There are more ways than ever to put your money into real estate thanks to the JOBS Act of 2012. The law opened up doors for many investors who want to invest in small businesses and real estate projects throughout the country. Additions and tweaks opened the doors even further; in 2016, investors without accreditation saw themselves with more options for investing.
One of the most accessible ways to buy into real estate is through crowdfunding websites.
Read over the basics of crowdfunding in real estate, the ways non-accredited investors can get returns, and what sites are your best bet in the upcoming year. Crowdfunding is just one of the ways that people with little to no money can invest in the real estate industry.
What is crowdfunding?
If you have an Internet connection and network of friends, family, or colleagues online, you’ve probably participated in crowdfunding before. Crowdfunding raises funds from a crowd, usually online. GoFundMe and Kickstarter are two great examples of crowdfunding websites that allow people to pool together money for a cause.
The limits for crowdfunding projects are endless. Communities can raises funds for medical bills or a new business. Somewhere along the way, real estate investors had the idea of using crowdfunding for real estate projects. The two ideas were married, and now crowdfunding for real estate is an $11 trillion market.
Recent legislation has opened the real estate crowdfunding game open to non-accredited investors. Some sites allow people with as little as $5 to buy in.
Types of Crowdfunding Projects
What is this $11 trillion going toward? It depends on the crowdfunding site.
Most crowdfunding platforms give investors the chance to back real estate investment trusts (REITs) with a diverse portfolio of real estate holdings.
If you want to fund one type of real estate (senior housing, student housing, office space, etc.) you will probably be able to find a crowdfunding site or REITs that focuses on that specific type of project.
Other crowdfunding sites will allow you to invest in individual projects and buildings. Small Change, for example, is a site that focuses on projects that will bring positive change to local neighborhoods. Investors can put money behind projects that speak to them. Most projects require a $500 minimum investment, although other projects raise the bar or are exclusive to accredited investors.
How is crowdfunding different from REITs?
Crowdfunding sounds very similar to another type of real estate investment - REITs. Real estate investment trusts (REITs) allow a group of investors to pool their money together and back real estate projects. But crowdfunding takes this concept one step further and expands the opportunities for investors.
Crowdfunding allows investors to put their money behind publicly traded and private REITs. Other crowdfunding sites allow investors to put money behind individual projects or buildings, as well as 1031 exchanges or mutual funds. The right crowdfunding site can help you diversify your portfolio for the same price as putting your money behind one trust or fund.
How can investors buy in? About Debt Vs. Equity Investments
Before we go into the specifics of other crowdfunding websites, it’s important to know the two main types of real estate crowdfunding. Investors have the option to put their money behind debt instruments or in equity; different sites may offer one or both options.
Consider which type of investment you want to make before you put your money behind crowdfunding websites.
Debt Investment: Low Risk, Low Return
If you choose to invest in debt instruments, you are essentially lending your money to the owner or managers of the property.
As they would with any loan, the owner must pay back the debt as they generate income from the property. This makes debt investments a low-risk option; your returns rely on the owner’s ability to pay you back rather than the success of the property. You will also be one of the first investors to get money back.
With low risks generally come low returns; this is the story of debt investments. Returns are set by interest rates rather than profits. Owners will also be able to pay back the debt in a manner of months - debt investments are a great option for investors who only want to deal in shorter terms.
Equity Investment: Playing the Game
Equity investments have the type of structure you may be used to if you play the stock market. Investors buy a share and wait for the real estate project to start making returns. You get a piece of those returns based on the size of your share.
This has the potential for greater returns, but it also comes with the risk of losing out on your investment. Take a look at what each individual project before you make an equity investment.
Choosing a Crowdfunding Website
Debt and equity investments are just one of the factors that investors will look out for as they choose a crowdfunding website. As you choose a crowdfunding platform, be sure to weigh all of the factors, including:
- Accreditation and minimum investment requirements
- Portfolio within the website (and how it fits into your current portfolio)
- Fees for investing
- Return potential
- Ease of use
- Reputation of the website and how long it has been in the game
Browse carefully before you invest, especially if this is your first time using a crowdfunding website to invest.
What is the offering circular?
As you read reviews of crowdfunding websites, you might hear this advice: “read the offering circular.”
The offering circular is basically the “terms and conditions” of real estate crowdfunding. It’s the fine print. It states the objective of the projects or investment, the investment terms, and what risks come with the investment. Be sure to give it a look before you put away your money. Since most crowdfunding sites involve equity investments, you do face the risk of losing out.
Best Crowdfunding Websites for Non-Accredited Investors
Again, if you have specific objectives (i.e. you want to invest in student housing or in projects that take place in a hot market,) you might be able to find a crowdfunding website that suits your needs. But if you are looking for some of the most popular websites for crowdfunding, give these sites a try.
Fundrise has recently lowered their minimum investment to $500, giving more investors the opportunity to put money into their eREITs and eFunds. The highly-rated crowdfunding site offers quarterly distributions. Investors can put their money into debt or equity instruments.
Fundrise and Realty Mogul are constantly battling it out for the prize of the most trusted, most-used crowdfunding website on the market. The minimum for Realty Mogul is slightly higher ($1,000) but you will be able to choose from investing in REITs, individual properties, and 1031 exchanges through debt or equity instruments. Realty Mogul offers monthly or quarterly distributions.
You don’t have to invest hundreds of dollars into real estate crowdfunding websites. Rich Uncles allows you to buy in with just $5. The website offers equity investments in a handful of different private REITs. They focus primarily on student housing but have their toes in other types of commercial and residential real estate.
Alternatives to Real Estate Crowdfunding Websites
Real estate crowdfunding allows investors to put money into REITs through the crowdfunding platform. Investors (accredited or non-accredited) can also put money directly into REITs. This option offers slightly different risks to crowdfunding websites. Investors can also put their money directly into real estate mutual funds or ETFs.
If you want to directly own real estate, you have even more options. Consider all of your options before you put money behind real estate. Your first investments are exciting - good luck!