What is Real Estate Crowdfunding? Everything You Need to Know.

Investing in Real Estate Private Equity can be a great solution to quickly invest in all types of commercial real estate from multi-family apartment complexes to medical, office, self-storage and of course, non-commercial single-family houses while letting someone else handle all the details. 

This post is a continuation in the series on Investing in Real Estate Private Equity, a guide to Real Estate Partnerships, Real Estate Private Equity Funds, Syndicates & Crowdfunding.

What Exactly is Real Estate Crowdfunding? 

There’s some confusion related to Real Estate Crowdfunding. Crowd funding is the practice of obtaining needed funding by soliciting contributions from a large number of people. Taking this literal definition, then every Real Estate Private Equity deal is technically crowdfunded since many limited partners take part and fund the deal.

But, many in the investing world further constrain Crowd funding as “the use of small amounts of capital from a large number of individuals“, which potentially leaves Private Equity investments out depending on your definition of “small amounts of capital”.

The bottom line is, however you define the word, if you were to search for Real Estate Crowdfunding or Real Estate Crowd Funding in your web browser, one thing you will find are websites that list commercial real estate deals looking for investors.  These websites aggregate the various deals for you to sift through and include giants such as CrowdStreet, Fundrise, EquityMultiple, PeerStreet and RealtyMogul. 

Real Estate Crowdfunding Sites

Real Estate Crowdfunding platforms act as intermediaries between the real estate sponsors and investors, providing access to a wider pool of capital for real estate developers while offering investors the opportunity to invest in projects that were once only available to large institutional investors or accredited individuals.

One of the advantages of Real Estate Crowdfunding is the ability to invest in real estate projects with relatively small amounts of capital, making it accessible to a larger pool of investors. It also allows for greater diversification of investments, as investors can invest in multiple projects across different geographies and asset classes. However, like any investment, it comes with risks, and investors should carefully research the platform and projects before investing their money.

I will create a separate post on these platforms shortly, in the meantime know that some of them are fabulous and others not so much. One of the issues that you need to be aware of with these sites is their potential for a conflict of interest.

A Conflict of Interest?

It’s important to note that these crowdfunding sites are getting paid to display the deals, generally by the real estate sponsors, but sometimes they actually take a cut of the distributions and profit or charge a fee from you. 

They claim they vet the deals for you, removing the questionable ones, but buyer beware. While they do some vetting, I have found that in general there are many deals that quite honestly, shouldn’t be listed.

The problem is that, these sites need fresh deals on their site continually for you (the potential investor) to keep coming back, as a result there are times the deals they list are just not ideal. 

Whether good or bad, most of the websites mentor green sponsors and help even seasoned operators to prepare their deal structure and marketing materials for displaying on their sites.

Are Crowdfunded Deals Lower Quality?

Most of the deals on Crowdfunding sites are considered smaller in nature, too small for institutional investors (including pension funds or large family offices). Or the sponsors are newer, less experienced that can’t find funding on their own. Sometimes you will have sponsors that are having trouble finding funding, which leaves you to wonder why.

In this industry, generally speaking a good sponsor with a long track record doesn’t have trouble finding money for their deals, but this doesn’t mean that the deals on these Crowdfunding sites are bad, in fact, most I would argue are quite good.

A good example of this is when a sponsor is looking at a need for larger capital and they’ve tapped their previous investors and still need more.

The point is to perform your own due diligence and never assume, even if it is implied that it has been done for you.

Who Are Their Customers?

The arrangement of finding a deal ‘through a middle man’ leaves one to ponder who is their customer. And ultimately who do they need to make happy, you or the real estate operator?  But, with this said, most of these Crowdfunding sites do a service to the industry focusing on educating investors and performing some due diligence, albeit light, on the deals that they will post.

And obviously, the opposite argument is that if you take part in a bad deal using one of these sites, you probably won’t use that site again for a future deal. As a result, they certainly have a vested interest to vetting their deal flow to some degree.

Ultimately, if you are aware of the potential conflicts of interest and understand how each site is generating revenue, then you can utilize these sites to discover worthwhile investment opportunities.

If anything, I look at their vetting process as providing a good first pass, figuring that if it made it on to their site, then there has at least a minimum of decency to it. Just don’t put too much weight on this.

Crowdfunding sites do a service to the industry focusing on educating investors and performing some due diligence

Shady Dealings?

I have personally witnessed sponsors with supposedly platform pre-vetted financials that were shady. Additionally, I have observed completed deals that did not yield favorable results for the investor being quickly removed from the sites. Meanwhile, better-performing deals remained on the sites for longer periods, leading new visitors to assume that all deals on the site are good.

Compounding the dilemma is that it is hard to find good, experienced sponsors out there. The good ones generally don’t do advertising, they don’t need to, and many times have high minimums. I prefer to spread my investments around, investing $50,000.00 in ten deals instead of $500,000 on one deal, so this can create a problem.

Eliminating the middle man saves money and removes potential conflicts of interest. Which, of course begs the question, where can you find deals if you don’t use the crowdfunding websites?

Where Can You Find Private Real Estate Deals?

Unless you have a friend that already has connections, you might find that you have to start with these Crowdfunding sites while you slowly build up your rolodex with quality sponsors. Most active investors start with Real Estate Crowdfunding sites, until they get the experience and networking to find their own private deals. 

I will cover this topic in a future post, but in general, it can be difficult for beginners to find deals. There are investor groups (some savvy, some not) as well as financial advisors (some savvy, some not) that have access to good deal flow.

The really good operators don’t need to advertise since they have their own pool of happy investors.

Of course, finding these ‘good’ sponsors can be a challenge, but once you do, finding good deal flow becomes easier and easier. This hopefully further hits home the potential lack of quality at the crowdfunding websites. After all, if a sponsor can’t find their own investors, is their deal not as good as the sponsor that has no problem finding investors?

In summary, crowdfunding sites can be very helpful in the beginning especially for learning, but over time you will find better deals elsewhere.

Non-Accredited Crowdfunding Deals

You will also find crowdfunding sites that cater to a less savvy investor and even ones that do not require accredited investor status.  I would stay away from these sites.  The deals they offer tend to be of lower quality.

A Warning

Non-accredited crowd funding deals may not have the same level of regulatory oversight as accredited deals. For example, in the United States, offerings made under Regulation A, which allows for crowdfunding offerings up to $75 million, are subject to SEC review and qualification. However, offerings made under Regulation Crowdfunding, which allows for crowd funding offerings up to $5 million, have fewer disclosure requirements and are subject to less scrutiny.

Anything that lets you invest $100.00 or even $1,000.00 into a deal is either going to take a large chunk in fees to handle all of the investors, OR the deal is too risky for a more savvy investor base.

Lowering the minimum tends to make the deals more appealing to regular joe’s that won’t take the time to review and perform proper due diligence to separate the diamonds from the many lumps of coal.

Is Private Equity Real Estate right for you?

Investing in Private Equity Real Estate is not right for everyone, but with the diversification, tax advantages and other advantages they are quite compelling for high wage earners looking to reduce their taxable income along with high-net-worth individuals looking for an alternative to the volatility of traditional stocks and bonds investing.

In our next post, we discuss the various Real Estate Types including residential, commercial, industrial, hospitality, and specialized properties and the advantages and disadvantages of each.

Share your thoughts below on Real Estate Crowdfunding? Would love to hear your experience with Crowdfunding sites below. I hope it has been a good one!