It’s often said that real estate is one of the more reliable paths to wealth.
Then the subprime mortgage crisis happened, the housing bubble popped, and historical data has shown that from 1890 to 1990, after adjusting for inflation, home prices only rose 0.2% a year.
Yikes. Feels neither reliable nor a path to wealth!
That being said, real estate should play a role in your investment portfolio. The tricky part about real estate is that many of us don’t have the investment assets, or the time, to invest in real estate property.
It’s not like an index fund where you can buy any S&P 500 Index fund and pretty much win. There will not be a significant difference between a Vanguard index fund and a Fidelity index fund.
The same cannot be said about real estate. You can’t just buy any old house. That’s what makes real estate so tricky. If you opt to rent it out, versus flipping it, you will be required to learn a whole new skill set.
It’s not necessarily difficult, per se, but it will require your time. And the lessons can be expensive!
A few years ago, I joined a very small real estate investing group (3 people) that dabbled in single-family homes in the Kansas City region. These were all ~1,000 square foot, 2 bedrooms, 2.5 bath units that rented out for around $600-750 a month. The first year was good, we acquired a few homes, but after that, the area became too popular and we couldn’t get homes at a price we felt comfortable with. Just recently, we had a call where we decided that because things stagnated, we’d sell off the assets and move on. We will probably show a return of about 0.2% over inflation. 🙂
That’s where real estate crowdfunding could play a role.
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What is Real Estate Crowdfunding?
Crowdfunding is where you get a lot of people to invest a little bit (relatively) into a single project – think Kickstarter. A crowd funds a project. Crowdfunding.
Prosper and Lending Club are often called peer to peer lending but they are in effect crowdfunding personal loans. A lot of people each invest a little bit into personal loans and get a return.
Real Estate Crowdfunding is simply a version of this except you don’t fund a personal loan, you fund a real estate project. Real estate projects, especially smaller ones, are notoriously hard (and slow!) to fund the traditional way and so naturally an online marketplace has emerged to fill that gap.
Investors, seeking a higher return, can diversify their risk by investing small amounts into a variety of projects. Instead of putting tens of thousands into homes in Kansas City, I can put a few hundred in Kansas City, commercial property in San Francisco, a strip mall in Buffalo, etc. Different markets, different types of projects, and all small amounts and hopefully very weakly correlated.
How Does it Work?
You open an account on the crowdfunding platform, you research and select a project to invest in, and then you invest! The steps are easy to list but harder to execute.
First things first, to invest in individual projects, you need to be an accredited investor. That means you need a net worth of at least a million dollars, excluding primary residence, or income of at least $200,000 each year for the last two years ($300k if you’re married) plus an expectation to earn that this year.
When you invest in a project, often with a minimum $5,000 investment per project, you are becoming a limited partner in the investment.
If you are not an accredited investor, there are still ways for you to invest in crowdfunded real estate. They’re structured as a fund, similar to real estate investment trusts that you can already buy on the public markets. You buy shares of the fund and the fund makes the investments. You do not make individual investments on individual projects, thus removing the accredited investor requirement.
What are the best crowdfunding real estate sites?
We take a deep dive into the best crowdfunding real estate sites here, but my two favorites are Fundrise and RealtyMogul:
You invest in an “eREIT” as opposed to a single project (they no longer originate deals). The eREIT invests in real estate projects, either debt or equity, so you don’t have to be an accredited investor. It’s like investing in any REIT, except in this case you buy the eREIT directly from Fundrise so you skip a lot of the fees (just a 1% annual asset management fee). There is just a $10 minimum.
A $5,000 investment balance lets you invest in advanced strategies such as supplemental income (high dividends) and long-term growth (fewer upfront dividends but the potential for more potential gains).
High net worth clients with a $10,000 balance or more can invest in strategies few crowdfunded platforms offers. Single-family rental properties and last-mile distribution centers are two examples.
We also have a review of Fundrise.
Learn more about Fundrise
(This is for both accredited and non-accredited investors)
When it comes to investing in property, there are a lot of options if you want to invest in commercial real estate or apartment complex or other massive multi-unit properties. Very few offer the ability to invest in single family homes, townhouses, or vacation rentals – until Arrived.
Arrived offers up two real estate classes that don’t get a lot of attention from other platforms:
- Vacation Rentals – Higher potential revenue but potentially lumpier income stream due to seasonality and other factors
- Rental Homes – More consistent income given rental leases
If you want a REIT, you can just invest in one from Fundrise or a publicly traded REIT. If you want to invest in a vacation home, there aren’t too many options out there. Arrived is worth a look if that’s a class you wish to get into.
Learn more about Arrived
(This is for both accredited and non-accredited investors)
You can pick from a variety of investment types (residential, commercial, mixed, retail, etc.) or you can go with a their two REITs (the Income REIT and the Apartment Growth REIT), where they invest for you. Investor fees will vary based on the deal. You can read our deeper review of RealtyMogul and form your own opinion.
Learn more about RealtyMogul
(This is only for both accredited and non-accredited investors)
Is this equity investment or debt?
Here’s another important point to review… (many thanks to Liz, who is not affiliated with any real estate crowdfunding companies) when you invest, you need to fully understand the position you’re invested in.
For example, some of the investments are in equity, preferred equity and mezzanine positions. Some are senior debt. The positioning matters when defaults happen, which will happen as these businesses get larger and you start talking about billions changing hands.
I’m not familiar with all those listed but with Fundrise and RealtyShares [which is no longer operating], I think you missed a couple of important distinctions between those and PeerStreet. Those two offer equity, preferred equity and mezzanine positions along with “some” senior debt.
PeerStreet only offers senior debt positions. Further, that’s what also separates PeerStreet from Lending Club and Prosper because they are collateralized debt instead of unsecured consumer debt.
Investing in the more exotic investments may seem exciting and sexy but in my opinion, they are just “giving” real estate developers equity to make their transaction work, which works as long as prices are increasing.
I feel much more comfortable in a secure, shared 1st trust deed debt position.
Why does this matter?
I just think that a lot of people don’t know what they are getting into when they invest in preferred equity or mezzanine positions. It sounds important but it’s much more risky, and less liquid than a Vanguard Index Fund. Think of it this way – you get a capped upside for taking on very high levels of risk. In an index fund, you have an unlimited upside for diversified risk. That capped upside return in one of those RealtyShares positions is NOT commensurate with the risk, in my opinion.
Like any investment, do your homework!
If you need help, my friend Robert at The College Investor has this epic guide on real estate crowdfunding that explains quite a bit about the nuanced differences between each of these platforms, how to conduct proper due diligence, and more.
Should you do it?
No one can predict the future and when we view success and failure in terms of returns, nothing is certain.
If you want to get into real estate and you want to learn, buy The Ultimate Beginner’s Guide to Real Estate Investing and join Bigger Pockets.
If you want to get into real estate and you want the safest bet — go with a REIT. Vanguard has an index fund (VGSLX) that invests in real estate. Low expense ratio at 0.12%, $3,000 minimum, and performs well. It invests in big boring real estate companies like Simon Property Group (they own malls) and Public Storage (they own storage facilities).
If you want something that feels more exciting, gives you more action and activity, and is far more interesting to talk about — go with crowdfunded real estate investing.
Years ago, when the peer to peer lending craze boomed, I couldn’t participate because Maryland residents weren’t permitted to fund loans. This time around, I can, so maybe I’ll dabble a little to see how it is.
Have you jumped in on this type of real estate investing?