Real estate has long been considered one of the best ways to build long-term wealth. After all, we all need roofs over our heads. The only problem is that it takes a small fortune to buy an investment property.
However, there is another option. You can now invest in private real estate deals through crowdfunded real estate companies.
If you don’t have the time, skills, or cash to own rental property, crowdfunded real estate lets you own rental property without all the headaches. And, crowdfunded real estate investing helps to diversify your investment portfolio while earning potentially higher investment returns.
For example, your investment can earn a 12% yield while the average historical return for the broad stock market is approximately 8%.
This article will help you find the best crowdfunded real estate companies and even learn a few tips from crowdfunding veteran Joseph Hogue to help you decide which platforms you should use.
In fact, I like crowdfunded real estate because I don’t have the time or money to own rental property at the moment. I currently use several of the platforms below to invest in real estate, and it helps diversify my investment portfolio.
Invest With These Crowdfunded Real Estate Companies First
There are roughly 100 different crowdfunded real estate companies you can invest with, but that doesn’t mean they’re all excellent opportunities. Before you give just any company your business, give the below recommendations a try. You can also open an IRA with many of these companies to minimize your tax bill.
If you’re a non-accredited investor, Fundrise may be your best option. Unlike other crowdfunding platforms, investors are welcome from all 50 states.
You only need to invest $500 to create your starter portfolio. Fundrise invests your money in a basket of commercial and residential properties located across the United States. Some of the current property types include:
- Apartment development and renovation.
- Rent-stabilized apartments.
- Home construction.
- Commercial developments.
The annual dividend for the Fundrise Starter Portfolio as of August 20, 2018 is 6.7%. When your account balance reaches $1,000, you can begin investing in advanced plans that focus on local geographic areas like Los Angeles and Washington D.C. or some of these investing strategies:
- Supplemental income.
- Balanced investing.
- Long-term growth.
Investing in advanced plans lets you earn a potential annual dividend yield of up to 12%. And, you don’t have the daily stock price fluctuations you experience with publicly traded REITs.
Read our Fundrise review to learn more about their different advanced investing plans.
2. Rich Uncles
Another option for non-accredited investors is Rich Uncles. This company launched in 2012 and is one of the oldest crowdfunded real estate companies. Rich Uncles primarily invests in commercial property, but you now have a second investment option, too. The two types of REITs you can invest in are:
- Student housing REIT.
- Commercial property REIT.
Student Housing REIT
The Student Housing REIT is available nationwide and only requires a minimum $5 initial investment. As of Sept. 19, 2018 this REIT offers a 6% annualized dividend by investing in student housing meeting the following criteria:
- Housing located within a one-mile walking distance of NCAA Division I campuses with at least 15,000 enrolled students.
- 150-bed minimum capacity.
- 90% rental occupancy rates.
Since this REIT launched in mid-2018, its only investment property so far is the Stadium View Suites complex located on the Iowa State Campus. It currently has a 99% occupancy rate with 518 total beds. These are the types of properties that Rich Uncles wants to add to its Student Housing REIT.
Commercial Property REIT
The Commercial Property REIT is Rich Uncles’ original REIT option. It holds different commercial and retail properties located across the United States, including store locations for companies like Dollar General, and Harley Davidson.
Rich Uncles makes a 50% down payment in each property, which greatly reduces the risk of borrower default and missed payments. Both of these events would mean less investment income.
Although you only need a $500 initial investment, you can only invest in this REIT if you’re a resident of one of 24 states. If you live in a non-permitted state, you’ll have to use one of the other options on this list to invest in commercial real estate. For non-accredited investors, your best option might be Fundrise.
RealtyShares is for accredited investors looking to invest in commercial real estate. You can also invest in residential and multifamily properties.
You invest in individual properties, which means you’ll usually have to invest at least $5,000 per project, although you can periodically find a minimum $1,000 offering.
If you prefer to invest in hand-picked projects instead of letting the fund manager choose what to invest in, RealtyShares is one of your best options. Like other crowdfunded platforms, your potential dividend yield depends on if you invest in a debt or equity property:
- Debt properties give you fixed, interest-only payments.
- Preferred equity properties give you fixed monthly payments plus accrued return when the investment matures.
- Common equity properties give you variable payments, including asset appreciation.
