Real estate crowdfunding is a way for investors to pool their money with others to purchase real estate at a fraction of the cost. While investment opportunities provide current income and price appreciation, many real estate crowdfunding platforms often require sizable minimum investments, have relatively high fees, and lock up capital for long periods of time. This article will focus on these issues so that potential investors have an understanding of the costs associated with this type of real estate investing.
Key Takeaways
- Real estate crowdfunding allows investors to see an inventory of potential real estate investments that they can passively participate in by paying for a small percentage of the overall deal.
- Investments may provide current income and price appreciation, but often require sizable minimum investments, have relatively high fees, and lock up capital for long periods of time.
- Real estate investing, whether done directly or through crowdsourcing, has unique opportunities and risks in each individual investment.
How Much Does It Cost to Invest via Real Estate Crowdfunding?
While owning real estate has the benefit of generating cash flow, there are also fees that cut into the profitability of that cash flow. Every real estate transaction is unique. Even though the crowdfunding company’s fees may be consistent, there are often different fees that investors pay for owning different property types, so investors need to carefully consider the fee structure to ensure revenues will be enough to provide a good return after all fees.
- Platform fees: Crowdfunding companies often charge a fee for deals that are done through their platform. Sometimes, these are called platform fees or technology fees. These fees are typically paid for by investors, even if they are passed on to deal sponsors when a deal is completed. Platform fees across the landscape of companies we reviewed range from 0.15% to 4.25% per deal.
- Management fees: Management fees for crowdfunded real estate deals consist of two classifications. One is the management fee paid to the crowdfunding platform. This works as an assets under management fee. If the company is running a fund, this may be higher than the fee charged for properties already purchased through the platform. An example might be a 2.5% fee on assets under management for actively managed funds, and 0.25% on assets already purchased by the investor. The other type of management fees are the fees paid to the various management companies that help with the property. The most common management fee is to the general building manager, who is typically paid a percentage of a property’s gross rent revenue. This can range from 5% to 25%, depending on the type of property. In addition to general management fees, there may also be additional fees that need to be paid, such as to construction managers.
- Minimum investments: The minimum investment amount varies across real estate crowdfunding platforms, depending on the type of deal you’re investing in. Some of the more basic funds have minimums as low as $10, but for platforms that connect investors with individual real estate deals, minimums can range between $5,000 and $200,000, with $25,000 being a commonly used minimum investment amount.
- Penalties: Some real estate crowdfunding platforms do not offer the opportunity for an early withdrawal from deals, but some do. Those companies that do let you out may charge a penalty that can range from 1% to 10% for selling your investment early; often, these penalties are higher the sooner you exit the deal.
Why Invest in Real Estate
There are many benefits to investing in real estate. Properly selected real estate investments can generate income, appreciate in value over time, provide tax advantages, and can even be leveraged. Further, real estate is often not correlated at all to other major markets, providing a certain level of diversification.
Cash flows from real estate investments can be predictable because buildings have tenants that pay known sums in consistent intervals, and the cost of buildings and improvements can be depreciated over time, which reduces taxable income. Real estate assets can also be used to borrow against, which can produce funds to pay out to investors or to invest in other properties.
Not all real estate deals are successful, however, and there is a risk of losing all of your capital, so careful selection of investments is imperative.
| Compare Real Estate Crowdfunding Platforms | ||||
|---|---|---|---|---|
| Company | Fees | Minimum Investment | Accredited Investors Only? | Investment Selection |
| Fundrise | 0.15% and 1.85% | $10 (brokerage) or $1,000 (IRA) | No | Equity, debt, and funds |
| EquityMultiple | 0.50%-1.5% + origination fee | $10,000-$30,000 | Yes | Equity, debt, and funds |
| YieldStreet | 0.00%-2.00% | $10,000 | No | Equity, debt, and funds |
| Arrived Homes | Long Term Rentals: 3.5% Sourcing Fee, 0.15% AUM. Vacation rentals: 5% Sourcing fee, 5% Gross rents fee, property management fees (third party-pass-through fees): vary | $100 | No | Equity, fund |
| RealtyMogul | Vary per deal; Income REIT caps fees at 4.5%, Apartment Growth REIT caps fees at 4.75% | Varies per project, from $5,000 and up | No | Equity, debt, and funds |
| CrowdStreet | Vary per investment and are paid to the sponsor | Typically $25,000, but varies per investment | Yes | Debt, equity, funds |
| DPL Capital | 2% (fee rebates for investments greater than $1 million) | $200,000 | Yes | Debt, equity, funds |
We earn a commission for this endorsem*nt of Fundrise.
Alternatives to Real Estate Crowdfunding
Besides real estate crowdfunding, here are other alternative investments to consider:
Fine Art and Collectibles
Investing directly in fine art or wine represents the purchase of art, wine, or some other collectible. This type of investing requires a great deal of capital, but also a certain level of expertise that many investors do not have. Further, collectibles are typically illiquid assets that do not generate income, can be volatile in price due to whims of the marketplace, and can’t be converted to cash as quickly as stocks or other investments, so they tie up capital. This type of alternative asset investing has been difficult for individual investors to access in the past, but there are now crowdfunding websites that provide individual investors (typically accredited investors) access to these markets.
