The Ultimate Guide to Crowdfunding in Real Estate
As a real estate investor, I meet a lot of people who are fascinated by the development that is going on in their city, neighborhood, or even their backyard. Seeing this, many of them are interested in getting involved in real estate as an investment strategy, however, two main questions always come up:
How can I/we build or renovate something without any construction experience?
How can I/we buy an investment property with my current salary and/or savings?
This is where crowdfunded real estate comes into play. It opens the door for anyone looking for an opportunity to invest in real estate, or take on ownership of a project, with little to no construction experience and small initial investments.
There is a growing trend in the real estate industry to raise funds to acquire projects via crowdfunding. There are both national and local companies that are offering opportunities for anyone to invest in ongoing short term renovation projects or long term buy and hold rental properties.
At this point you may still be asking yourself what is crowdfunding in real estate. That’s what we are here for, to help you understand what it is and why you should get involved. If you have a general knowledge of real estate please read on, if you are a newcomer to the industry, welcome, and we suggest checking out the eBook “The 50 terms you need to know before investing in real estate” first to get a grasp of the common terminology used in the industry.
Table of Contents
INTRODUCTION TO CROWDFUNDING IN REAL ESTATE
Introduction to Crowdfunding in Real Estate
What is it
We know it can be hard to find a simple explanation to crowdfunding in real estate. Crowdfunding in its simplest form refers to raising a defined amount of money via small investments from a large group of individuals. Crowdfunding in real estate, simply put, is raising money via crowdfunding to invest in real estate either for renovation projects or rental properties.
How does it work
One of the key reasons why crowdfunding works in general is that it is peer-to-peer meaning that you are investing in ideas, projects, etc. with your neighbors, colleagues, friends, or other like-minded people and groups. Because of this, it allows for low minimum investments from a large group of people. Crowdfunding in real estate is no different, except the investment vehicle is defined by a particular property.
Who is it for
In essence, crowdfunded real estate is for everyone and here is why. Have you ever said to yourself, or others, I really want to invest in real estate but do not have enough time or money? Well, crowdfunding allows you to invest what you have available and let experienced investors take care of the heavy lifting. It doesn’t matter if you are a recent college graduate, raising a family and building your retirement, looking for other forms of investing, or retired and looking for an additional stream of revenue, crowdfunding will work for you.
What are the benefits
Obviously, since this is an investment the benefit is having your money work for you. Also, there aren’t any fees associated with investing. You get your entire principal back plus interest. If you are a recent grad, you may be looking for a way to offset your rent so you can enjoy life a bit. If you are growing your investment portfolio for retirement maybe you have been burned a bit by the volatility of the stock market and know that you need to add some real estate investing to your portfolio. Or, maybe you are retired and looking for an alternative revenue stream or to build a legacy.
What are the returns
Generally speaking you should plan to receive a fixed interest rate of return (usually 5-8%). In some cases you will also receive a cut of the profits from individual real estate projects.
TYPES OF INVESTORS
Types of Investors
In general, there are two types of investors out there. However, most of you probably do not actually know that or if you do, you are not really sure how investors are defined or which category you fall into. Lets make this simple. You are either an accredited investor or a non-accredited investor.
There are two basic ways to be considered an accredited investor, either by your net worth (amount your assets exceed your liabilities) or your annual income.
Net worth qualification: Your net worth, individually or including spouses, exceeds $1 million.
Annual income qualification: Your individual annual income over the past two years is at least $200,000 or including spouse is at least $300,000. You must also demonstrate that your annual income is expected to remain at, or above, these levels.
Are individuals who do not meet the requirements outlined above of accredited investors.
Regardless of the category you fall into, you are able to invest in real estate. Some crowdfunding platforms require you to be accredited and some do not so it is important to know where you fit in and with whom you can start investing.
CROWDFUNDING IN REAL ESTATE: WHAT DOES THIS MEAN?
Crowdfunding in Real Estate: What does this mean?
Let’s dig a little deeper into crowdfunding in real estate and what this actually means. You have all probably heard of KickStarter, IndieGogo, and GoFundMe and maybe have invested or donated in the past. However, you may not know that crowdfunding for real estate investing has been approved by the Securities and Exchange Commission (SEC) as an option for both accredited and non-accredited investors alike. This means that whether you are looking to invest $500 or $50,000 in real estate, you have the option to get involved.
This is important because now anyone who is interested in investing in real estate has the opportunity to work alongside experienced investors, such as our team at REvolve Partners. The best part of the process is as a member of the real estate crowdfunding community, you get to reap all the rewards of owning investment properties without any of the day-to-day headaches of being on-site.
REAL ESTATE CROWDFUNDING VS OTHER INVESTING OPTIONS: A COMPARISON
Real Estate Crowdfunding vs other investing options: A comparison
Let us take a quick step back and let you know we are not telling you that real estate investing should be where you park of all of your investment capital. This section has been written to compare real estate investing via crowdfunding to what we consider the other main investment vehicles out there. This way if you have been considering investing in real estate you have a place for a quick comparison.
Let’s look at some year-to-date real estate trends across the country according to Realtor.com.
In general, you can see that the country’s real estate market is up as a whole. Additionally, the days on market and active listings are declining which means the real estate market is strong.
What does this mean for real estate investors? The short answer is that it is a great time to invest some of your money in real estate. Using crowdfunding as a vehicle to invest in real estate, you can start with as little as $500 and should expect 5-8% annualized returns at a minimum without any startup or investing fees. Additionally, some of the crowdfunding platforms are offering profit sharing.
