?

Investors might be drawn to real estate crowdfunding for several reasons:

• Crowdfunding allows investors to diversify their investment portfolio. Instead of putting all their money into one type of asset, they can spread their investments across different properties and locations. This reduces the risk of loss if one investment doesn’t perform well.
• Traditional real estate investments often require significant capital upfront. Crowdfunding platforms, however, allow investors to start with much lower amounts. This makes real estate investment accessible to a broader audience.
• By pooling funds with other investors, individuals can participate in larger property deals than they could afford on their own. This means that investors can get a piece of high-value real estate without spending too much money.
• The risks associated with property ownership, such as market fluctuations or property damage, are spread among multiple investors. This means that no single investor bears the full brunt of any potential losses.
• Crowdfunding platforms often provide access to investment opportunities that are not available to the general public. This includes high-value commercial properties or prime real estate locations that individual investors might not be able to access otherwise.
• Investors can diversify within the real estate market itself by investing in various types of properties, such as commercial buildings, residential homes, and real estate portfolios. 
• Unlike traditional property ownership, where investors might have to handle upkeep and maintenance, real estate crowdfunding typically does not require such involvement. 
• Investors don’t need to qualify for a mortgage, which can be a significant barrier in traditional real estate investment. This makes it easier for people who might not meet strict lending criteria to still participate in the real estate market.
• Crowdfunding doesn’t require investors to guarantee loans with their property and assets. This reduces personal financial risk.

How does crowdfunding work?

Real estate crowdfunding platforms give investors a chance to get in on exclusive property deals that aren’t usually available to the public. It’s great for diversifying your portfolio alongside stocks, bonds, and other investments.

This method is similar to equity investing, where you buy a share of the property and become a part-owner. Companies can use crowdfunding to access funds they might not get otherwise. Investors earn a portion of the profits from rental income or sales, based on how much they invested. Many crowdfunding sites allow minimum investments. So, you can start investing with a small amount – as little as $1,000.

Individuals and businesses use social media and internet platforms to connect with potential investors. Some crowdfunding sites are open to everyone, while others require investors to be accredited. To be an accredited investor, you need to have an annual income of over $200,000 or a net worth of over $1 million.

What are the pros and cons of real estate crowdfunding?

Like any real estate investment, real estate crowdfunding has its advantages and disadvantages. Before you commit to a crowdfunded real estate investment, it’s essential to weigh both. Considering these pros and cons can help you make an informed decision about whether real estate crowdfunding is the right investment strategy for you or not.

Pros

• Real estate crowdfunded investing often pays out larger dividends as compared to traditional real estate investments.
• It allows investors to diversify their financial portfolio by adding real estate investments without the need for substantial capital upfront. 
• Crowdfunding platforms provide access to unique and exclusive real estate projects that individual investors might not have the opportunity to invest in otherwise.
• It eliminates many of the common headaches property owners and landlords face, such as property management, maintenance, and tenant issues.
• Crowdfunding requires minimal upfront and ongoing investments compared to traditional real estate ventures.

Cons

• Crowdfunding platforms may charge investors various fees, such as management or advisory fees. These can eat into overall returns.
• Real estate crowdfunding investments are not easily sold off or divested quickly. Investors might have to wait for the project to reach completion or for the investment term to end before they can access their funds.
• Participants must pay taxes on any dividends they receive from their investments.
• Some platforms require investors to be accredited, meaning they must meet certain income or net worth thresholds. This can limit participation to relatively well-capitalized individuals, excluding those with less financial means.

Key takeaway

Real estate crowdfunding is all about raising money from a big group of investors to buy property. Both individuals and businesses can tap into this type of investment vehicle. 

The method leverages social media and the internet to link investors with property deals. The bottom line is that crowdfunding opens up new avenues to capital that investors might not be able to access otherwise. They get the chance to become part-owners of high-value real estate properties.

FAQs

How does crowdsourcing differ from traditional investing?

Crowdfunding allows you to invest with less money compared to traditional real estate investing, which usually requires substantial capital upfront. And, it lets you participate without having to manage the property or handle the administrative details. 

How do I earn money through crowdfunding?

Investors can earn a steady income through rental income, property appreciation, or a proportionate share of the profits when a property is sold. The returns depend on the performance of the investment and the amount invested.

Read more: What is GRM in real estate?

What are the tax implications of crowdfunding?

Yes, you will need to pay taxes on any dividends or income received from your real estate investments. A tax professional will be the best advisor for your specific situation.

What are the tips for choosing a real estate crowdfunding platform?

Potential investors can look for real estate deals on platforms with a strong track record, transparent fee structures, and a variety of investment opportunities. You must do your due diligence, research user reviews, and check for any regulatory compliance or accreditation.

What types of properties can I invest in?

You can invest in a wide range of properties, including residential, commercial, industrial, and mixed-use developments. Some platforms also offer opportunities to invest in real estate investment trusts (REITs) and real estate portfolios.

How long will my money be invested?

Investment periods can vary widely, typically ranging from a few years to over a decade. 

Is real estate crowdfunding regulated?

Yes, real estate crowdfunding is regulated. However, the extent of regulation can vary by country and platform. Always ensure the platform you use complies with local regulations and standards.

Written by Ramona Sinha. December 19, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.