Costs associated with investments in wine, art, and other collectibles beyond the price of the collectible include commissions on purchases at auction, insurance, storage to ensure optimal aging and protection of the asset, and expertise and consulting that may be needed. There are platforms available for both accredited and non-accredited investors, with minimum investment amounts ranging from a low of $10 to as high as four to five figures.
Cryptocurrency
Cryptocurrencies are digital currencies that are not backed by a sovereign nation, and work via blockchain technology that creates a log of all transactions. Bitcoin is the most commonly known cryptocurrency for transactional use, and the market has matured to where owners can now generate interest on their cryptocurrency holdings through staking.
Owning cryptocurrency is relatively easy and inexpensive, typically with a fee built into the price of the cryptocurrency by the exchange. It should be noted that while many see cryptocurrency as an important competitor to sovereign currencies in the future, cryptocurrencies are still subject to a great deal of volatility.
The best cryptocurrency exchanges typically charge transaction fees that range between 0.00% and 1.15% and require minimum investments as low as $1 to get started. This article provides a more detailed overview of investing in cryptocurrencies, including the pros and cons.
Precious Metals
Gold and other precious metals have been used as a currency, a symbol of wealth, and as an investment for thousands of years, in large part because precious metals have retained their purchasing power over time. There are many ways to add precious metals exposure to your portfolio, including owning the physical asset, futures contracts on individual metals, and ETFs that track individual metals or a precious metals index.
Downsides to owning physical metals include not just the cost of the actual metals, but also additional costs for storing and insuring them. There’s also the issue that precious metals do not pay interest or generate revenue. Because of this, some investors choose to gain precious metals exposure indirectly by buying stock in mining companies that may pay dividends as well as rise in value. The best online gold dealers that offer storage for physical gold charge stocking fees of 5% to 10%, and will ship your gold for free on orders as low as $99.
Peer-to-Peer Lending
Peer-to-peer lending is where individuals lend money to other individuals, cutting the bank out of the lending process. Peer-to-peer lending is also known as “social lending,” because individuals often outline the reasons for borrowing, and lenders on these platforms will sometimes choose a borrower to lend to based on their story.
Peer-to-peer lending is facilitated by a platform provider that collects fees from borrowers and lenders on the site. The platform also vets both lenders and borrowers that use the platform and classifies borrowers into risk categories for the lenders to sort and easily review.
How Does Real Estate Crowdfunding Work?
Real estate crowdfunding works through crowdfunding platforms, which seek to match individual investors with deal sponsors who want funding for their investments. The crowdfunding platform puts together due diligence and other materials for its investors to evaluate deals, and if an investor chooses to move forward, they can invest passively in a portion of the deal, which will commence once the deal has enough investors to raise all the cash needed.
Is Real Estate Crowdfunding a Good Investment?
Real estate crowdfunding can be a good investment, but the specifics of the deals and the timing of the transaction are critically important to ensure the investment is right for you. Evidence that crowdfunding is a good investment can be seen in the overall results of some of the most popular crowdfunding platforms.
Of platforms with more than 300,000 investors, overall returns have been strong. CrowdStreet shows a 17.9% realized internal rate of return (IRR) on the $4.2 billion invested in 798 deals; YieldStreet real estate deals have a 9% net annualized return; Arrived, which focuses on single-family rental homes, shows total returns on its more than 353 properties funded that range from -17.8% to +136%; and Fundrise shows an average income return to its customers of 4.81%. As you can see, real estate investing can show some very good returns, but each deal is its own individual investment that needs to be considered carefully.
What Is a Good Historical Rate of Return?
Rate of return is a relative measure of an investment’s performance over time. Over the past century, the stock market has performed better than real estate, but periods of corrective price weakness in the stock market have tended to be more extreme than real estate, making real estate a less volatile asset to hold.
From 1968 to 2009, average annual returns were 7.5% on the S&P 500; 11.5% for small-cap stocks; and 5.4% on existing homes against an average inflation rate of 4.6%. All of these markets outpaced inflation, but it is not easy to compare each investment because of their relative risks, as well as differing tax treatment and the availability of leverage in different markets.
What Are the Risks of Real Estate Crowdfunding?
Real estate crowdfunding investing entails risks. Each deal is different and has its own risk parameters. Some deals may be mature properties that pay investors income right away, while others are new construction projects that won’t generate passive income for some time. In addition to the types of properties, crowdfunding investors also have the risk of the sponsor of the deal, as that is the manager of the individual deal and the entity they will deal with once they have made their investment. Other risks are similar for all real estate owners, such as the building type, location, and the ability of the property to generate revenue and appreciate over time.
Article Sources
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