How to Build Passive Income using Real Estate Crowdfunding

How to Use Real Estate Crowdfunding to Create Passive Income

Real estate crowdfunding, also known as crowdsourcing real estate, provides a way to invest in real estate without having dirty hands.

For as little as $500 or $1,000, you will be on your way to gaining a passive income from real estate.

But is crowdfunding real estate a successful investment? Here’s what you need to know before you cross the dotted line.

What’s Crowdfunding in Real Estate?

Real estate crowdfunding requires small donations from a number of individuals to purchase real estate or fund development. Real estate crowdfunding projects operate just like well-known user websites such as GoFundMe.

Both types of projects are collecting funds from a wide pool of individuals. Yet crowdfunding is not a gift. Alternatively, it is an opportunity that will return dividends and create long-term capital gains.

In 2012, the Jumpstart Our Business Startups Act, also known as the JOBS Act, eased company fundraising laws. Regulation D controls how real estate fundraising can be used and who should join.

Rule 506(c), the latest regulation under Regulation D, currently requires businesses to promote private investment. Nevertheless, Rule 506(c) also limits such contributions to approved investors on the basis of profit or net worth.

Real estate investing platforms use 506(c) eligible portfolios combined with private real estate investment trusts (REITs) to offer direct real estate profits to a wide variety of investors.

Regulation A+ requires the latter to open up the private sector to smaller investors yet to restrict the joint contribution to $50 million.

In Which Way Does Crowdfunding in Real Estate Work?

Real estate crowdfunding sites use customer capital in a variety of ways. Some projects may target acquisitions of real estate (equity) while others may target repayment of real estate debt.

It’s not uncommon to find that you’re investing in a combination of both if you pick a REIT. Many sites use REITs to make investments available to almost all.

You receive dividends when you buy shares in the REIT and can even see capital appreciation over time. When the securities owned by the REIT are growing in value, share values are also raising.

The share price is better used as a long-term income. Dividends, though, will produce passive income almost instantly. You have the option of reinvesting your dividends or keeping your earnings as cash.

You can’t purchase a bunch of real estate for $500 or $1,000 on your own. Investment real estate lending sites pool the money with other investors’ assets.

A pooled fund will then buy a portfolio of diversified real estate assets. That can involve both actual structures and loans.

You get the perks of buying real estate without having to think about seeking sales, attracting renters, or replacing leaky pipes. Expect certain recurring payments to be charged for these facilities if you buy an equity contract, although they are typically a low amount.

Better Returns Than Other Ventures

Fundrise, the biggest crowdfunding site for real estate, has an annualized return of more than 12% in recent years. However, as with most of the portfolios, there are no promises.

Both principal and potential dividends can face market downturn risks. To be honest, the same risks also occur in conventional stock investments.

Think about crowdfunding in real estate as a way to diversify instead of only buying stock and funds. For eg, you could spend 20% to 30% of your investment money on crowdfunded REITs.

If the stock market crashes, then portion of the investments will be shielded from the fallout.

Generate Passive Income

A high dividend draws investors who want to create passive income. REITs have a long tradition of sound and accurate payments.

Dividends can be charged monthly or annually, depending on the program you choose and the plan you select.

During the early years, you can reinvest your dividends to earn bigger dividend checks in the future. Alternatively, when you go, you can take the cash.

Diversification by Design

When it comes to conventional real estate investing, most investors start with one house. In certain instances, this technique is working fine. But with so many unknowns, it’s easier to distribute your money over many assets.

Crowdfunded REITs do not invest in a single unit. Many REITs own multiple units or even multiple properties and some also own other loans. Investors will reap improved diversification coverage thanks to the manner in which REITs spend.

Invest for the Long Term

Once you leap in, it’s important to know that the capital will be locked up for a while. Also, you’re going to have to make a 5 year or more investment. Compared to publicly traded REITs, you’re losing some value with crowdfunding real estate.

However, if you purchased single properties that you bought on your own, you will face a similar problem. There is no easy way to sell without paying a premium.

How Much Money Would You Make When Crowdfunding Real Estate

Long -erm growth combined with monthly or quarterly dividends makes crowdfunding real estate an enticing choice.

A recent study calculated total returns at 11 percent or more, while this level may fluctuate higher or lower year-to-year. With an estimated annual return of 11 percent, here’s how your investment could work.

$1,000
at 11%
S5,000
at 11%
$10,000
at 11%
$20,000
at 11%
3 years$1,367$6,838$13,676$27,352
5 years$1,685$8,425$16,850$33,701
10 years$2,839$14,197$28,394$56,788

Part of the taxable return shall be dividends. If you don’t need your money right now, you can spend to earn more later. In certain years, the investment can also earn better yields.

Types of Real Estate Crowdfunding Investments

The kinds of property crowdfunding follow the “capital stack” frequently known in the business. Debt has to be paid and thus has most security.

