Investing directly in real estate traditionally required an investor to have a large amount of capital available. Real estate investment trusts (REITs) helped to open up real estate to more investors by combining resources via a pooled fund. More recently, crowdfunding has emerged as another way for everyday investors to add real estate to their portfolios. We’ll walk you through how to compare your options, cover your alternatives, and answer your most pressing questions. With an understanding of how to open a real estate crowdfunding account, you can choose the right investments that meet your goals and start investing.
KEY TAKEAWAYS
- Real estate crowdfunding is a path to raise money online for real estate projects from a large group of investors.
- Direct investing in real estate can provide diversification and solid returns.
- There is a wide range of real estate crowdfunding platforms with different investing requirements and platform fees.
- Even in crowdfunding, accredited investors get access to a wider range of opportunities than non-accredited investors do.
- When investing through a real estate crowdfunding platform, it is critical to understand the due diligence that has been done on the deals that are presented.
What You Need to Open a Real Estate Crowdfunding Account
Similar to opening any online investing account, obtaining a real estate crowdfunding account requires that you first provide a combination of personal and financial information.
Personal Information
Some platforms allow you to create an account with just an email address and password, but an actual investing account will usually require your basic personal information:
- Legal name
- Physical address
- Phone number
- Birth date
- Government-issued ID number may be required for verification
Financial Information
Most platforms will ask you outright whether you are an accredited investor or not, but even the platforms open to non-accredited investors will require the following information:
- Social Security number (or a tax identification number if using a company structure)
- Your income and net worth for a know your client (KYC) survey
Accredited investors may have to verify their claim with one or more of the following:
- Investment account statements
- Tax returns
- Third-party confirmation from a financial professional like an accountant
- Proof of financial license
- A signed affidavit
How to Open a Real Estate Crowdfunding Account
Opening a real estate crowdfunding account is relatively straightforward. That said, it is important to take a few steps back in the process before signing up with the first platform that pops up in your search.
Understand the Real Estate Crowdfunding Market
Real estate can be a great alternative asset for investors, but it is important to know your financial situation and risk tolerance before jumping in. Accreditation is a key difference in the real estate crowdfunding market. Accredited investors will see a wider range of direct investment opportunities in real estate. Non-accredited investors may be limited in the types of deals they can access or the type of investments (REITs and funds only, for example).
Evaluating your risk tolerance is a trickier task. Many real estate crowdfunding sites trumpet high “targeted” returns in the double digits, but the flipside of that is that equity investments can also fail. In addition, even debt investments can end up going insolvent, placing the investor’s initial investment at risk along with any owed proceeds. While direct real estate investments do provide diversification from the stock market, they come with many of the same sensitivities that affect the general economy. As with any higher-risk investment, real estate crowdfunding is best done with risk capital rather than making up a majority of your financial portfolio.
Research the Different Platforms
Thorough research of a potential crowdfunding platform is a must, as this is still a relatively new industry where many companies have witnessed very few, if any, recessionary cycles. Some platforms are only open to accredited investors or have high minimum investment requirements that put them practically out of reach for non-accredited investors. Some platforms also charge fees to either the sponsor or the investors, so it is important to be aware of how the company you’re considering makes money. Beyond whether you can afford to invest on the platform or not, the process a platform goes through prior to listing an investment is key. You will want to know how the platform conducts due diligence, what it is analyzing, and how it structures the deals to protect investors.
Create an Account
The account setup varies by platform. Some just require an email and a password to get into the platform and view investments, allowing you to finish setting up and funding an account when something catches your eye. Other platforms take you through a longer onboarding process that may include confirming accreditation status and linking a bank account prior to getting inside.
Fund the Account
While procedures can vary across platforms, most will accept transfers from a linked bank account, similar to traditional brokerage accounts. However, in some cases, large amounts of money may have to be moved via a different process such as a wire transfer directly to the sponsor or a corporate entity like an LLC.
Start Investing
While you can start investing as soon as you have a funded account, it is important to do some of your own research on top of the due diligence done by the platform. If you don’t understand the key metrics in the research, like loan-to-value ratio or free cash flow, then start there before you invest. Cross-check the research provided on the platform with other sources, and even consider calling real estate professionals in that area for a second opinion.
Choosing a Real Estate Crowdfunding Platform
Real estate crowdfunding platforms facilitate investments in private real estate deals. This is important to remember as the terms “fund,” “shares,” or “REIT” mirror the publicly traded assets. Still, these are in fact illiquid private investments where any resale market may be limited to the platform listing them.1 That is why it is critical to choose a platform that is putting in the work to qualify good investments and filter out bad ones.
- Eligibility requirements: Many platforms are still exclusively for accredited investors and most that allow non-accredited investors limit the investments to funds and REITs. Residency status can also matter, as many real estate crowdfunding platforms are only open to U.S. residents and U.S.-based entities.
