Real estate crowdfunding is among the hottest trends in property investing for the 2020s. Crowdfunding empowers property investors to leverage capital from a pool of like-minded people to buy into developments that would be otherwise unattainable.
In its simplest form, real estate crowdfunding is an investment strategy in which investors combine funds to purchase a property and share in the profits. These deals can take multiple forms. You could invest in a single-family home to fix and flip, for example. Or buy into a multi-family construction project and cash out when the completed development sells. You could even invest long-term in a multi-family building, earning a share of the monthly rental revenue for passive income.
But before you invest, you need to understand the crowdfunding pros and cons. As with most investments, there are many advantages to crowdfunding, and there are a few potential disadvantages to be aware of.
Advantages of real estate crowdfunding
There are several advantages to property investment in general. And then there are advantages to investing in crowdfunding in particular.
As an investor in a property, you generally benefit from:
- Appreciation of the asset over time
- Quick return potential when an asset is flipped over a short period
- A hedge against inflation
- High potential for profitability
- Diversification from an asset portfolio made up of stock market securities
- Ongoing cash flow potential through rent-producing properties
Now let’s take a closer look at the specific advantages of the crowdfunding investment strategy.
Comparatively low investment minimums
Buying a property on your own is expensive. In May of 2021, the median existing home price in the U.S. hit a record-breaking $350,300. With a 20% down payment, you’d be looking at $70,060 out-of-pocket. Plus closing costs. Plus renovation costs. And then ongoing maintenance costs or closing costs when you flip the home. And that’s just single-family homes. Imagine the upfront expense of a multi-family investment as an individual investor.
But because crowdfunding pools capital from multiple investors, it comes with the benefit of low investment minimums. While exact investment minimums vary by project, you could invest in a fix-and-flip in Los Angeles for approximately $10,000. And if you want to get into the multi-family game, there are opportunities available for around $25,000.
Leverage
The low investment minimums are great, but the real power lies in leveraging the crowdfunding model to access bigger deals than most investors can attain on their own. Take luxury estates for example. You might not have the $4.6 million needed to build a luxury estate in the Hollywood Hills on your own, but by using crowdfunding to leverage funding from other investors, this deal suddenly becomes realistic to many investors. That's attractive to when you consider the potential for an estimated 22% annualized ROI.
Diversification potential
Also because of the low investment minimums, many investors can afford to invest in multiple projects at the same time to diversify their property portfolio.
In traditional real estate investing, you’re putting substantial resources into a single property. And while real estate is generally considered a low-risk investment, it is possible for unexpected circumstances to sideline a project. If you spread your resources among multiple developments, you’re mitigating your overall risk.
Flexibility
With so many crowdfunded deals to choose from, there is an option for nearly any investor. You have the flexibility to choose projects that work with your available budget, your investment goals, and your desired timeframes. You might choose a fix-and-flip for a low buy-in and a quick pay-out. Or you could invest more over the long term to access an apartment building development that provides monthly rental income.
Passive income
Traditional real estate investing requires active involvement. You need to spend excessive amounts of time and energy to find the deal, close the deal, oversee the development, add sweat equity of your own, then manage the property or sell it. But with crowdfunding, all you have to do is pick your project, fund it, and go about your business while a team of experts handles everything for you.
So you’re able to earn passive income from crowdfunding. It could come in the form of a lump sum if the project is sold, or you could earn periodic payments if the project is held to generate rental income.
Disadvantages of real estate crowdfunding
As with any investment, there are a few downsides to consider before investing in crowdfunding. Here are the cons.
A comparatively short track record
While wealthy individuals have privately arranged joint real estate ventures for over a century, this modern iteration is fairly new. In 2012, the JOBS Act removed the SEC’s ban on “broad-based funding” which opened the door for publicly-offered, crowd-sourced investment deals. So there isn’t a lot of hard data available to offer a long-term overview of the success of these types of investments.
When choosing a real estate company to invest with, it’s important to consider the experience of the company’s team and the returns the company has secured for other investors.
Lack of control
While you do get to choose the specific project(s) you want to invest in, you won’t have any direct control over the management of the project. The fund’s sponsor will oversee the project based on the fund’s goals, and won’t accept input from individual investors in the fund.
Furthermore, this lack of control extends to ownership rights. Most real estate companies have investors invest in debt funding rather than equity funding. This means investors are acting more like a bank (lending money to fund the project) than as owners (building equity with an ownership stake in the underlying property).
If owning a share of the property is important to you, you may need to shop around for projects offering equity funding opportunities.
Low liquidity
As with most property investments, the liquidity is fairly low. Your investment will be tied up in the project until completion. So you won’t be able to cash out your investment any time you want. Only invest what you’re comfortable living without for the duration of the project.
Luckily, many fix-and-flips have comparatively short turnaround times. You might be able to receive your returns in just 10-14 months, depending on the project.
Three real estate crowdfunding alternatives
Real estate crowdfunding is a solid investment option, but maybe it’s not the best option for your unique investment goals.