Preferred equity and common equity are farther away in the money flow in the funding stack. This implies there might be risk.

  • Debt: Some crowdfunding platforms concentrate exclusively on debt and also make interest on property loans. Platforms may provide a mixture of equity investments and debt investments.
  • Preferred equity: Investors receive payment following debt shareholders but before equity shareholders. This arrangement is very similar to shares, where both common and preferred stocks could be available.
  • Common equity: Furthest from the money flow for a job, common equity is compensated last. If a job fails, equity investors possess the lowest claim on assets and also face the threat if the project doesn’t succeed.

Pros and Cons in Crowdfunding Real Estate

source: Sushiman / bigstock

There is no such thing as an ideal investment for everybody. Below are a few advantages and disadvantages.

Advantages

  • Small initial commitment: Many incentives for minimal investment are as small as $500 to $1,000.
  • Diversification: If you opt for a REIT or a fund, then you are able to diversify automatically in many projects. You could shield component of your investment funds from the stock market’s ups and downs.
  • Outsized yields: Successful jobs may provide annual returns of 15 percent or more.
  • Shielded from price fluctuations: Publicly listed REITs are influenced by wide-ranging stock changes or news circling about the industry. Non-traded or proprietary REITs do not change value on a regular basis.

Disadvantages

  • Illiquidity: Expect a 5-10 year devotion. There might not be a simple way to get your cash.
  • Gains risk: Earnings may alter and it might take some time until there aren’t any earnings in any way.
  • Delayed dividends: With equity transactions, you can have to wait until the repairs are complete or before the tenants are located.
  • Decreased tax breaks: Depreciation might not pass through precisely the exact same manner. Expect to pay taxes on dividends, though reinvested.
  • Multiple country taxation: You may pay state income taxes on earnings from a different nation.

Crowdfunding Real Estate Sites Appeal to 2 Groups of Investors

  • Accredited investors: Some websites offer exposure to certified investors. In the US, an authorized businessman has a net worth of $1 million or more β€” excluding his primary residence β€” or a net profit of $200,000 a year. The wage minimum for married couples is $300,000 a year.
  • Non-accredited investors: Most crowdfunding sites now allow for non-accredited investors. These goods typically take the form of REITs which offer a way to spend as little as $500 in real estate. The SEC rules restrict the amount of investment by non-accredited investors.

Real Estate Crowdfunding Platforms

In most instances, lending is a long-term investment. It’s important to carefully pick a platform. Seek, if available, returns over a period of several years.

Also, review the specifics of each network or the particular investment you are considering. Many of the networks and individual REITS depend on dividends.

Others provide a more sustainable blend of returns on dividends and gains on debt. Some might be focused on specific structures. Identify the priorities first, because there may not be a convenient way to change tactics later.

Fundrise

source: fundrise.com

A pioneer in crowdfunding real estate, Fundrise delivered its first online investment in 2012. With over 500,000 users now, you can find support and answers to your questions through a variety of online forums and other tools.

Fundrise insists on openness and offers a variety of information to potential buyers. A high-tech approach to real estate investing reduces depreciation and increases returns. However, there are still certain fees that can impact your earnings.

The organization provides investment options starting at as low as $500 and its Starter Portfolio has become the most common option for new investors.

source: fundrise.com

Fundrise provides free updates on 1 out of 3 main plans. This helps you to prioritize your investment on the basis of your long-term goals. For eg, one program offers additional income.

The second strategy provides conservative investments that provide both dividends and long-term growth. The third plan focuses mainly on long-term development.

The estimated output for all 3 programs is similar, with overall yields varying from 9% to more than 10%.

DiversyFund

DiversyFund provides products with both accredited and non-accredited customers. However, the company sells REITs that are sporting a minimum as low as $500.

source: diversyfund.com

DiversyFund sets its eyes on multifamily properties, but do not plan to see a portfolio of sagging duplexes. Luxury condos, student accommodation and large residential buildings are among the projects of DiversyFund.

You’ll also see schemes in development markets like Texas and California. Like other rivals, DiversyFund does not charge broker commissions or application fees.

There is no assurance that this approach will have better long-term returns. Nonetheless, this makes the money easy to grasp.

DiversyFund prevents certain extra expenses by buying and handling real estate internally, reducing the price of a middlemen.

Realty Mogul

Realty Mogul relies on deals that already have contract contracts in place or that already have elevated leasing prices. Ground-up building projects without a ready audience are costly and can take years to get off the ground.

Instead, Realty Mogul works on developments that are already a success story. With Realty Billionaire, you have two main investment opportunities.

source: realtymogul.com

For developers with a valuation of more than $1 million or qualifying earnings, Realty Mogul provides direct investment in chosen ventures. You are a share owner in this situation. Realty Mogul offers REITs to other investors.