Equity investments offer higher potential yields — up to 24% — but these investments can also be riskier because you have a larger ownership stake and a longer investment term. To diversify your crowdfunding portfolio, you should invest in both debt and equity positions.
Since you’re investing in individual properties, you have more flexibility in how long to invest your cash. Each property listing includes the investment term length (i.e. 12 months to five years) and the projected investment return.
Read this RealtyShares review to learn more about investing in individual real estate projects.
PeerStreet specializes in debt investment loans for accredited investors. Most loan terms last from six to 36 months with a 6% to 9% return. You can consider using PeerStreet for your short-term investments in residential properties. It’s also possible to invest in commercial and multifamily deals.
While most crowdfunded companies charge an annual 1% administrative fee, PeerStreet charges between 0.25% and 1% for each investment, making it a low-price leader.
Another reason to consider PeerStreet is its automated investing feature. You can create investing screens that filter open opportunities by several factors:
- Property type.
- Loan maturity date.
- Geographic region.
RealtyMogul has a platform for accredited and non-accredited investors. Accredited investors can invest in individual commercial and residential properties, which even include mobile home parks.
Another option for both accredited and non-accredited investors is to invest in one (or both) of RealtyMogul’s REITs. MogulREIT I focuses on debt investments that pay a fixed monthly dividend.
But if you can invest for at least three years, you might want to consider the MogulREIT II. It has more upside potential as investment properties appreciate in value and generate more income. The tradeoff is that you receive a smaller monthly dividend in the meantime.
The MogulREIT I portfolio offers a dividend yield of 8% with monthly payments, as of Sept. 19, 2018. This REIT holds commercial and retail properties across the U.S. with debt-style investments. There are also a few multifamily properties in the portfolio. You can view the current portfolio holdings on the RealtyMogul website.
The MogulREIT II pays only a 4.50% annual dividend (as of Sept. 19, 2018) and holds multifamily apartment buildings. However, there’s more long-term upside potential because this REIT is more equity-focused.
RealtyMogul projects a 16% internal rate of return when you remain invested for at least three years. This figure includes the current dividend plus any gains from property appreciation and monthly cash flow.
This REIT launched in September 2017 and currently holds six properties located in Illinois, New York, and Texas. The dividend yield is less than the MogulREIT I because this REIT focuses on equity investments and can earn potentially more income when the property value increases.
The minimum initial investment for each REIT is $1,000. If you can invest $2,000, you might decide to invest $1,000 in each to diversify your holdings between debt and equity investments. Plus, you’ll have a great mix of commercial and residential properties.
Both of these REITs are available in an IRA or a non-retirement account, too.
If you already own rental property, you can also use RealtyMogul’s 1031 exchange to swap rental properties in a tax-advantaged manner.
Accredited investors can invest in debt and equity offerings on EquityMultiple. It only approves 6% of borrowing requests in an effort to ensure no loan application will default. You can browse the open and closed listings to get an idea of what the opportunities on offer.
Some of the property types include:
- Multifamily apartments.
- Self-storage facilities.
- Student housing.
- Industrial properties.
One recent closed offering was a 16-home residential subdivision in Kahuku, Hawaii. This proposal had a 12-month term with a 10% income rate. In the offering proposal, you can view two proposed house drawings plus more information about the lender and borrower.
While most crowdfunded REITs are aimed at non-accredited investors, accredited investors can have a similar experience investing with AlphaFlow.
You contribute the cash and AlphaFlow automatically distributes your contribution among 75 to 100 open investments. All investments are residential properties with an 8% to 10% annual yield potential and a 6-12 month maturity date.
You can continually reinvest your matured investments to capture rising interest rate momentum. Or, you can withdraw your funds penalty-free sooner than other real estate investments that might have a three- to 5-year maturity date.
The $10,000 minimum initial investment is higher than on many other platforms, but it helps build a diversified portfolio to maximize your potential earnings. If AlphaFlow invests $1,000 in each property, that’s equivalent to a “full position” for most stock market investors that are opening a new position.
8. Fund That Flip
Another tried-and-true way to make money in real estate is to buy and flip homes. Like owning rental homes, flipping houses requires a lot of time and money if you’re doing it yourself. FundThatFlip lets you finance current property flips across the United States.
