Crowdfunding websites such as Kickstarter and IndieGoGo have made crowdfunding a popular way for anyone with a project, a financial goal, and an Internet connection to collect money from a pool of online backers.
With crowdfunding, entrepreneurs can raise money for their project or venture using the Internet to source funds from a large number of people.
Recently, crowdfunding has expanded to the real estate market. Websites such as Fundrise, Realty Mogul and CrowdStreet allow investors to participate in real estate deals that may have been previously available only to institutions or larger operations.
Who can invest in real estate using crowdfunding?
Some real estate crowdfunding sites allow you to invest with as little as $100, while others require at least a $10,000 investment. Additionally, depending on the site, investors may need to be accredited. Those who wish to use these sites but who are not accredited may have limited investment options from which to choose.
To be considered an accredited investor, you must earn more than $200,000 per year (or $300,000 together with a spouse) in each of the prior two years or have a net worth greater than $1 million, either alone or with a spouse. That $1 million net worth excludes the value of your primary residence.
The Securities and Exchange Commission (SEC) is working to change the definition of “accredited investor” to allow more people access to investment opportunities. There are also some real estate crowdfunding sites, such as Groundfloor.us, that are open to non-accredited investors.
How does it work?
Sites offer members an online showcase of properties ranging from mixed-use buildings and student apartments to retail rehabs and senior housing developments. The sites market themselves as a preferable investment platform to real estate investment trusts (REITs) or other funds because of greater transparency and lack of an institutional middleman.
Once you’re registered on a site, you can view details about the property, the other individuals who are investing, the developers and their track record, the expected return, and more.
“You’ll be able to see the whole deal, and that is light years ahead of what you’ll get out of the stock market or bond market,” says Scott Whaley, president of the National Real Estate Investors Association. “Investors can get deeper knowledge, they can more accurately evaluate, and they can get a higher return because the middleman and his fees are gone.”
Additionally, investors have the benefit of the crowd’s appraisal of a particular deal. If, for example, a developer is posting an offer, chances are a percentage of those weighing in on the deal are in the real estate business as contractors, leasing agents, or other related professions. You can also view the profiles of other investors to get a read on their expertise. If the pros are investing, you might feel more comfortable doing so.
“With crowdfunding, you don’t rely on one expert who’s getting a paid commission to get the deal for you and does your due diligence,” Whaley says. “In crowdfunding, the crowd does the due diligence.”
Of course, like any investment, investing in real estate does have its risks. Returns aren’t guaranteed, and neither the FDIC nor any other federal agency guarantees these investments. If you choose to invest, be sure to do your homework. You may want to invest in a project that’s spearheaded by an experienced developer, rather than one with less experience, and you may even want to limit your investments to local properties that you can see.
Lara Levitan is a freelance writer and editor with more than ten years of experience writing about a variety of topics, from architecture to Zen Buddhism. She has served as the co-editor of the Remodeler’s Journal published by the National Association of the Remodeling Industry (NARI) and as the marketing coordinator at an award-winning architecture firm. Currently she is the literary editor for GapersBlock.com, a popular Chicago-based website. Lara is a graduate of the University of Illinois at Urbana-Champaign.