How crowdfunding actually works in real estate

How crowdfunding for real estate really works

At its heart, crowdfunding involves pooling capital from a group of donors to make an investment. In this way, crowdfunding has been going on in real estate for decades.

Neighbors have purchased land together, husbands and wives, and their siblings have bought property together, and even several institutions have come together to buy properties together.

The biggest distinction between joint real estate investment in the past and investing in real estate today is the freedom to sell online and unprecedented exposure to transaction flow by the use of the internet as a digital delivery channel.

With the advancements of digital technology, investors can now browse investments electronically, safely sign legal papers digitally, move money, and have access to investor dashboards to track how investments are made.

Instead of actively seeking one to invest among hundreds of real estate deals, buyers will search the list of pre-curated investments by crowdfunding firms.

Although the banking sector financing industry is patiently expecting unaccredited crowdfunding as a product of Title III of the JOBS Act, crowdfunding for real estate with approved buyers has already started.

The modern method of investing in real estate begins with tailored transactions and checks every transaction in-house. We go to great lengths to better understand the factors of each deal, including the structure, industry trends, property condition and track record, credibility and profitability of the real estate investment firm we partner with.

We also run background, criminal and credit checks to make real estate investment firms and their management teams more confident. While no crowdfunding firm can guarantee the success of any investment and there are definitely dangers, curation is becoming a very critical feature of crowdfunding which can contribute to better security for investors.

Here, we only work with the best-in-class business partners who have a reputation and experience of achievement in real estate. They’re not hobbyists, but real estate experts who have been in business for decades.

When we consider a best-in-class business partner and a deal that we are involved in, we set up a single-purpose company, such as the Limited Liability Company (LLC). It protects creditors from any potential exposure for their original investment and it is not uncommon for businesses today to set up a new LLC for any land they buy or participate in. Investors pool capital into this LLC and, by having “interest” in the LLC, are thus entitled to share the rewards of investment in the property.

There are two kinds of assets that you can make when you use crowdfunding real estate:

  • Equity contributions (like buying shares in an apartment building) that enable investors to share in cash income from rentals and appreciation when the property is sold
  • Loans backed by real estate (similar to a bank providing a loan); these loans incur monthly interest and the money is secured by the property.

Although equity investments encourage investors to share in the “upside” and cash flow of rentals is usually spread on a quarterly basis, loans enable investors to earn a stable, monthly income stream with less uncertainty.

For both cases, the communication surrounding the property and the performance of the property is reported at least on a quarterly basis and tax statements are given to investors on an annual basis.

Crowdfunding for real estate allows more buyers to have access to pre-vetted real estate investments that were previously scarce outside of close-knit circles. It also helps investors to write smaller check sizes.

During the past, all of these best-in-class business companies may not have accepted a payment of less than $100,000 or $250,000. Through pooling funds online together, participants will spend as little as $5,000.

By opening the field of real estate investing to a broader variety of buyers, it allows more and more individuals to benefit.

Instead of coping with the issues of land ownership themselves, such as bathrooms, renters and garbage, buyers now have access to real estate investments that allow them to make passive cash flow, all of which are protected by tangible properties.