You will invest in distressed residential properties that need some TLC. All investments are debt-type loans with a $5,000 minimum investment. Most investments return 9% to 12% per flip.
At this time, only accredited investors can invest on FundThatFlip.
CrowdStreet invests in commercial real estate, with a minimum $10,000 investment. You might like CrowdStreet because it focuses solely commercial real estate, as opposed to other platforms that also invest in residential properties.
This gives CrowdStreet the privilege of being one of the very few crowdfunded companies that let you invest directly in commercial real estate. Although other crowdfunding platforms invest in commercial real estate, with them, you’re still investing through the lender or managing company.
Being a direct investor offers a higher income potential, as you can easily find deals with a minimum projected yield of 20%. Of course, it also means potentially higher risk since the investing company can’t use other investment assets to offset losses.
To your benefit, CrowdStreet has a current 2% acceptance rate for borrower applications. Most crowdfunded platforms have a 5% to 10% acceptance rate.
10. Senior Living Fund
With Senior Living Fund, accredited investors can invest in American senior housing. As a record number of Baby Boomers are retiring, there is a shortage of retirement housing.
As of Sept. 19, 2018, you can earn projected returns of between 13% and 21% for each investment. Senior Living projects the annual loan term is five years from funding until project completion.
Most individual investments require a minimum investment of $5,000. Sharestates reduces that requirement to $1,000 for your first five investments. After that, each subsequent investment requires a minimum $5,000 investment.
You can invest in land construction projects and renovations for residential and mixed-use lots. Most annual yields are between 8% and 12%.
It’s possible to browse the current listings in the funding round. You can also see the projects that are in-progress and completed.
12. Patch of Land
One of the original real estate crowdfunding sites is Patch of Land. Its website claims you can earn 12% in 12 months. You can invest in new construction or rehab projects for residential or commercial properties.
Most properties come with a 12-month maturity term, but a few also have a 24-month loan term. After your loan investment matures, you can reinvest the balance or withdraw to your interest-bearing bank account.
DiversyFund is another crowdfunded real estate platform open to all investors. You can invest in both its private growth and income REITs.
Another investment option is individual commercial and residential properties located in California. The DiversyFund team is based in California and they invest in what they know best; California real estate.
You can invest in one of the DiversyFund REITs with a minimum $500 investment. Investing in individual properties requires a larger initial investment.
Anybody can invest in the stREITwise Office REIT, which has a 10% dividend target. You only need $1,000 to open a position.
There is a one-year lockout period on your invested funds, and in fact, to receive the full redemption value, your funds must be invested for at least five years. So, treat your stREITwise investments as the equivalent of a five-year CD.
But the current dividend rate is significantly higher than 5-year bank CD average rate of roughly 3%. So, stREITwise can be a better place to park your cash to triple your potential income.
sREITwise also tends to charge fewer fees than other crowdfunded companies.
YieldStreet is another impressive real estate platform for accredited investors. So far, YieldStreet boasts a 0% principal loss (meaning, an investment hasn’t failed) and investments have an 8% to 20% target return. All projects have a maturity date of between one and three years.
If you want to diversify your portfolio beyond commercial and residential real estate, you can also invest in these assets:
- Marine shipping vessels (boats and vessel deconstruction).
- Legal assets. (Invest in legal expenses and receive payment when settlement is made.)
- Small business financing.
Of course, you can also invest in regular residential and commercial offerings.
How is Crowdfunded Real Estate Different?
Maybe you’re new to the real estate investing world and don’t know much about crowdfunded real estate. That’s OK!
Crowdfunded real estate is a relatively new investment opportunity that’s a result of the 2012 JOBS Act. Since the passage of this act, the general public has been able to invest in private real estate deals with relatively small amounts of cash.
Before 2012, your only options were to invest in real estate stocks or buy actual rental property.
Now, you can directly invest in real estate projects. You avoid stock market volatily, landlord headaches, and can earn a higher yield while investing less cash in each project.
Instead of having to invest $100,000 to a million dollars of your own cash per project, the initial investment can be as low as $500! Crowdfunding makes it easier than ever for average folks to afford investing in real estate.
Crowdfunded Real Estate vs. Publicly Traded REITs
Before crowdfunded real estate, the only way to invest in real estate with small amounts of money was to trade publicly traded REIT stocks (real estate investment trusts) on the stock market.
