What Is Real Estate Crowdfunding and Should You Invest?

Real estate crowdfunding is a great way to add yield, income and diversity to your portfolio

Real estate crowdfunding may be the most important investment revolution you’ve never heard of. It’s the simple idea of allowing accredited and non-accredited investors to buy, hold and sell fractional ownership in real estate assets, like they buy, hold and sell stocks.

What Is Real Estate Crowdfunding and Should You Invest?
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Sounds simple enough, right? It is. Yet, it’s exceptionally profound.

Looking for yield? Cash flows? Income? Steadier returns? Portfolio diversification through uncorrelated assets? Real estate crowdfunding allows you to do all of that, with little friction and for as little as a few bucks.

If you’re watering at the mouth right now, you’re not alone. But, if you’re also scratching your head, you aren’t alone there, either.

So let’s learn more.

Let’s discover exactly what real estate crowdfunding is, and how it can help jump start your investment portfolio.

What Is Real Estate Crowdfunding?

In its simplest form, real estate crowdfunding does two things: On one end, it allows real estate owners and developers to raise funds from the crowd for a new project, as opposed to tapping the banks. On the other end, it allows individual investors to invest in traditionally private real estate projects.

The process varies from platform to platform. But, the core ideas are similar across the whole industry.

Say I want to build a new apartment building in Los Angeles, and that doing so would cost me $100 million. Traditionally, assuming I didn’t have $100 million to finance the project myself, I’d be forced to get a loan from a bank. Crowdfunding, though, enables me to go through a crowdfunding platform, and raise that $100 million from the crowd. In this case, the crowd is investors of all incomes, shapes and sizes.

Investors would provide the funds for an equity stake in the project. I’d take those funds and go build the apartment building. During the process, the investors would get paid a cash yield to supply them with income while the building is being developed. At the end, the apartment building gets constructed, and becomes a cash-producing asset which all the investors earn significant income from and return on.

The History of Crowdfunding

If real estate crowdfunding is such a great idea, why is it just now becoming a thing? Legislation.

In the 2012, former U.S. President Barrack Obama passed the Jumpstart Our Business Startups (JOBS) Act. Among other things, the JOBS Act made crowdfunding both legal and possible. It opened up the door for individual retail investors — defined as anyone who isn’t making $200,000 per year and/or doesn’t have a net worth in the seven figures — to invest in traditionally walled-off, private assets, like real estate and private equity.

Title III of the JOBS Act (the all important part which actually made retail crowdfunding legal) was signed into law in 2016. Ever since then, the real estate crowdfunding market has taken off like a rocket-ship (while other markets, like equity crowdfunding have not, for a variety of reasons).

We are still in the first inning of this growth narrative. For all intents and purposes, real estate crowdfunding is only four years old. It also has a rather limited amount of investor interest and capital at the current moment. As the market gets old, it will get bigger and better, and the amount of money flowing through it will increase dramatically.

The Implications of Crowdfunding

Why should you care about real estate crowdfunding? Because a few real estate crowdfunding assets could add incredible benefits to your investment portfolio.

First, real estate has traditionally been one of the most stable, secure and strong long-term investments in America. So, buying a real estate crowdfunding asset is a great way to buy an asset that will likely appreciate at a healthy rate over the long term.

Second, these assets are largely uncorrelated to other liquid financial assets in your portfolio, like stocks and bonds. That means they probably won’t go down in value if your stocks and bonds are going down. This uncorrelated diversification means that real estate crowdfunding assets could make your portfolio more stable than ever before.

Third, these assets are great income plays. On most real estate crowdfunding platforms, you can earn big cash yields on your investments. So, if you’re looking to supercharge your portfolio with more income in a world where income is tough to find, real estate crowdfunding could be your answer.

Those are the main reasons to get in on real estate crowdfunding earlier. But, the list of benefits is much longer — long enough to warrant you taking a look into the space as way to boost your portfolio. There are other considerations, too, that aren’t so bullish. Dr. Vivek Sah, Director at the Lied Institute for Real Estate Studies at the Lee Business School, says the following:

“[Real estate crowdfunding] works for investors who have an appetite for higher risk real estate returns, as such platforms don’t provide too much transparency for their clients along with information on which assets they are investing in. Also such platforms are good avenues for much smaller real estate investors who want direct investment opportunities unlike other derivative platforms such as REITs. It is a good platform but too much risk for small retail investors, that is why a lot of such platforms have higher investment limits and are currently restricted to high net worth individuals and have minimum network requirements (maybe greater than $500,000). Also, the reputation and background of the management and operator will dictate the success of the investment and the platform …”

Bottom Line

Real estate crowdfunding is the next big thing in the investment world. Many platforms like Cadre, Fundrise, ArborCrowd, Groundfloor, Small Change and Real Crowd offer incredible real estate crowdfunding opportunities for investors today.

My two cents? Go check out those platforms. See if you meet the requirements. If so, sign up for a few of them. Check out the assets. Get a feel for the market. Then, if it feels right, pull the trigger on a few assets.

You won’t regret it.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


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