Is this a new way for the rest of us to invest in real estate?
Demand for homes is high, and prices are soaring. If you’re looking to take advantage of the hot real estate market without buying a house of your own, it may be time to consider real estate crowdfunding.
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One of the biggest perks of homeownership is the ability to earn a profit when you eventually sell. Owning a home is often considered a solid path to build wealth. People are always looking to buy, and prices generally increase over time: The average home price in the beginning of 2021 was $403,600, compared to $202,900 in 2000.
Even if you aren’t interested in buying a home (or you can’t afford one yet), it’s worthwhile to consider investing in real estate. You don’t need to buy a property to get into the game — crowdfunded real estate makes it possible to invest in real estate and diversify your portfolio for a lower upfront cost.
“It’s never been easier to invest in real estate, which was previously inaccessible to most individuals,” said Brett Crosby, founder of PeerStreet, a real estate crowdfunding company. “It gives investors both access to the real estate market and diversification opportunities.”
So, is real estate crowdfunding legit? Here’s what you need to know about this type of investing (and how to get started).
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Real estate crowdfunding allows you to pool your money with other investors toward almost any real estate property, from single-family homes to commercial properties. Some real estate crowdfunding investments allow you to “own” a percentage of the properties mortgage, paying you returns as the space is leased out. Other investments allow you to invest on the debt side, earning returns as the buyer pays back their mortgage.
“Previously, if you wanted to buy an investment property, most of us are looking at tying up a significant portion of our net worth in a single asset,” said Alison Staloch, CFO at Fundrise, a direct-to-investor real estate platform, “not to mention taking on what usually amounts to a second job managing the property.
So why is it so popular right now? More Americans started investing during the COVID-19 pandemic, and the emergence of crowdfunded real estate startups has made it easier than ever to get started. The real estate market itself is also very hot, and some would-be buyers who may not have the cash for a down payment may turn to real estate investing as an alternative.
“There’s also nothing inherently new about marketing real estate investments, like crowdfunding. It’s more of a new twist on an old model,” said David Bodamer, executive director at National Real Estate Investor.
Legislation also played a role. Previously, it was pretty much impossible for the average individual to earn returns off commercial properties, like office buildings, storage units or multi-family residential properties — only “accredited investors,” or those with an annual income of $200,000 or more, could invest. But in 2017, the Securities and Exchange Commission expanded access to real estate crowdfunding, giving most people access to real estate crowdfunding. How much you can invest each year largely depends on your annual income and net worth.
Any financial expert will tell you that diversification is key when it comes to investing, and real estate investments can help balance out your portfolio. These investments often don't move in tandem with the stock market, which can reduce overall portfolio risk. According to research by the Federal Reserve Bank of San Francisco, real estate, not equity, has been the best long-run investment over the course of modern history. Real estate investing also typically comes with less volatility (though the 2008 Recession proves you can get burned).
Real estate crowdfunding is typically cheaper than buying a home outright, and doesn’t come with the hidden costs of homeownership. Most importantly, you’re not on the hook for the mortgage.
“Before, you had to have a lump sum on hand to put into a home or an entire building, usually millions of dollars. Now you just need a few thousand,” said Crosby. “And you’re avoiding all the headaches that go with being an owner.”
Investing your money in real estate is nothing new. Real Estate Investment Trusts, or REITS, have been around for decades. They are similar to mutual funds, allowing investors to buy shares in a company that invests in real estate, rather than investing directly in the real estate yourself via real estate crowdfunding. REIT shares are much more liquid than real estate crowdfunding, and tend to move more alongside the stock market, so they may not have the diversification benefits real estate crowdfunding has.
Investing in real estate crowdfunding depends on your current financial situation, including your risk tolerance and time horizon. Like with any other investment, there is a risk to investing in real estate. Crowdfunding is also a relatively new space in the financial world, which comes with its own risks. Make sure you fully research the investment and its risks beforehand, including any management fees, said Bodamer.
Crowdfunded real estate investments are also less liquid. Because of the complexities of real estate investing, investors may not be able to access their money without a liquidity event, typically refinancing or a sale of the property. Instead, take a long-term approach when investing in crowdfunding.
“Real estate is a good investment option, but it is different from investing in stocks or bonds. It is a long-term investment,” said Bodamer. “And in a lot of cases you may be required to keep your investment for a certain hold period before you can cash out.”
If you’re looking for a way to get involved in the real estate market without buying, want to diversify your portfolio, and are looking for long-term growth, real estate crowdfunding may be for you. We also have a roundup of additional ways to invest outside the stock market.
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