Have you ever tried to create a passive income stream? Fixed-income investors are familiar with the concept. So, too, are dividend investors. In recent years, real estate crowdfunding has become an additional way to create a passive income stream.
But how do you create this revenue stream? Well, the beauty of investing in real estate using crowdfunding is that it’s easier than you might think.
Here are a few tips for accelerating your plans to create a passive income stream using real estate crowdfunding.
You Need a Reputable Source of Investments
Let’s say you wanted to buy a golf course. The first thing you would do is find an expert in the real estate industry that specializes in the buying and selling of golf courses. One such expert is the Leisure Investment Properties Group, an affiliate of Marcus & Millichap (NYSE:MMI), one of the country’s largest commercial real estate advisors.
So, before you can build your income stream, you need to find a few reputable sources of real estate crowdfunding investments. I believe the best ones for most people are those catering to smaller, non-accredited investors.
The definition of accredited investor is an individual (or couple) who either have a net worth exceeding $1 million, excluding their primary residence, or individuals that have earned $200,000 in each of the last two calendar years ($300,000 combined) and be able to earn this much in the next year.
For many, that’s a tall order, which is why I suggest you consider these real estate crowdfunding sites:
Fundrise: Based in Washington, D.C., Fundrise got its start in 2012. Since then, it’s attracted more than 500,000 investors to its platform, investing nearly $2 billion in real estate across the country.
For as little as $500, you can invest in commercial real estate. Fundrise’s starter portfolio consists of four eREITs that own quality real estate projects. In this way, it’s much like owning an ETF or mutual fund-of-funds.
The starter portfolio has 20% invested in Growth eREIT III, 20% in Growth eREIT V, 20% invested in Balanced eREIT and 40% in the Income eREIT. The Income eREIT was launched in December 2015. It pays an annual dividend of 7.5%.
The best part of investing with Fundrise? You pay 1.0% in annual fees (0.15% for an annual servicing fee plus 0.85% annual management fee), considerably less than other big-league real estate income trusts.
But don’t take my word for it. Go check out Fundrise for more information.
What makes Rich Uncles unique is that it puts its money where its mouth is.
Rather than charging fees of 1% to 2% of the assets under management, it makes nothing until a real estate project matures (average term 3-7 years) and profits are realized. You, the investor, get the first 6.5% of the project’s total net profit, and 60% of anything above that.
If the real estate project doesn’t make money, Rich Uncles gets nothing for their time. That’s what I call a motivated asset manager.
In addition to the fee advantage, Rich Uncles pays monthly dividends that can work out to 6% or %7 a year. That’s on top of the profits from successful projects.
Another attractive feature of Rich Uncles is the fact the real estate it buys are triple net leases, which means the tenant is responsible for all expenses related to the investment property, leaving more cash flow to distribute to investors.
Lastly, it makes a down payment of at least 50% on all properties it buys, ensuring that leverage doesn’t get the best of its investment. The conservative approach is ideally suited to the smaller real estate investor.
There Is Risk Involved in Real Estate Crowdfunding
In the previous section, I discussed two real estate crowdfunding sites that private investors ought to check out if you want to develop a passive income stream using commercial real estate.
However, like any investment, there is no free lunch. To obtain rewards, you have to risk your investment. While Fundrise and Rich Uncles might make it look risk-free, they’ll both be the first to admit real estate crowdfunding does have its risks.
According to, W. Ben McCartney, Assistant Professor of Finance in the Krannert School of Management at Purdue University, the novel coronavirus is a risk to consider:
“The Covid-19 pandemic will absolutely affect real estate markets across the United States. We’re already seeing decreases in the numbers of new listings and home sales and I imagine the volume of home transactions is going to continue to decrease as states order people to stay at home. How prices will be affected is not yet clear.”
Further, TheRealDeal, an online website specializing in real estate news and analysis in the U.S. marketplace, recently discussed a real estate crowdfunding firm that’s struggling to stay afloat:
“Prodigy claims to have raised $690 million from thousands of investors around the globe for its developments in New York and Colombia. Prodigy’s website appears to still be actively soliciting funds for two developments in Chicago,” wrote TheRealDeal contributors Sylvia Varnham O’Regan and Mary Diduch on March 19.
“The fate of the company has been in limbo for more than a year, as investors stopped receiving distributions from properties at the end of 2018. CEO Rodrigo Niño stepped down from his role last September, and the company’s succession plan remains.”
In February, the duo discussed setbacks the Prodigy Network faced in recent times, after launching to much fanfare in 2011. It’s a classic case of over-promising and under-delivering.
As we’re starting to see with some big-name dividend stocks during the current coronavirus crisis, your real estate crowdfunding income stream isn’t guaranteed. If you can’t afford to lose your entire investment, you ought to be investing in Treasury bills or other guaranteed investment vehicles.
The Bottom Line
Equity crowdfunding, whether the investments are in real estate, private businesses, art, exotic cars, etc., can provide small investors with a diversified portfolio beyond stocks and bonds.
With a little due diligence and a sensible investment strategy, smaller investors can invest alongside institutional money, while also generating a passive income stream.
In my opinion, that’s excellent news.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.