Since the minimum commitment is higher than you can expect for certain other sites, expect to spend a total of $5,000 to get going.

Prodigy Network

Based in New York, but has drawn supporters from 42 countries and throughout the States.

Early ventures included 5 luxury properties, including buildings on Park Avenue and Wall Street. The biggest of these, the Park Avenue Assemblage, raised about $90 million in funds.

Chicago is next on the agenda as the Prodigy Network moves west in the hunt for technology opportunities. The Standard Hotel and Old Town Residences, a proposed luxury apartment development, are now open for investment.

Both ventures predict an average return of 7% with an expected holding time of between 4 and 7 years.

The offers of the Prodigy Network vary from other rivals. Don’t expect a diversified investment or a REIT. Instead, you’re working with solo ventures directly. The finished projects had a min. investment of $10,000.

PeerStreet

source: peerstreet.com

Most lenders depend on physical property, while some offer a combination that includes real estate loans. PeerStreet piques the latter and provides a simplified mechanism that defines purchases.

You can pick your investment according to the risk profile or even select a single investment that you find fascinating.

Yields with PeerStreet are mostly on par with peer-to-peer lending networks. There is one major distinction, though.

The loans from PeerStreet are backed by real estate. With peer-to-peer lending networks, there is a larger chance of losing the whole investment.

With real estate as collateral, lenders have more incentive to pay and investors have more protection. Expect to spend at least $1,000 to get going with a 6 to 24 month commitment.

Crowdstreet:

source: crowdstreet.com

Since 2014, CrowdStreet has funded hundreds of ventures with the support of over 100,000 investors. Deals attract approved buyers, while individual ventures have, more often than not, a minimum investment of $25,000.

However, CrowdStreet also provides REITs that have a lower minimum of $5,000 to $10,000β€”or even $1,000. For eg, CrowdStreet’s Impact Housing REIT is available to anyone with a minimum of $1,000.

You can choose between funds or individual offers based on how much you can spend. You can also have a personalized portfolio, courtesy of CrowdStreet, based on your goals. As for other sites, expect a period of 5 to 10 years of commitment.

RealCrowd

source: realcrowd.com

If you are an authorized buyer, RealCrowd offers a exclusive range of transactions. Apartments are growing among projects, but you can also find commercial real estate projects.

This may include day care or assisted living facilities. Hotels and shopping malls are also in the mix.

Expect to spend between $25,000 and $100,000 based on the project you select. Present spending focuses on apartment buildings and malls in leading markets such as Texas, Florida, California and New York.

Patch of Land

source: patchofland.com

Patch of Property, another site that caters to licensed customers, is a lending firm at its heart. When you spend with Patch of Ground, you’re collecting interest on hand-picked property loans.

Patch of Land is proud of its honesty. All the underwriting details you need to make an educated judgment on loans is open to investors.

The business also spends alongside private investors, and you can rest easy knowing that a team of experts is also spending their money on Patch of Land’s transactions.

Deals fund fast β€” often in just a few minutes β€” so you will start making money right after you make your investment. A minimum commitment of $5,000 applies and Patch of Land returns the money in the unfortunate event that the transaction is not entirely funded.

How Does Real Estate Crowdfunding Compare With Other Real Estate Investments?

Crowdfunding varies from other investment in real estate, but each form has its pros and cons.

Real Estate Crowdfunding vs. Property Ownership

The risk is balanced with crowdfunding (as are the rewards). However, for conventional real estate ownership, all risks and benefits fall to one investor or a smaller number of buyers.

In certain cases, tax law also varies. However, although crowdfunding can lose some of the tax benefits, the risks are always smaller.

Real Estate Crowdfunding vs. Real Estate ETFs

You’re paying a price for easy trading. ETFs are common, which can push up ETF prices and their underlying properties.

Real estate crowdfunding investments typically don’t trade at all, which means you won’t pay a premium for simple trading. Alternatively, you’re making a long-term commitment so you can bring your capital to use because there’s no risk advantage.

Real Estate Crowdfunding vs. REITs

Similar to ETFs, publicly traded REITs often trade on a premium basis. The benefit of purchasing either ETFs or REITs is that you can purchase them from popular brokers and can sell them at any time.

Crowd-funded portfolios have smaller liquidity, but can also generate higher gains without stock market uncertainty.

Final Words

Real estate crowdfunding includes a wide variety of investment forms. Accredited investors can obtain exposure to preferred securities and collect fixed interest rates.

Non-traded REITs open up the market to smaller investors while also charging better dividends than you would expect elsewhere. Just the same as with all spending, do your due diligence before investing and never spend more than you can lose.

Although there are some big names in the crowdfunding real estate market, some businesses have already collapsed and others do not work as they expected.

Aside from Caveats, today’s crowdfunding sites provide a way to start with little risk and then expand to greater investments by reinvesting dividends.