I’m a real estate junkie. I know you are too. And if you’re like me, you have money in the stock market because it’s a good thing to do. But what if you could put some of that diversification into real estate on a more limited basis? Read on for our take on crowdfunding — and how it stacks up against other alternative investments investors are drawn to.
So, What Is Crowdfunding?
Platforms like Fundrise, EquityMultiple, YieldStreet, and others help connect investors looking for capital with investors looking to place capital — part of what’s driven the broader rise of digital real estate investing. “Crowdfunding” can also include syndications that are widely advertised.
Investors participate in these offerings through several different securities regulations:
- Regulation Crowdfunding (Reg CF): Allows up to $5 million in fundraising annually per sponsor, but comes with stringent reporting demands. Must be made through a registered platform or a broker-dealer.
- Regulation A+: Allows up to $75 million in annual fundraising but requires detailed upfront disclosures and an SEC-qualified statement.
- Rule 506(c): Sponsors can advertise widely and there’s no cap on investment amounts by participants, but all participants must be accredited investors.
How Is Crowdfunding Different From REITs?
While both REITs and crowdfunding let investors purchase smaller fractional shares of real estate ownership, the risk profiles can differ significantly.
REITs
Pros: Provide investors with stable income, are easy to buy and sell like stocks, and often come with a long track record.
Cons: High expenses can eat into returns, returns tend to follow the stock market more than the real estate market, and dividends are subject to ordinary income tax.
Real Estate Crowdfunding
Pros: It’s possible to invest in real estate projects with a relatively small amount of cash, there’s potential for substantial gains with equity investments, and investors can see and understand the specific real estate project they’re backing.
Cons: There’s no guarantee a venture will deliver on its promise, many platforms charge fundraiser, donor, or processing fees, some options are only open to accredited investors, and tax implications may be better or similar to REITs depending on structure.
While REITs typically invest in large, stabilized assets, crowdfunding investments can be much more volatile, and the risk correspondingly higher. Investors should carefully understand these risks before committing capital.
Why Invest?
1. Pick a Side
There are two main options for crowdfunding: equity investments and debt investments.
Equity investors can see higher returns and may be able to deduct expenses come tax season, but equity investments are also riskier, with holding periods that typically range from 5 to 10 years.
Debt investors generally earn a lower return than their equity counterparts, but assume less risk. Since debt investments are usually tied to development projects, they tend to have shorter holding periods, though you may also see higher fees, and returns are typically capped.
2. Know Your Market
Want to bet on a specific market, like Austin, Texas? With crowdfunding, you can pick a property there. Unlike a REIT, where you’re just one investor in a large, generic pool, crowdfunding platforms let you select properties and make tailored decisions.
3. A Home for Retirement Funds
Crowdfunding can also be a great place to have passive control over a portion of your portfolio through self-directed retirement accounts.
What Is the Risk?
- Liquidity: Crowdfunding investments often function more like syndications, much harder to exit during the life of the investment.
- Risk profile: Because many deals are “value add,” the risk profile tends to be higher than stabilized, long-term hold investments.
- Investment limits for non-accredited investors: The JOBS Act broke down some barriers to entry, but it also set contribution limits for non-accredited investors.
Under those rules, if either your annual income or net worth is below a certain threshold, your investment is capped at a modest dollar amount or percentage of income or net worth, whichever is lower, over a 12-month period. If both are above that threshold, you can generally invest a higher percentage, though still subject to an overall cap. Accredited investors aren’t bound by these limitations.
Conclusion
The global crowdfunding market has continued to grow, and while much of that volume funds businesses and other capital needs outside of real estate, the ability for investors to dip into real estate on a smaller scale suggests this corner of the industry will keep expanding in the years ahead.
Many investors we work with are hard-working people who appreciate the multi-faceted approach we proactively pursue with them to grow their long-term wealth. Contact us today to plan your strategy for growth.
