By Dan Miller, WCI Contributor
Investing in real estate can be a great way to diversify, especially if you have a heavy exposure to the stock market. Real estate can also provide tax advantages when compared to other types of investments. There are a variety of different ways to invest in real estate—like being a landlord, putting money into funds, or flipping houses. Real estate crowdfunding platforms are one way to invest more passively in real estate.
Let's talk about them today.
What Is Crowdfunding?
Crowdfunding is a term that has become more and more popular since the 2012 JOBS Act was passed. The basic idea behind crowdfunding is that a lot of people get together to fund some sort of cause. The cause may be charitable—a GoFundMe, for example—but in the context of real estate, the cause is typically a real estate investment where a lot of people pool their money together. The amount of money that each investor contributes can vary, but many crowdfunding investments only require a relatively small amount to be invested. This is the same concept behind a mutual fund, and you could say that any investment with more than one investor is crowdfunded.
What Does Crowdfunding Mean in Real Estate Investments?
However, in real estate investing we’re typically talking about a real estate syndication (or sometimes a fund) bought through an online platform that could have minimum investments from $2,000-$20,000. For example, the minimum for RealtyMogul, which has more than 250,000 investors on its platform and is a White Coat Investor partner, is $5,000. The same goes for WCI partner EquityMultiple. There are dozens of these platforms out there—and for someone interested in private, passive real estate investments with low minimums, this is likely your only option.
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How Do Crowdfunding Platforms Make Money?
The main way that any crowdfunding platforms make money is by charging a small fee on each transaction. This could be anywhere from 1%-5% of each transaction. Real estate crowdfunding platforms can also make money through management fees for handling the day-to-day affairs of the project. And in many cases, the principals of a particular real estate crowdfunding platform may also be investors in a given deal, which means that they can make money if the investment itself makes money.
Crowdfunding Real Estate vs. REIT
With both real estate crowdfunding and Real Estate Investment Trusts (REITs), the goal is to have access to a larger deal than you could pull off on your own. But the manner in which they do it varies slightly. In a REIT, you buy shares in a company, and the profits are returned to investors in the way of dividends. Many REITs are listed on various stock exchanges, and anyone can be an investor. Investing minimums vary on crowdfunding platforms, but in many cases, you need to be an accredited investor to invest.
Is Crowdfunding Real Estate A Good Idea?
The upside of getting your real estate investments from a crowdfunding site is the low minimum investments, making it easier to diversify your real estate portfolio. You may also benefit from having some of the due diligence done by the crowdfunding platform. The downsides, however, are not insignificant. You may end up having to pay an additional layer of fees. The due diligence done by the platform may not be worth the paper it is printed on since they have to have deals in order to make money. Most importantly, the operators that tend to be on these platforms are those who have not been in the game long enough to have a track record or network of investors that allows them to raise money on their own without a platform. They might be relatively new, unproven, and inexperienced.
Like everything in real estate investing, caution is advised and diversification is key. Caveat emptor, i.e. buyer beware. Many of us started our private real estate investments with these platforms but moved away from them toward more established operators as soon as we no longer needed the rock bottom minimum investments.
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Who Should Consider Investing Through a Crowdfunding Platform?
Anyone who is interested in real estate investing should at least consider investing via a crowdfunding platform. Real estate can be an attractive way to diversify your investments, especially if you are a high net-worth investor. If you don't have the time or energy to take an active role in real estate investing (like by flipping houses or being a landlord), you may want to explore different types of passive real estate investing. Real estate crowdfunding platforms are one way to invest passively in real estate.
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Best Real Estate Investing Crowdfunding Platforms
There isn't one private real estate investing crowdfunding platform that is the “best” for every situation. Remember that your investing philosophy or style may not be how others prefer to invest. At White Coat Investor, we maintain a list of recommended real estate investing company partners. If you're looking to invest in a real estate crowdfunding platform, you can use this list as a starting spot. You should also sign up for the White Coat Investor Real Estate Newsletter that will alert you to opportunities to invest in private real estate syndications and funds, including most of those Dr. Jim Dahle has used to invest. As always, make sure to do your own due diligence to find the best private real estate investment fund for you.
WCI’s No Hype Real Estate Investing is the best real estate course on the planet and the best way to get started in this exciting (and profitable) asset class. Taught by Dr. Jim Dahle and more than a dozen other experts, this course is packed with more than 25 hours of content, and it gives potential investors the foundation they need. If you’re interested in real estate investing, you can’t afford to miss the No Hype Real Estate Investing course!
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