How to Get Involved in the Emerging World of Crowdfunded Real Estate

Posted on: 24 July 2015

In the past, investing in real estate meant putting up your own money to buy a property with the intention to sell or rent it out for a profit. If you didn't have the money for a full purchase, you either had to find partners, take out a loan, or find a different type of investment. Recent changes to investment law now allow investors to join together and crowdfund bigger real estate projects, but you still need to prepare carefully before jumping into this new and wild form of investing.

Establish Your Net Worth

While group investment plans have been available in different formats like trusts for decades, they were greatly limited to only the most wealthy investors. The JOBS Act of 2012 lowered the bar so that investors could become accredited to contribute to these group investments if they could prove a net worth of $1 million or an annual income of $200,000. Make sure you have at least one year's worth of financial records meeting these minimum requirements to get accredited as soon as possible.

Decide Between Equity & Debt

All the platforms currently offering crowdfunding opportunities for real estate either offer equity or debt-based returns on investments. Equity plans allow you to collect a profit for years or even decades to come, but you have to wait quite a while for the investment to start generating money. Debt investments provide benefits like

  • Fixed terms, including very short time periods like three to six months, so you get your returns quickly
  • Flexible interest rates that provide a better return for you and fairer financing for the borrower
  • Greater security for the investor due to collateral and personal guarantees
  • No need to keep up with a real estate developer and track their decisions

Only you can decide which type of investment is better based on your return goals. Some crowdfunding platforms mix investment opportunities so you can join in on both debt and equity plans for a combination of quick and long-term income.

Choose a Platform

Once you're accredited as an investor and know what type of investing you want to do, it's time to choose an online crowdfunding platform. New ones are popping up each day, so check that the company handles all due diligence requirements and follows SEC reporting guidelines. Just because the investment platform is online and offers crowdfunding opportunities does not exempt it from the usual legalities.

Look for a platform offering a wide range of different properties to gain the most experience in real estate investing. Crowdfunding allows for a lot more flexibility because you can spread out your money across various projects, so you could put 10% in commercial real estate and the rest in residential and see which performs best for you. If you already have experience in a specific type of real estate, consider a specialized platform so you can get early access to the best investment opportunities.

Prepare for Mistakes

In more traditional forms of real estate investing, the people putting up the money usually visit the property to check it out personally before spending a dime. You can't do this with crowdfunded real estate, so keep in mind you are likely to fund a few poorly performing properties along the way. Start small on a platform that lets you invest just a few hundred dollars at a time if you have no real estate investment experience so you can get a feel for picking a winner before you run out of money.

The new opportunities for group investment make these crowdfunding platforms an exciting option for anyone who thinks they can pick a project that turns a profit. You can find everything from small-scale flipping and rehabilitation attempts to groundbreaking commercial building ideas, so do plenty of research on each type of real estate before putting your money down on something that sounds too good to be true.