Crowdfunding isn’t just about your cousin wanting to go on a trip to Peru. It can also be a smart way to discover new opportunities for investors outside the stock market.
Real estate crowdfunding platforms are newer to the crowdfunding space, but they can be a worthwhile addition to your portfolio – as long as you understand exactly what you are investing in.
What Exactly Is Real Estate Crowdfunding?
Real estate crowdfunding works in the same way as many other crowdfunding ventures: investors pool their money to fund a project – a product or a business – in the hopes of a future profit. In certain situations, investing in real estate poses a high financial barrier to entry, such as saving a down payment. But some sites for real estate crowdfunding work to lower the threshold so you can invest with as little as $500.
In most cases, crowdfunding real estate platforms channel the money of investors into real estate investment trusts or related investments. REITs are businesses that own real estate, such as homes, factories, malls and hotels, and also operate them sometimes. Shares of other REITs are traded publicly on stock exchanges, while other REITs are privately owned.
Public and non-traded REITs are constitutionally required to reimburse creditors 90% of their taxable income. Therefore, a lot of REITs deliver a good dividend background.
Platforms for real estate crowdfunding also give investors access to private-market real estate investments that can produce better returns than publicly traded REITs. According to one website, Fundrise (read out Fundrise review here), a regular liquidity REIT investment in the public sector (an opportunity to sell at any time) has an average trailing 20-year annual return of 8.2 percent, while a private-market REIT investment with an investment period of three to seven years has an average trailing return of 12.3 percent over 20 years.
Although that number may sound exciting, dedicating too much of your portfolio to crowdfunding services is not advisable. A balanced stock and bond portfolio has proven track record over the long run. But allocating some funds to a crowdfunding platform could make sense if you’re looking for diversification and an opportunity to make some healthy returns.
Where Crowdfunding Immovables Shine
The concept is simple: allow average investors to take advantage of not-so-average real estate returns that can yield.
Dividends That Are High
Since most crowdfunded real estate sites operate through REITs, investors are having the opportunity to reap their benefits. Public, as well as non-traded REITs, are legally required to reimburse investors 90 percent of their taxable income. Therefore a lot of REITs deliver a good dividend background.
Adding real estate investments will help boost your portfolio and diversify it. You may still have to pay tax on the dividends you receive (unless you put those dividends into a retirement account with tax advantages).
Low investment minimums
Some of those sites have relatively small minimum investments. Fundrise provides a portfolio for novices with a minimum investment of $500. This threshold can sound high but it is smaller than the minima typically paid by private-owned REITs (often in the thousands) while still allowing investors access to private-owned properties.
No landlord trouble
One of the big benefits of crowdfunding real estate is not having to deal with the problems that come with owning conventional real estate. It’s cool to invest in large properties and never have to deal with frozen pipes or distressed tenants (though by investing in publicly traded REITs you can also prevent that).
An easy investing experience
These companies’ newness is not all bad: it means they make quick access a priority. Some crowdfunded real estate platforms offer apps that allow users to quickly and easily start investing from wherever they are.
There are a number of online trading platforms which allow you to invest in real estate. Here are only a few to consider:
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Where crowdfunding immobilities falls short
There are a couple of drawbacks to keep in mind before you get too excited about becoming a digital land baron.
Depending on the platform you choose, annual fees could range from 1 percent to 2.5 percent (or higher) of your assets that are managed. Management fees, consultant fees, individual fund fees: They add up, no matter what the company calls them. Although the rates for comparable services may be small relative to other management fees, 1 percent may still be more than you would like to pay. Be sure to read the fine print before investing.
Illiquid assets are not willy-nilly sellable. Unlike more liquid investments, such as most stocks and publicly traded REITs, converting to cash takes longer. Many of the REITs provided by crowdfunded platforms for investment in real estate are illiquid and come with long-term investment horizons. It is perfect for investors who are sure they won’t need the money they’ve placed into their accounts anytime soon, but it’s not so great for people who might want to sell their assets in the near future or need to.
Implications on taxes
It’s awesome to get a dividend check but bear in mind, you can owe some dividends taxes. Most crowdfunded real estate platforms will send out a tax form to their investors outlining how much they owe on ordinary dividends, eligible dividends, and capital gains, all taxed at various levels.
Yeah, the websites are elegant and compelling, but it is worth noting that they are fairly new investment platforms. Fundrise and Land Patch launched in 2012, with RealtyMogul launching in 2013 and CrowdStreet beginning in 2014. RealtyShares, established in 2013, shut down five years later because it was running out of funding. None of these businesses have undergone a serious downturn in the economy, so it’s hard for investors to know how they’d fare. There is also no requirement for crowdfunded real estate platforms to register with the SEC.
Many financial professionals have some concerns about such items. Ian Bloom, licensed financial planner and owner of Open World Financial Life Planning in Raleigh, North Carolina thinks that they are set up basically to circumvent the protections provided by conventional real estate deals and publicly traded REITs. His choice is to have clients gain exposure from REIT mutual funds or ETFs.”
One of the major hurdles was accreditation which held investors out of real estate before crowdfunding. Accredited investors are described as having a net worth of more than $1 million (not including the value of a home), or a $200,000 or more annual profit. Several websites, such as CrowdStreet, also are available only to accredited investors. But some have options for non-accredited investors, such as RealtyMogul and Fundrise.
Alternatives For Real Estate Crowdfunding
If you are not feeling right about novice sites and ventures, there are plenty of alternatives to invest your money in.
If publicly traded REITs seem like a better bet, a special platform is not required to access them. A brokerage account can provide you with access to the public REIT sector, as well as many other forms of investments. Use the stock screener on the website of your brokerage to compare rates, dividend history and other information about REITs.
If it seems a little bit difficult to study individual REITs, REIT exchange-traded funds combine the advantages of REITs with the simplicity of an index fund. REIT ETFs combine several REIT shares to allow for instant diversification. The screener for your brokerage account can help you compare these as well.
Standard market investments
If a three to seven-year investment commitment makes you anxious, it might be a safer choice to stick with more liquid assets you can find on the stock market. Stocks, shares, mutual funds — there are endless options for investment if crowdfunded projects aren’t your thing.
Traditional real estate
If crowdfunding sounds too tech-heavy for your taste, real-life alternatives are available that you can use to integrate real estate into your portfolio. You’re not (necessarily) stuck in a seven-year contract, so you’re going to have to commit to maintaining a property or employing someone else to do so. Nevertheless, real estate rentals will produce high returns. You can join the real estate game if you have a spare room, a separate unit at your home, or even a basement. You might also try running a short-term rental (think Airbnb) to check it out.
Is the investment in crowdfunded real estate worthwhile? It all depends on what you seek, and what platform you choose for crowdfunding. There are more options for the accredited investors. And there are always a few options for the ones that aren’t millionaires. New technology still has its risks, so be especially cautious when putting your hard-earned cash into such new investments.
If you are looking to diversify your portfolio with real estate and have around $500 somewhere arpund, the potential for growth could make it worth it. If you don’t want to commit to a whole new platform but still want exposure to real estate, you may consider looking at publicly traded REITs more closely.