Let’s dig into the stocks. Surely, many of you are already thinking of investing in the stock market. One of the most striking things we found when looking into investing in the stock market is that many stock market firms have fairly high minimums. Additionally, all brokerage firms have trading fees that range from $10-30 per trade. That can put a serious dent into your investment capital. Both of these are in direct contrast to investing in real estate via crowdfunding where the minimum is $500 and you will not pay any fees to invest your money.
Another common investment strategy is mutual funds. Investing in mutual funds does allow you to invest smaller amounts of money, as little as $50-100/month, but there are still fees. Most funds have a management expense ratio (MER) charge each year and sales charges when mutual funds are purchased. Again, with real estate these types of fees do not exist.
Lastly, we wanted to include the run of the mill savings account as an investment strategy. Average savings account rates range from 0.32% to 1.55% annually according to mybanktracker. Need we say more about this option?
To summarize, there are definitely options for you to invest your money. We think based on the low minimums and lack of investing fees that investing in real estate via crowdfunding should be an option in your portfolio.
WHO SHOULD BE INVESTING IN REAL ESTATE VIA CROWDFUNDING
Who Should be Investing in Real Estate via Crowdfunding
If you have read the section before this, you know our answer is everyone…However, here is how different age groups can benefit from the returns available from real estate investing.
Yes, even if you have just graduated college and are trying to figure out your finances this is an investment strategy for you. Once you have a plan in place to start investing, the returns can help offset your rent, help pay for those dinners out with friends, or whatever else you are looking to do now that you are becoming an adult.
For those of you that have been working for a few years and have saved up some money, real estate investing is a good option to start with. It offers low minimums and you will receive consistent returns without any investing fees. Additionally, it can be completely passive so you will not have to worry about it interfering with your busy everyday life.
For those of you that have been working for a while and maybe have a family and own a home, you probably have a fairly solid investment portfolio working for you. If you aren’t investing in real estate yet, we think it is a good way to diversify some of your investment capital. Savvy investors always include real estate in their portfolio. Some of the reasons why include low volatility in real estate, you own a piece of a tangible asset, and your returns will hedge your money against inflation.
If you have recently retired, or have been retired for a while, you may be thinking that you need to work a part time job to make ends meet. Retirement is supposed to be a time where you no longer think about work. Investing in real estate gives you an additional stream of income so you do not have to think about another job.
On the other hand, some of you may be thinking that you are okay with your retirement income but you would like to leave a legacy behind. With the consistent returns offered by crowdfunded real estate, you can get started building that legacy today.
TYPES OF DEALS TO INVEST IN
Types of Deals to Invest in
So, we have been explaining to you what crowdfunding is, who should invest in it, and why it is such a solid option for your portfolio. Now it is time to discuss the types of projects and properties to invest in. There are two main categories: Short-term flips and buy-and-hold rentals.
In our opinion, as long as the flip is purchased for the right price all of the following options are good ones. We believe some are better than others, but all flips make money if purchased correctly. Flips are great for generating larger chunks of capital in shorter periods of time.
The first option is to invest in a single family flip. These are the simplest type of renovation projects out there. The key to single family flips is to find a market that is just outside a major city. Commuter towns are perfect for these flips.
Secondly, you can invest in condo conversions. Now, I will be completely honest with you, this does not work in every market. Condo conversions are perfect in major cities and the towns right outside the city that are commutable via public transportation. The reason for this is many condo buyers prefer not to drive to work. They are usually young professionals that work in the city and use public transport on a regular basis. We have had great success in and around Boston right now. For more info check out some of our recent projects.
Lastly, you can invest in bigger commercial projects. These are usually 10+ unit projects and are much more involved in terms of timeline. We suggest starting off with one of the other types of flips to get your feet wet before venturing into something of this size.
Buy and Holds
Investing in buy and hold rentals is key to developing long term wealth. The returns are a bit smaller and slower than flips, but they are consistent. Additionally, they tend to appreciate over the years and allow you to build equity along with your monthly returns. With this equity you can borrow against your investment property or sell it for a nice profit.
The options are the same as above, you can invest in single family, multi-family, or apartment building buy and holds. For buy and holds, our advice is to get as many as you can as quickly as you can. Again, as long as you buy them correctly, your rents will be higher than your mortgage and operating costs which will afford you as an investor a nice monthly cash flow.
WHERE CROWDFUNDED REAL ESTATE IS WORKING
Where Crowdfunded Real Estate is Working
By this time you are probably thinking…all of this info is great, but how about some actual examples to show
REvolve Partners has actually successfully developed a few projects and
Crowdfunding in Real Estate is actually a thing.
So, let’s start with some credibility for REvolve Partners. We have been working in and around the Greater Boston market for the last few years. Here are a few of the most recent, bought, renovated and sold projects.
13 Dell Street, Somerville, MA 02145 – Units 1 and 2
Purchase Price - $575,000
Renovation Cost - $380,000
Sale Price - $1,364,000 ($715,000 Unit 2, $649,000 Unit 1)
Profit - $97,000
447 Meridian Street, Boston, MA 02128 – Units 1 and 2
Purchase Price - $625,000
Renovation Cost - $325,000
Sale Price - $1,350,000 ($725,000 Unit 2, $625,000 Unit 2)
Profit - $160,000
Okay, so enough about us…let’s discuss a little bit about markets where crowdfunded real estate is already happening.
Fundrise has been successfully investing in Los Angeles, Washington DC, and Jacksonville. Additionally, RealtyMogul has been using this model in New York, Virginia, and on the west coast of the US. There are also some other smaller crowdfunding platforms, such as EarlyShares, that are also proving the model around the country.
Interestingly, there has not been any crowdfunded real estate offerings in the Greater Boston market, one of the strongest real estate markets in the country. That is until now.
We at REvolve Partners are now offering the option to invest in the Greater Boston market with minimum investments of $500. Do you have questions that you would like answered? Schedule a call with one of our experts.