Home Investing The Appeal of Real Estate Crowdfunding as an Investment

The Appeal of Real Estate Crowdfunding as an Investment

by Ryan DiMilia

Real estate crowdfunding has become an appealing investment option that’s swiftly gaining traction. Since the passing of the JOBS Act in 2012, this investment option has been thriving. The JOBS Act paved the way for individual investors to participate in larger investments traditionally exclusive to affluent investors.

The concept of real estate crowdfunding is to capitalize on quickly developing markets with high cap rates (net rental yields), without the need to travel or raise a substantial amount of capital.

In 2017, after selling my San Francisco rental property for 30X the annual gross rent, I reinvested $500,000 of the proceeds into Midwest properties. These properties were trading at 10X the annual gross rent, yielding a net rental return of 8% – 12%.

Here are several reasons why real estate crowdfunding could be a compelling investment for you.

Reasons for Real Estate Crowdfunding’s Appeal

  1. Over-Diversification of REITs When you invest in a real estate investment trust (REIT), you become exposed to all their investments. The lack of choice may not be appealing as a REIT can have dozens of properties, many of which might not be in your preferred investment areas.

REIT funds add another layer of diversification as they invest in other REITs, further diversifying your real estate exposure. While diversity can be beneficial, when investing specifically in real estate, the goal is to invest in the highest growth markets with the most potential.

In contrast, real estate crowdfunding platforms like Fundrise, one of the industry’s pioneers, offer you the flexibility to invest in individual properties or more narrowly focused eREITs. Such platforms enable you to seek out inefficiencies and capitalize on them.

  1. Lower Capital Requirements Purchasing a single-family home or a multi-unit rental property demands hefty down payments. This requirement can be restrictive, especially for properties in areas like San Francisco or New York City.

Real estate crowdfunding, however, allows investments as small as $10 to $10,000, enabling you to diversify across borrowers, asset types, geographic locations, and project types. This diversity, combined with a low capital requirement, is what makes real estate crowdfunding appealing.

  1. Availability to Non-Accredited Investors Many private investments are exclusive to accredited investors, those with a net worth of at least $1 million (excluding their primary residence) or with annual earnings of at least $200,000.

Non-accredited investors, however, can still access real estate crowdfunding through eREITs offered by platforms such as Fundrise. These eREITs are centered around regions, income, and growth, catering to investors with varied investment needs.

  1. Passive Investment One of the main reasons why I sold my San Francisco rental house in 2017 was the maintenance hassle. With crowdfunding, once the investment closes, the only responsibility is monitoring your dashboard and collecting your electronic payouts.
  2. Best Investments Handpicked for You Platforms like Fundrise only display the top 5% of deals they screen. This ensures that only the best deals reach their platform, saving investors a significant amount of work.
  3. Geographic Arbitrage Real estate crowdfunding platforms enable investments anywhere. This availability makes it prudent to invest in the heartland of America, where real estate prices are lower and returns are potentially higher.
  4. Short-Term Investment Durations Real estate crowdfunding allows for investment in projects with typically 1 – 5 year durations. This feature caters to those who have liquidity needs or want to diversify their liquidity options.

Real Estate Crowdfunding: A Mainstay Investment Option Real estate is currently my preferred investment class for building wealth. With real estate crowdfunding, it’s possible to live in world-class cities while investing in potentially higher-returning cities across the country. If you’re a non-accredited investor, take a look at Fundrise, my current favorite real estate crowdfunding platform. For accredited investors, CrowdStreet is a reliable platform to explore.

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