Real estate crowdfunding is a hot trend in property investment. Crowdfunding is when investors pool capital to fund a specific project. And because real estate requires a lot of capital upfront, it’s a great fit for crowdfunding.
Wealthy investors have been pooling funds for property developments for generations through exclusive private equity funds and joint ventures. Crowdfunding has made this once-limited opportunity available to everyday investors. Most notably, it gives investors access to deals that would have otherwise been out of reach.
Imagine funding a multi-family development as an individual investor. Not only would you need a prohibitively large amount of available capital, but you would be solely responsible for the management of the project, and you would be assuming all the risk yourself.
Savvy investors know it’s better to leverage funding from other investors to access projects with greater returns and mitigate risk. And they know it's better to leverage the time, skill, and knowledge of real estate experts to manage the development on their behalf!
Let’s take a closer look at crowdfunding and answer your important questions:
● How does crowdfunding work in real estate?
● Is real estate crowdfunding a good investment?
● Is crowdfunding safe?
● What is the difference between real estate crowdfunding and syndication?
● How can I start investing in crowdfunding and syndication?
By the end of this article, you’ll know exactly how this all works, and you’ll be ready to choose your next investment project.
How Does Crowdfunding Work in Real Estate?
Real estate crowdfunding is flexible and can take several different forms. For example, you could invest in a short-term fix-and-flip for a quick profit or you could invest in a long-term development that takes a year or more but provides greater returns.
Some projects are designed to be resold upon completion, allowing the investors to receive their money back plus proceeds immediately. Other projects are designed to be held after completion, giving investors monthly proceeds, but keeping their initial investment locked up for longer.
With so many ways to use crowdfunding, the process varies from project to project. But here are the five steps most often included in a crowdfunded investment:
- The sponsor scouts locations, plans the development, and acquires the property. The crowdfunding sponsoris the person (or team) responsible for the success of the project. The sponsor can make or break your project, so choosing a sponsor you trust is critical. If you're using an online platform, check the track record for the sponsor to see how their deals have performed in recent years. Gatsby Investment, for example, has provided average annualized returns of 23% for investors since inception!
- Investors provide funding for the project. It’s important to understand if you're providing debt funding or equity funding. With debt funding, your role is similar to a bank, lending money to fund a project in exchange for a set rate of return. With equity funding, you own a share of the underlying real estate and are entitled to a share in the profits.
- The sponsor manages the project from start to finish. One of the biggest benefits of crowdfunding is that it's passive. You get the benefits of real estate investing without the hassle of managing a development yourself. A typical multi-family development might include the tear-down of an existing single-family structure and the building of a new multi-family structure. This requires a team of skilled architects, designers, and craftsmen, with strong leadership from a competent sponsor.
- The sponsor oversees the ongoing performance or the sale of the completed development. This step depends on whether you're investing in a develop-and-sell project or a develop-and-hold project. If the project is to be sold so the investors can recoup their investment, the sponsor will work with real estate brokers, appraisers, inspectors, escrow officers, and title companies to complete the sale of the finished project quickly and smoothly. If the project is to be held for longer-term cash flows, the sponsor will oversee the performance of the development (or hire a professional property management team for this purpose). This oversight would include finding renters, signing leases, collecting rents, and handling ongoing maintenance.
- The sponsor distributes earnings to the investors. If a project is sold, proceeds of the sale will be distributed to the investors, typically within 30 days of closing. If the project is held, earnings will be distributed at regular intervals (typically monthly or quarterly).
Is Real Estate Crowdfunding New?
The terminology is fairly new, but the concept has been used in the United States since at least 1885. In 1885, Joseph Pulitzer (yes, that Pulitzer) crowdfunded to keep the Statue of Liberty in New York. The statue was a gift from France, but couldn’t remain in New York unless the city raised funds to build the stone platform for Lady Liberty to stand on. Cities like Boston and Philadelphia were willing and able to build platforms to move the statue to one of those cities. But Pulitzer put an ad in his newspaper asking for public donations to fund the development project. In just five months, over $101,000 was raised by over 160,000 donors.
But this fundraising model had a logistical problem. Tracking small amounts from a large pool of donors was time-consuming. And tracking individuals’ returns on the investments would have been prohibitive. So real estate crowdfunding was kept to a small pool of wealthy investors with the capital to put up substantial investments.
Flash forward to the 2010s. By then, we had the technology to easily track comparatively small investment amounts from a comparatively large pool of investors and distribute proceeds from the investment accurately, quickly, and without hassle. But crowdfunding was still not widely available because the SEC prohibited “broad-based funding.” The purpose of this rule was to protect smaller investors from being taken advantage of, but the effect of the rule was to keep smaller investors out of lucrative real estate developments.