This option is still available today. Instead of directly investing in real estate deals, you invest in the companies that develop and manage real estate projects.
There are several differences between crowdfunded real estate projects and public REITs.
Crowdfunded Real Estate (Private REIT) Traits
Here are the key traits of crowdfunded real estate:
- It’s illiquid. Plan on waiting three to five years to get your original principal back (like a three-year CD).
- Pays higher dividends than public REITs because of the illiquidity.
- Lets you invest in individual properties or a basket of properties.
- Earns taxable income instead of capital gains.
- Less volatile and not as subject to market sentiment.
Crowdfunded real estate income is treated as taxable income, just like your salary or income you make from your side hustle. To lower your tax bill, you may decide to invest in crowdfunded real estate with your IRA retirement account, which lets you invest pre-tax dollars.
Some crowdfunding platforms now offer eREITs, which invest in a basket of properties. Unlike some other crowdfunded REITs, eREITs are open to non-accredited and accredited investors (more on that below). And compared to public REITs, they pay higher dividends and give you the benefits of being a direct investor.
By being a direct investor you get to pick the real estate investments you want to invest in, rather than investing in a company that you hope picks the right projects. And because you’re not investing in the stock market, you avoid market volatility that can diminish a share’s price even if the company is doing everything right.
Public REIT Traits
Publicly-traded REIT stocks and funds share these common traits:
- Highly liquid. You can buy today and sell tomorrow, if necessary.
- Shares are purchased through your investment brokerage account (or one of these free investing apps).
- Share price fluctuates daily but the REITs pay consistent dividends.
- You invest in a wide real estate portfolio.
Both forms of real estate investments have unique advantages and disadvantages. Crowdfunded real estate is a more appealing option if you want to enjoy the financial benefits of being a landlord without being personally responsible for vetting the tenants, collecting rent, and maintaining the building.
I personally invest in both crowdfunded real estate and publicly traded REITs for a diversified real estate portfolio.
Accredited Investors vs. Non-Accredited Investors
Do you know the difference between accredited investors and non-accredited investors?
Accredited investors have a net worth of at least $1 million or earn at least $200,000 a year. Non-accredited investors include anyone who doesn’t meet one of these requirements.
Which category you fall into determines what type of crowdfunded real estate deals you can invest in. In fact, some platforms only let accredited investors in.
If you happen to be a non-accredited investor (like me), in most cases your only investment option will be an eREIT that invests in a basket of properties instead of a single property. These eREITs still invest in residential or commercial property, plus they hold debt and equity investments to optimize your risk-reward balance.
As an accredited investor, you have full access to every crowdfunded real estate platform. You can invest in private REITs, but you can also invest in individual properties that offer potentially higher investment returns.
The tradeoff is that these investments can be riskier because your money is tied up in a single property instead of multiple properties. And, you usually have to invest at least $5,000 in one property.
Debt or Equity Investments?
A third factor you need to consider when investing in real estate is if you want to invest in debt or equity properties.
Debt investments are similar to a mortgage or peer to peer loans in that you collect monthly interest payments. Essentially, you’re the bank and you lend your money to the property owner and aren’t purchasing the property.
You receive fixed monthly payments but your average potential income is less than with an equity investment. For example, your debt crowdfunded properties might only earn 8% interest annually.
On the other hand, equity investments give you a more direct ownership stake. Instead of lending money to the apartment agency and earning a monthly dividend payment until the loan is paid off (as you would with debt investments), you’re a part owner and can earn a share of the monthly rental income and the property appreciation value when a new owner buys the property.
Equity investing is probably most similar to owning rental property, except it requires a smaller financial and time commitment.
You can make more money on an equity investment than on a debt investment, but you can also lose more. If the project doesn’t find as many tenants as projected or property prices don’t appreciate as much as expected, you may lose money. With either debt or equity investments, you’ll lose money if the project fails.
Tips to Become a Successful Crowdfunded Real Estate Investor
Although there’s less risk with crowdfunded real estate than with traditional real estate investing because you can invest in many properties with small amounts of cash, you still lose money if you pick the wrong investment.
Joseph Hogue has been investing in real estate since 2001. In the past few years, he’s added crowdfunded real estate to his portfolio to diversify his holdings without being a landlord for more rental properties. Specifically, crowdfunding lets him build exposure to commercial property and to real estate markets across the country.
