Platforms for real estate crowdfunding offer investors a slice of construction deals for as little as $1,000. Yet is this necessarily a safe investment?
Picture this: You have 5,000 USD and you want to invest in real estate. Even though you might be able to leverage that cash and borrow extensively to squeeze your way into a rental property, that is a risky step on such a small amount, assuming you can even make it work.
The question is, will this job help investors gain reliable profit?
The investment, however, will give prospective investors some comfort as it is focused on a proven financial fact: real estate has a long history of profitability. At least one analyst claims it’s the chosen tool for rich people.
Kurt M. Westfield, WC Companies’ managing partner in Tampa, Florida says that about 90 per cent of millionaires — yes, 9 out of 10 — created their wealth through real estate. Not by stocks or gold. Not by baseball cards or other investment instruments which are seasonal or whimsical.
What is crowdfunding?
Crowdfunding lets big ventures be funded by small-time investors.
Crowdfunding (or crowdsourcing on equities) is a modern-era idea. What is it, then?
The Jumpstart Our Business Startups (JOBS) act came into effect in May 2016 and lets “non-accredited” investors to back up private companies for the very first time. Beforehand, investors had to be “accredited” to invest in private businesses, which means they had to have a net worth of at least $1M, or received at least $200,000 over at least two years.
Crowdfunding has been awaiting the green light from government authorities for the better part of four years — ever since President Obama signed the JOBS Act in 2012 and commenced its planning stages. Now that it’s a go, the investment channel offers an open mode for people involved in bringing real estate into their portfolio — and, boosters claim, yields that can reach 10 percent annually.
Charles Clinton, CEO of EquityMultiple, a New York-based online real estate investment platform believes that at a time when the stock market has been especially volatile and returns are hard to find due to low interest rates, real estate is a sector where you can find relative stability and good results
But even Clinton admits that the market is simply not old enough to provide a lot of objective data in one direction or another, so far as the JOBS Act and real estate go. And therein lies the rub — and a major one.
Crowdfunding means capital and opportunity, but also lots of risk
The key reason the JOBS Act got support was because government officials were scared of what could happen if mom-and-pop investors were trapped in an unsavory scenario. And if there is one area in which unsavory characters are known to lurk, that is real estate. (Come on: this is the area that coined euphemisms like “cozy” for cramped and “larger than it seems” for very cramped.)
Writing on cre.tech in June, Jordan Wirsz pointed out the risks with which real estate and crowdfunding intersect, stating that real estate capital raisers are more often than not, self-promoting real estate developers and investors. In addition to the lack of expertise in risk management and risk awareness, the lack of complexity and comprehension is a dangerous mix.
And even if the current crowdfunding world continues to be chaotic as a whole, real estate can in fact prove to be a port in the storm.
In general, real estate has been a very stable investment in the past, at least according to Allen Shayanfekr, CEO and co-founder of Sharestates, a real estate crowdfunding platform based in Great Neck, New York. He beleives that like all investments, real estate is cyclical in nature but relatively less volatile compared to other investment classes.
When a hot property starts in the six digits in an urban metropolis, investors can get started at Sharestates for $1,000 (less than a well-appointed doghouse in the Hamptons). The Sharestates website looks much like a version of a personal finance platform, as investors will look at color-coded, horizontal-line graphics from A-plus to D-minus that display the risk rating of each property featured.
As you might say, real estate is also rooted in ways other non-stock investments aren’t. In markets like New York and San Francisco and Boston, where apartments are scarce year after year, there’s ample supporting evidence.
It has really taken off to create compound wealth by rental properties, Kurt M. Westfield believes. With an average annual growth of 3 percent and increasing rent prices, income assets have started to fill more portfolios of investors. Then again, there is this little thing called the subprime mortgage crisis between 2007 and 2010. Such a crisis – which has almost taken the U.S. economy down, after all – will probably not repeat itself in this generation. Yet that does not mean that there are no other means of losing money in real estate.
That’s where it can help to think of crowdfunded real estate investment as analogous to stocks. The best bet is to only invest in companies that you care about, in industries that you care about (or at least that your financial advisor knows). Warren Buffett follows this dictum to a fault, among others, and it is hard to shoot holes in the playbook of the billionaire.
Best real estate crowdfunding options
With an online platform from Fundrise, you can invest just $500 in real estate. What this means is that unaccredited investors can purchase properties in the real estate market without paying large fees to middlemen. The fees fall to a mere 1 percent by running your own portfolio, and Fundrise provides a 90-day satisfaction guarantee.
EquityMultiple provides the opportunity to invest in real estate with the comfort of being backed by Mission Capital, an existing real estate company. Accredited investors need to spend at least $10,000 in each investment and need to have at least $1M of net worth or make $200,000 annually.
Streitwise helps you to spend as little as $1,000 in real estate. The company is transparent about the dividends it charges and has a 9.8 percent historical average. On the website, you can search past investments to get an idea of the types of properties purchased in Streitwise. Both properties and tenants are closely checked to ensure your investment is safeguarded.
Crowdstreet would definitely be a better fit for you if you choose to handle your own investments. You browse opportunities in the real estate sector and select the ones you want to apply to your portfolio. Nevertheless, if you prefer, you can hand the portfolio-building process over to the in-house advisory team at Crowdstreet. They’ll pick the investments that best suit your financial goals.
Realty Mogul is another real estate crowdfunding tool that gives you access to carefully inspected commercial and retail properties, as well as multi-family properties. You may also invest in real estate investment trusts (REITs), if you meet the initial conditions for investment. Minimum investment criteria vary from $15,000 to $50,000 for single investments.
Should you invest in real estate crowdfunding?
Crowdfunding in real estate provides a simple way to spend small amounts and get a potentially exciting return. But it’s important to note that real estate investment is inherently risky, and crowdfunding is still a fairly new idea. And you should be bearing that in mind.
Real estate crowdfunding might not be the kind of investment that you should pour your life life saving into – or even a small percentage of your assets. But if a few thousand dollars represents a small percentage of your portfolio and you are searching for a high-risk, high-reward opportunity, you may consider it. And definitely, real estate crowdfunding platforms like Fundrise and EquityMultiple provide enticing opportunities for investing in diversified real estate ventures with the potential to fully diversify your overall portfolio of investments.