Then in 2012, the JOBS Act removed this prohibition. Smaller investors were finally logistically and legally able to participate in these exclusive deals and real estate crowdfunding went mainstream.
Is Real Estate Crowdfunding a Good Investment?
Real estate crowdfunding comes with several advantages:
- Low minimum investments. You get a piece of a large property deal without investing a large amount of money.
- Flexible options. Invest a little or a lot. Invest for the short-term or the long-term. Invest in single-family or multi-family. You have lots of options, and you get to choose exactly which projects you’ll invest in rather than investing in a general property portfolio.
- Diversity. With low minimum investments and flexible options, you can spread your investment among multiple projects.
- Expert acquisitions and management. A team of development professionals is dedicated to the success of the project.
- Your investment is completely passive. You get to kick back and enjoy the progress while the sponsor handles the work.
There are a few limitations you should also be aware of:
- Most property crowdfunding is limited to accredited investors. To be accredited, you need an annual income of $200,000 or more (or $300,000 when combined with a spouse) or a net worth of at least $1 million (excluding the value of your primary residence).
- Your investment will be tied up until the project is complete. But with some options for short-term flips, this period can be as little as six months.
- Crowdfunding platforms are fairly new since the SEC just approved them in 2012. So there is just over a decade of proven performance for you to review.
For a complete breakdown of the advantages and disadvantages, check out Real Estate Crowdfunding Pros and Cons.
Is Real Estate Crowdfunding Safe?
Real estate is largely considered to be among the best investments you can make. But traditional property investments carry several risks:
- They require large sums of capital.
- Putting so much capital in a single project leaves you susceptible to unforeseen circumstances affecting that single property.
- You would need to be an expert in analysis, finance, project management, construction, marketing, and sales to avoid making a costly mistake.
- Liquidity is low, so it may be difficult to recoup your original investment.
Real estate crowdfunding mitigates each of these risks:
- You can invest in an expensive development project with comparatively little cash.
- With investment minimums low, you may be able to afford to invest in multiple projects, diversifying your real estate investments.
- You get a team of experts who specialize in every aspect of the development.
- You can choose shorter-term investments (around just six months for a single-family flip) so you don’t have to keep your cash tied up for long.
The primary risk associated is simply the risk of the unknown. With today’s modern systems established in 2012, crowdfunding sponsors and real estate companies don’t have a long financial history. This is why it's important to put your faith in an institution with a long and clear history in this segment.
Crowdfunding vs. Real Estate Syndication
With modern-day crowdfunding being so new, there is a bit of confusion around some of the terminology. Some investors use the terms crowdfunding and syndication interchangeably, but this isn’t entirely correct. There are a few key differences between crowdfunding and syndication.
Crowdfunding is a broad term, meant to cover any form of raising funding from a group of investors. While investors can be equity owners, it is more common for crowdfunding investors to act as lenders.
Real estate syndication refers to the specific investment relationship in a special type of crowdfunding arrangement. Real estate syndication is a partnership between the syndicate sponsor and the investors. In a syndication agreement, the sponsor forms a legal partnership with the project’s investors. The investors all own a share in the entity that owns the development. This gives real estate syndicate investors the benefits of direct ownership without the hassle that usually comes with direct ownership.
Investors in property syndicates get all the benefits of crowdfunding. They also get benefits specific to the syndication legal structure. Ownership of the property is held in a secure legal entity (a limited partnership, limited liability company, or Delaware statutory trust). Property records are transparent and available to all investors. And investors get to know the details of the available projects before transferring their funds to the sponsor.
Invest in Real Estate Crowdfunding with Gatsby Investment
Gatsby Investment is a premier real estate investment company that specializes in the syndicated form of real estate crowdfunding.
Gatsby makes it easy to invest in high-quality projects. You simply sign up with Gatsby Investment online to create your investor profile, get your accredited investor status verified, choose your investment project(s) from our available opportunities, and transfer funds to the syndicate sponsor. You'll be able to monitor the progress of your investment through our convenient online portal.
Gatsby investors get to participate in property investments that have been hand-selected by our team of real estate experts. We want your investing experience to be easy, low-risk, and profitable.
With Gatsby Investment, you’ll benefit from:
- The experience, knowledge, and skills of our real estate professionals,
- Comparatively low minimum investments,
- Diverse investment opportunities,
- Competitive ROI,
- And our secure, transparent online platform.
If you’re looking for stress-free real estate investing with strong results, Gatsby is here to serve you. Learn more about investing with Gatsby and sign up today!