He primarily invests with RealtyShares and PeerStreet to invest in individual deals, but his advice may help you successfully invest on any platform.
Invest in Debt and Equity Crowdfunded Real Estate
Diversification is the easiest way to minimize risk while maximizing returns. With crowdfunded real estate, you should own both debt and equity holdings, Hogue advises.
For debt investments, Hogue tries to look for a target return of between 9% and 12%. When it comes to equity positions, he aims to earn between 15% and 24%.
Of course, you need to take the maturity date and investment risk into consideration. You might only consider longer maturity dates if the upside potential is notably higher.
For example, you might decide to have a 60% equity and 40% debt portfolio. Equity positions might be riskier but have a substantially higher upside potential.
Owning debt investments might provide a lower rate of turn, but add a stable source of income that can perform better than other fixed income or stock market investments.
Own Commercial and Residential Real Estate
Besides debt and equity investments, you should also invest in a mix of commercial and residential real estate. Many real estate investors that already own rental property like crowdfunded real estate because it’s the easiest way to invest in commercial real estate.
Although you might think that commercial real estate is risky because of all the news headlines (i.e. the “retail apocalypse”), you gain exposure to a different type of borrower.
Investing in commercial real estate also doesn’t automatically mean you invest in retail store buildings. You can also invest in office parks, self-storage facilities, or mixed-use buildings.
If you invest in a crowdfunded REIT, you’ll most likely invest in both commercial and residential properties. And, the REIT fund manager will also include debt and equity loans.
If you don’t have the time to build a diversified portfolio (or you’re a non-accredited investor), private REITs can be the best option for instant diversification.
Research Potential Investment Properties Yourself
Regardless of which platforms you invest with, always perform your due diligence. Never invest blindly in any crowdfunded product, no matter how compelling the loan proposal is.
Your research should cover these factors before you make an investment:
- Location (i.e., safe neighborhood, growing community).
- Developer’s track record. (Have they successfully repaid previous crowdfunded loans?)
- Are the proposal’s fundamentals realistic? (Are the tenancy rates or appreciation rates achievable?)
- Will you maintain a diversified portfolio with each new investment?
The various crowdfunded real estate companies have rigorous underwriting standards that reject 95% of all applications. Although most of the bad investments are eliminated, you still need to determine if the risk level reflects the projected investment return and loan maturity date.
You can perform your own due diligence by scouring the internet for local real estate market sentiment and current trends. If you have connections in that market, give them a call and ask their opinion. Until you get a deal or two under your belt, you might only pursue deals in nearby markets so you can research the potential property in person.
Read an Investment REIT’s Offering Circular
If you plan on investing in a crowdfunded REIT, take a few minutes to read the offering circular. The offering circular helps you understand how you can make money and the potential risks. Every circular covers the following topics.
- Investing strategy (debt, preferred equity, equity).
- Types of properties (i.e. commercial, residential, multifamily).
- Potential locations of investment properties.
- Maximum portfolio size.
- Cash redemption policy. (When can you withdraw your cash penalty-free?)
- Potential risk factors.
- Management fees.
An offering circular is similar to a mutual fund or ETF prospectus. You should be able to determine if the investing strategy will offer the potential returns you’re seeking.
If you still don’t understand the investment strategy or how the fund will generate the projected returns, you should call the investing platform for more information. Or, you can choose a different investment for which you understand the potential risks and rewards.
Consider Investing on Multiple Platforms
Depending on how much money you want to invest in crowdfunded real estate, it might be worth your time to invest on multiple platforms. For example, one platform might be better for residential investments while another has better commercial offerings. You don’t have to fund an account to explore the open investments.
Plus, each company’s inventory is always changing, so investing on multiple platforms helps you find the best investment opportunity when you have spare cash.
Anybody in any income bracket can now invest in crowdfunded real estate. It can be an effective way to earn steady passive income while avoiding stock market volatility.
Although the private real estate deals on crowdfunded sites require a longer investing horizon than publicly traded REITs, the rewards can be worth the access to residential and commercial markets with small requirements of time and money.
Do you currently invest in crowdfunded real estate? What’s your favorite company and investment property type? Let us know on social media.