- Minimum investments: Minimum investment levels range wildly from platform to platform. The range goes from $10 all the way to $200,000, so you’ll need to see if you have the capital on hand to even access a given platform. There may also be restrictions in the form of investment caps preventing more than a given percentage of net worth on the platform.
- Fees and penalties: Fees for real estate crowdfunding can be a bit confusing. Some platforms put all the fees on the sponsors, while others charge platform fees and/or management fees on their fund investments. Check any fees as well as the lock-up period rules for any set penalties around early redemptions or exits.
Real Estate Crowdfunding Account
- Transparency: You’ll want to see a clear explanation of how a platform vets sponsor deals and what steps it takes to support investors in the event of a default. Does the platform clearly explain how deals are structured? Is there a set process for unexpected events like additional capital calls on a project? If you can’t easily find this information, it is likely a bad sign.
- Investment selection: The investment selection will interest accredited investors more than non-accredited ones. In many cases, non-accredited investors are limited to the private REITs or funds offered through the platform. For accredited investors, a wide selection of commercial real estate and multi-family units is a base-level offering. Some platforms spread the net more widely to include industrial real estate, marine investments, storage, and so on.
Compare the Best 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 | $20,000 | 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 |
Alternatives to Real Estate Crowdfunding
Direct investments in real estate via private equity arrangements are considered a type of alternative investment. These are generally considered to be more illiquid and therefore higher-risk than publicly traded investment options. Crowdfunded real estate is not the only alternative investment, of course. Here are a few other alternatives that offer similar diversification away from the traditional market.
Fine Art and Collectibles
Fine art, antiques, wine, and other physical property that gain value over time based on rarity and popularity are broadly categorized as collectibles. To invest successfully in collectibles, you need to understand the market for various items and be able to assess quality and authenticity quickly. Investors in collectibles need to plan for things like secure storage and insurance for their investments.
Cryptocurrency
Cryptocurrency uses blockchain technology to create a virtual currency that doesn’t derive its value from a national government. Instead, these digital currencies are traded on a market maintained through cryptocurrency exchanges. Cryptocurrency is arguably on its way to becoming just another asset class but even then it is on the higher-risk, speculative side, similar to real estate crowdfunding. Cryptocurrency investments can be done directly through exchanges or an investor can take the more diversified approach of gaining exposure through an exchange-traded fund (ETF).
Precious Metals
Precious metals like gold, silver, and platinum are also considered alternative investments. Gold and silver come in a collectible form as with coins and jewelry that sell above the melt price. Some physical forms, like bullion bars, trade closer to the spot price of gold and silver as a commodity. Investors can also get access to precious metals through ETFs, futures, options, and even shares of the mining companies pulling them out of the ground.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending is very similar to real estate crowdfunding in that it is a private capital market outside of traditional bank financing. Investors can become lenders on the platform and provide loans to other individuals. The borrower may not be able to secure traditional financing, so the rates on the loans may be higher to accommodate the higher risk of default. As with real estate crowdfunding, platforms play the key role in creating the market with providers like Prosper and Lending Club—although the latter has moved to institutional investment with no replacement for its individual investment option as of yet.23 The requirements vary state by state, but the income and net-worth requirements are generally not as onerous as they are to be an accredited investor.
How Does Real Estate Crowdfunding Work?
Investors pool their money to acquire equity or debt stakes in private real estate projects or operations. In exchange for the capital, the sponsor of the deal will either pay investors out of the rent income and proceeds of an eventual sale or via regular interest payments if it is a debt investment. The platforms that list opportunities play a critical role in vetting the investment and structuring it.
Is Real Estate Crowdfunding Worth It?
Real estate crowdfunding is a higher-risk, higher-return investment. It is also less correlated with the financial markets, although it is still sensitive to the economic conditions where the properties are located. Real estate crowdfunding can provide investors with above-average returns and portfolio diversification, but it is best done with risk capital rather than making it a majority of any average investor’s portfolio.
What Are the Disadvantages of Real Estate Crowdfunding?
Real estate crowdfunding investments are higher-risk private investments. This means that in addition to the regular risks of total loss, if an investment fails, you may have issues around liquidity, fraud, and potential platform failure to consider. Investors in private projects also do not have the same guaranteed disclosures that more regulated investments have, making due diligence more difficult. Lastly, real estate crowdfunding projects face the same economic pressures as regular real estate investing. The cost of capital can go up in the form of interest rates, or inflation can drive up construction costs and suddenly a project costs more than planned. This can result in a capital call to existing investors or even dilution of equity via a secondary call for investment.
Can You Invest in Real Estate Crowdfunding With a 401(k)?
A traditional 401(k) through a brokerage or bank is unlikely to allow you to invest in crowdfunded real estate deals. To use retirement funds to invest in this type of alternative asset, you’ll need to go the self-directed 401(k) route. While this is possible, it is recommended that you limit your exposure to alternative investments by only using risk capital. Putting all of your retirement savings into crowdfunded real estate is not part of a sound investment strategy.
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