A common method of building wealth is through investing in real estate. Whether this is your own house or a rental property, this is a costly process. What can you do if you don’t have $10,000s or $100,000s to shell out? Real estate crowdfunding is the answer.
What is Real Estate Crowdfunding?
Real estate crowdfunding is when many people chip in to purchase a property or properties, each owning a portion of the property based on their contribution. The purpose is to give each of those investors access to a property they couldn’t afford by themselves.
This process is usually done through an online brokerage. The brokerage directs its investors’ funds to purchase and manage its assets.
An important detail is that when you crowdfund real estate, you are a part owner of the underlying asset. If you crowdfund a neighborhood, you are directly a part owner of that neighborhood. This point will become important later on.
The portfolios offered by the brokerage are usually made up of many properties. Sometimes, this can be dozens of properties. The brokerage uses these properties to balance your portfolio, whether towards growth or income. In addition, having many properties provides diversification.
The real estate crowdfunding platform that My Money Marathon recommends is Fundrise. Fundrise’s easy-to-use platform makes setting up recurring deposits and managing your portfolio simple.
Why Use Real Estate Crowdfunding?
Access Otherwise Inaccessible Properties
The foremost reason to use real estate crowdfunding is that you have the opportunity to invest in properties you wouldn’t otherwise.
Most of us don’t have the cash or assets for a loan to purchase a new 100-home neighborhood. However, if you and 1,000 other people can contribute smaller amounts, you can together buy the community. With this example, you would have 0.1% ownership of the neighborhood.
Though that ownership may sound small, you are still getting the performance of the neighborhood. If the area rises 20% in value, your 0.1% ownership also does. Without crowdfunding, you would have never been able to access those gains.
Accessing otherwise inaccessible markets can expose you to markets you would have never thought possible. Imagine the growth of an apartment complex in a major city. With crowdfunding, you can tap into those gains.
Diversify Your Investments
Diversification is a common practice in the world of the stock market. You don’t want to be too heavily weighted on one stock if it drops dramatically.
This same concept can be applied to investing as a whole. You don’t want to be too heavily weighted on one type of investment in case it fails.
A case in point is the recent fall of the market due to supply chain shortages, fear of a recession, and rising inflation. Though the real estate market has also been impacted, it has held firm.
This is a perfect example of how real estate is a powerful hedge against inflation and the stock market’s volatility.
Those with a diversified investment portfolio containing both real estate and stocks have felt the stability of real estate and the market’s growth potential. If you are only in one or the other, you miss out on diversification.
Low Barrier to Entry
This is similar to the accessibility point from earlier. To access most properties, even if you split the cost with partners, you need a lot of money.
Splitting a typical $300,000 house with six people is still $50,000 each. However, with crowdfunding, specifically Fundrise, you can get in with as little as $10.
It is becoming common knowledge that you can get started in the stock market with as little as $1 with brokerages like Robinhood. With the option of partial shares, you have extreme flexibility in the market.
However, the accessibility of real estate crowdfunding has brought this same accessibility to real estate. You can start and open an account with an initial investment equal to the cost of lunch.
This low barrier to entry is extremely valuable for those who want to test the waters first. You don’t have to commit $100,000 to try out real estate. Just deposit $10 and see how you feel about it.
Outside of upfront costs, real estate crowdfunding also helps individuals with low credit scores.
It would be best if you had a good credit score to obtain a home loan with a decent rate. Without one, you are out of luck. Real estate crowdfunding makes real estate accessible to anyone with $10 to invest, regardless of credit.
Hands-Off Real Estate Investing
Traditionally, managing real estate is a very hands-on endeavor. Many investors handle much of the labor and maintenance themselves, whether it is their home or a rental property. Not to mention the sometimes months it takes to source and vet potential renters.
With real estate crowdfunding, all of those headaches are managed for you.
Real estate crowdfunding platforms usually have different portfolio options to choose from. These differ by location, type (residential, business, etc.), and growth vs. income. However, on platforms like Fundrise, these options are locked behind tiers based on how much you have deposited. Higher total deposits unlock more flexibility in your portfolio.
