Real estate crowdfunding is a method of raising funds online from a large group of investors for the purchase of real estate. Individuals and businesses can use crowdfunding to raise funds from a large group of potential investors on Internet platforms and social media sites. The idea behind crowdfunding is that many people are willing to invest small amounts in such a project, and if they do, a large amount of money can be raised fairly quickly.
Key Takeaways
Real estate crowdfunding uses social media and the internet to connect investors with real estate investments. Real estate crowdfunding is similar to equity investing in that investors can purchase real estate and become shareholders. Companies can use crowdfunding to access capital they may not be able to raise otherwise. Crowdfunding offers investors the opportunity to become shareholders in real estate.
How Real Estate Crowdfunding Works
Crowdfunding is the use of the internet and social media sites to reach out to a large group of investors and raise funds from them. Crowdfunding is associated with donations to those in need and equity trading, which allows small businesses to pool their funds and use them to invest in their company's future, such as buying equipment or building a manufacturing plant.
Crowdfunding for investment began following the passage of the Jumpstart Our Business Startups Act (JOBS), which allowed small businesses to crowdfund their ventures. The 2012 law relaxed small business reporting requirements and eased Securities and Exchange Commission (SEC) regulation of small businesses, making crowdfunded investments more widely available. However, it placed limits on the amount investors could invest in crowdfunding based on their net worth and income.
The SEC subsequently enacted Rule 506(c) under Regulation D, permitting public advertising of securities provided all investors were verified as accredited, and Regulation A+ in 2015 allowed companies to raise up to $75 million per year from public investors.
In 2020, the SEC enacted Regulation Crowdfunding (CF), which allows companies to adopt a “common-owner CF” model for fundraising, including for real estate and small business endeavors. A year later, the SEC increased the investment limit under Regulation Crowdfunding from $1.07 million to $5 million, significantly expanding the size of the opportunity for non-accredited investors.
Real estate crowdfunding is similar to the equity version in that investors can purchase a property and become shareholders. Investors do not have to purchase the entire property, and they earn a percentage of the profits from their investment depending on how much they invest. For example, investors may receive revenue from a rental property or profits from the sale. Some of the best real estate crowdfunding sites offer investors low entry requirements, so you can get involved with as little as around $1,000.
Before the JOBS Act, real estate investors could only invest in real estate by purchasing physical properties or by investing in real estate investment trusts (REITs). Crowdfunding has brought a new way to invest in real estate.
The pros and cons of real estate crowdfunding
Real estate crowdfunding offers many benefits, including wider access to real estate investing, but it's important to understand the drawbacks before getting started.
advantage
The main benefit of real estate crowdfunding is that it allows individuals or companies to recruit large numbers of investors for their projects, who can then earn a profit by investing a small amount of cash in the property (or venture).
For investors, crowdfunding has much lower capital requirements than other methods of real estate investing. Larger real estate investments like apartments, offices, and hotels can cost millions or tens of millions of dollars. Through crowdfunding, investors can invest in these investments without putting down a large amount of capital, often with a minimum of as little as $1,000.
The SEC has lifted the ban on non-accredited investors investing in crowdfunding activities. Previously, investors had to be accredited and meet certain income or net worth requirements. Non-accredited investors can now participate in crowdfunding for equity and real estate deals.
Demerit
Real estate investing is already complicated before the complexities of crowdfunding are added in, so average investors crowdfunding real estate investments may not fully understand all the risks without taking the time to do their research.
Even if the investment is successful, fees can be high because managing so many investors requires resources.
Crowdfunding is also relatively new, having only been permitted by the JOBS Act about 10 years ago, so the companies involved in real estate crowdfunding are relatively new and it is difficult to find companies with a longer track record.
Strong Points
Access to more investors
Relaxation of minimum investment requirements
Ample investment opportunities
Open to non-accredited investors
Cons
Possibility of Loss
Companies and investors don’t know each other
Lack of regulation
Strict rules and fees apply
Crowdfunding has a short history, so it's hard to find a long track record.
Equity crowdfunding was previously only open to accredited investors such as banks, pension funds, insurance companies, high-net-worth investors, etc. To qualify as an accredited investor, an individual had to have an income of more than $200,000 or a net worth of more than $1 million.
Crowdfunding investment limits
Crowdfunding investments of any kind carry risks, and the SEC imposes investment restrictions on non-accredited investors.
Under $124,000
If either your annual income or net worth is less than $124,000, you can invest up to $2,500 in any 12-month period or 5% of your annual income or net worth, whichever is less.
Over $124,000
If your annual income and net worth are both $124,000 or more, you can invest up to 10% of your annual income or net worth, whichever is less, during any 12-month period, but you cannot invest more than $124,000.
How is real estate crowdsourcing different from traditional real estate investing?
Real estate crowdsourcing is a big shift from traditional real estate investing. Regular real estate investing requires a large up-front investment, either buying a property or investing in a real estate fund, but crowdsourcing allows you to invest with less money. While you still need to do your due diligence with crowdsourcing, you don't have to manage the property or do any other paperwork.
Can crowdsourced real estate investing bring in a steady income?
Real estate investment can provide a steady source of income, for example through rental income. Crowdsourcing platforms allow you to receive a percentage of the rental income, which depends on the amount of your investment and the performance and occupancy of the rental property, but can provide a regular passive income.
How big is the real estate crowdfunding industry?
Real estate crowdfunding is a unique way to raise capital because it allows those seeking funding to access a group of investors they would not be able to recruit in any other way. According to Vantage Market Research, the global real estate crowdfunding market is expected to reach $161.8 billion by 2030, up from $11.5 billion recorded in 2022, representing a compound annual growth rate of approximately 46%.
Conclusion
Real estate crowdfunding allows ordinary investors to invest in large-scale real estate projects such as hotels, apartments, and office buildings. However, because the industry is still relatively new, it can be difficult for investors to research crowdfunding companies and their track records. If you are interested in real estate crowdfunding, be sure to do your due diligence and consider the potential risks and rewards of your investment.