If you’re unsure about crowdfunding, consider these alternatives.
1. Note investing
Note investing is when you act as a bank for homebuyers. Buyers who have a hard time qualifying for a conventional mortgage might opt to finance their home purchase with a private note, and there is a thriving secondary market for these notes.
You can collect notes and have the homebuyers pay their mortgage directly to you.
The big benefit of note investing compared to crowdfunding is that you collect the entire profit rather than splitting the pot amongst a pool of investors plus a fund sponsor. And if the homebuyers default on their payments, you have the option to foreclose and take possession of the property for your portfolio.
But there are a few downsides to note investing as well:
- It requires a larger upfront investment than crowdfunding,
- It ties up your investment funds for the extreme long-term,
- And if your borrowers fail to make payments, the foreclosure process can be difficult and stressful.
2. REITs
REITs (Real Estate Investment Trusts) are basically mutual funds made up exclusively of stocks in real estate-related companies.
One key benefit of REITs over crowdfunding is the level of automatic diversification. Each share of a REIT contains stock in multiple companies, instantly diversifying your investment. Another key benefit is liquidity. You can buy and sell REITs any time you choose; there’s no need to wait for the completion of a project or a maturity date.
And here are the downside to REITs as compared to crowdfunding:
- You have no control over which projects your investment dollars go toward, let alone the direction of any single project.
- You don’t own any share in underlying real estate. You only own shares in the companies, not in the properties or developments those companies own.
3. Real estate syndication
Real estate syndication is a special type of crowdfunding relationship between a fund sponsor and the group of investors.
Syndication is very similar to crowdfunding, and is often used synonymously, but is actually a bit different. Unlike generic crowdfunding, syndication joins the fund sponsor and all investors into a single legal entity, which then buys and owns the property. This is an important distinction because it creates a stable legal ownership structure (often a Delaware Statutory Trust) and lends transparency to the transaction.
The advantages of real estate syndication
- The benefits of syndication include all the same benefits as crowdfunding that we detailed above, including:
- Low investment minimums,
- Leverage to access larger projects than otherwise attainable,
- Diversification potential,
- Flexibility, and
- Passive income.
But there are a few additional benefits that aren’t necessarily inherent in general crowdfunded real estate deals. The benefits specific to syndication include:
- The power to choose your specific projects. Many, but not all, crowdfunding platforms allow you to choose your specific project, down to the address. If you want the enjoyment of watching a specific tangible asset develop, syndication is extremely satisfying.
- Equity ownership in the projects. There may be some crowdfunding projects that offer equity funding, but most are debt funding, which means you don’t own a direct stake in the underlying real estate. If ownership is important to you, consider syndication.
- Transparency. As part owner in the legal entity that owns the syndicate deal, you’ll have access to property records, giving you a clear understanding of the deal.
The disadvantages of real estate syndication
As with the positives, the downsides to syndication generally mirror the downsides to crowdfunding:
- A short track record,
- Lack of control, and
- Low liquidity.
But there is one additional potential downside to be aware of: the accredited investor requirement. Most syndicates call for members to be accredited investors, which means meeting specific income or net worth minimums as outlined by the SEC. You should know that this is also a requirement for some crowdfunded projects, crowdfunding generally offers more opportunities to nonaccredited investors.
While the accredited investor requirement can be considered a disadvantage of syndicates because it creates a barrier to entry, some may argue that it is actually a benefit because bigger, better deals are often only available to accredited investors.
Which is the best real estate crowdfunding alternative?
The best crowdfunding alternative depends on your unique investment qualifications and goals.
If you’re an accredited investor, syndication is likely the best real estate investment strategy for you.
If you’re looking for a more liquid investment, REITs are probably the best fit for you.
And if you don’t qualify as an accredited investor, but you see the value in the syndication model, you can start with generic crowdfunding and move into syndication once you meet the accredited investor requirements.
How to start investing the real estate syndication form of crowdfunding
You’ve reviewed the pros and cons of crowdfunding as a property investment tool, and you’re ready to take action. As an accredited investor, you can start the simple process of investing in a syndicate today.
- You’re just five steps away from your new investment opportunity:
- Explore the varied investment opportunities currently available and coming soon.
- Sign up with Gatsby Investment. You can create an online account in under two minutes.
- Complete the accredited investor application through Verify Investor (a third-party service used by Gatsby to confirm your accredited investor status). Your status can be confirmed in around two business days.
- Select a project, or multiple projects, from the opportunities you saw in Step One.
- Transfer the investment funds.
Once the funds have been received, you’re in! From this point, you can spend your time focusing on other endeavors and passions while our team of experienced property and development experts goes to work for you. We have award-winning architects, builders, designers, and analysts to successfully complete a high-quality real estate development. You can even track the progress of your project(s) through our convenient online portal. And you’ll receive your share of the proceeds within 10 days of closing escrow on the sale of the development.