Real Estate Crowdfunding Basics

In Civic Crowdfunding, Crowdfunding, Crowdfunding Spotlight, Equity Crowdfunding, Real Estate Crowdfunding by Bill

Historically, real estate deals had very high barriers to entry they either required large amounts of capital up front or you had to be in the proper circles to access the deal flow. Well there has been a paradigm shift in the real estate investment industry that is technology driven and it happened with the passage of the JOBS Act and the SEC’s recent Title III ruling, so today accredited and non-accredited investors now have a new way to gain entry to this asset class with very low entry points.

There are over 125 real estate crowdfunding platforms that invest in a myriad real estate assets. There are very large differences in the minimum amounts of capital that can be invested to become a real estate investor. The massive pool of capital that will pour into the market over the next 5-10 years will have an immense impact on the growth and vitality of metro areas in the United States.

Real estate crowdfunding involves the pooling of funds by multiple investors in a real estate project. There are two main investment types to choose from:

  • Equity investments
  • Investors make investments in commercial or residential properties and in exchange, they hold an equity stake in the property. Each investor shares in a portion of the rental income the property generates.
  • Debt investments
  • Specifically, this means investing in a mortgage loan associated with a particular property. As the loan is repaid, the investor receives a share of the interest.

Between the two, equity investments offer the potential for bigger returns because the profitability of debt investments is limited by the loan’s interest rate. On the other hand, equity investments are riskier and they typically require a longer holding period. As smaller non-accredited investors having the ability to play in the same sand box as the big boys will change the trajectory of the urban landscape and expand the ways that people create wealth while building their communities.