Of course, in exchange for handling those messes, you pay management fees. For Fundrise, these fees add up to a total of 1%.
A 1% fee isn’t something to ignore, as that fee compounds year after year. In the stock market world, that would be a hefty fee that would make me think twice about the investment.
However, in real estate, that is a small fee to pay for the responsibilities taken off your plate. The time saved not dealing with renters or maintenance alone makes that a reasonable cost.
Other real estate crowdfunding platforms will have different fees. Make sure to research and compare them before making a decision.
Real Estate Crowdfunding vs. REITs
If you are familiar with real estate investing, all of this sounds similar to a REIT. A REIT, Real Estate Investment Trust, functions similarly to real estate crowdfunding.
A REIT is traded on markets like the stock market. You trade shares just like a stock, hoping you can sell them for more than you paid. In addition, you earn dividends over time, just the same as a stock.
A REIT is run by an entrepreneur or corporation that uses its investors’ funds to purchase. When you invest in a REIT, you invest in the company that buys the property.
Why Crowdfunding is Better than a REIT
Compare this ownership to earlier when I mentioned that you own the underlying asset in real estate crowdfunding. This is an important distinction because, along with the ownership, the asset’s returns are directly returned to you.
Though REITs are legally required to return 90% of their earnings to their shareholders, this doesn’t match the 100% of crowdfunding. Since you are the direct owner of the property, all the returns, based on your percent ownership, are yours.
Both REITs and crowdfunding are more accessible than directly purchasing a property. However, REITs still usually require $1,000s as an initial investment. This is part of the process of proving yourself as an accredited investor.
With crowdfunding, you can get started with as little as $10. Most REITs can’t match that.
Fees vary significantly by REIT and the performance of the REIT. Most REITs charge fees of 3-9% of your investment. This involves prices for management, performance, and other miscellaneous costs.
Compare this to the 1% fee of crowdfunding platforms like Fundrise. With crowdfunding, you will hold on to a greater percentage of your gains than with REITs.
Why REITs Are Better than Crowdfunding
The biggest downside to crowdfunding is liquidity. Many platforms lock your funds up for at least one year, sometimes more. This is because you are investing directly in a property, so they need to be sure everyone won’t pull out out of nowhere.
However, a REIT is more flexible since you invest in a corporation instead of directly in the property. You can trade a REIT just as easily as a stock, assuming it has a decent trade volume.
If you are worried you will need your funds soon, a REIT is the better option.
Treat any funds invested in crowdfunding as long-term investments.
How to Get Started in Crowdfunding
Let’s set up some actionable steps to get started in real estate crowdfunding.
Step 1: Sign Up for an Account
Do your research to decide which platform works best for you. Make sure to compare fee structures and required initial investments.
The process of signing up should take, at most, a few minutes. Provide personal information for tax purposes, tell them your long-term goal for your portfolio, and you’re set.
If you decide to invest with Fundrise, sign up using this link to get $25 when you deposit $10.
Step 2: Deposit Funds
How much you deposit upfront is up to you. Of course, you have to meet the required initial investment. However, past that, invest in what you are comfortable with.
If you want to start small to get the hang of things, do that. No investment is worth adding additional stress to your life.
Remember, money invested in crowdfunding is usually locked up for a while. This period is five years for Fundrise, so only invest as much as you are comfortable with. Only invest what you are comfortable not touching for the next several years.
The best method is to have the mindset of investing for retirement. You don’t expect to touch retirement funds for many years. Treat crowdfunding in a similar manner.
Step 3: Set Up Automatic Deposits
Automation is the key to long-term success in any investing venture. The same goes for real estate crowdfunding.
Compounding can do its best work with consistent investments. Trusting yourself to remember and have the willpower to invest on your own consistently is foolish. Set up a system to do it for you.
Most platforms offer a straightforward automatic investment tool. This will automatically withdraw a set amount of funds on a set schedule.
If you are serious about real estate crowdfunding, set up automatic deposits.
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