Investments

What Are the Investment Costs for Real Estate Crowdfunding?

Real estate crowdfunding costs can vary depending on the platform and specific investment. Generally, crowdfunding platforms may charge fees such as an origination fee, management fee, or performance fee. These fees can range from 1% to 5% of the total investment amount. It’s important to review the terms and fees specific to each platform before investing.

How Much Does Real Estate Crowdfunding Cost?

The costs associated with real estate crowdfunding can vary depending on the platform and the specific investment opportunity. Typically, crowdfunding platforms charge fees such as an origination fee, management fee, or performance fee. These fees can range from 1% to 5% of the total investment amount. It’s important to review the terms and fees of each crowdfunding platform to understand the specific costs involved.

KEY TAKEAWAYS

  • Real estate crowdfunding allows investors to see an inventory of potential real estate investments that they can passively participate in by paying for a small percentage of the overall deal.
  • Investments may provide current income and price appreciation, but often require sizable minimum investments, have relatively high fees, and lock up capital for long periods of time.
  • Real estate investing, whether done directly or through crowdsourcing, has unique opportunities and risks in each individual investment.

How Much Does It Cost to Invest via Real Estate Crowdfunding? 

While owning real estate has the benefit of generating cash flow, there are also fees that cut into the profitability of that cash flow. Every real estate transaction is unique. Even though the crowdfunding company’s fees may be consistent, there are often different fees that investors pay for owning different property types, so investors need to carefully consider the fee structure to ensure revenues will be enough to provide a good return after all fees.

Compare Real Estate Crowdfunding Platforms
CompanyFeesMinimum InvestmentAccredited Investors Only?Investment Selection
Fundrise0.15% and 1.85%$10 (brokerage) or $1,000 (IRA)NoEquity, debt, and funds
EquityMultiple0.50%-1.5% + origination fee$10,000-$30,000YesEquity, debt, and funds
YieldStreet0.00%-2.00%$10,000NoEquity, debt, and funds
Arrived HomesLong Term Rentals: 3.5% Sourcing Fee, 0.15% AUM. Vacation rentals: 5% Sourcing fee, 5% Gross rents fee, property management fees (third party-pass-through fees): vary$100NoEquity, fund
RealtyMogulVary per deal; Income REIT caps fees at 4.5%, Apartment Growth REIT caps fees at 4.75%Varies per project, from $5,000 and upNoEquity, debt, and funds
CrowdStreetVary per investment and are paid to the sponsorTypically $25,000, but varies per investmentYesDebt, equity, funds
DPL Capital2% (fee rebates for investments greater than $1 million)$200,000YesDebt, equity, funds

Alternatives to Real Estate Crowdfunding

Besides real estate crowdfunding, there are other alternative investments to be considered. Some are outlined below. Additional information regarding alternative investment types can be found in Investopedia’s article, What Are Alternative Investments?

Fine Art and Collectibles 

  • Investing directly in fine art or wine represents the purchase of art, wine, or some other collectible. This type of investing requires a great deal of capital, but also a certain level of expertise that many investors do not have. Further, collectibles are typically illiquid assets that do not generate income, can be volatile in price due to whims of the marketplace, and can’t be converted to cash as quickly as stocks or other investments, so they tie up capital. This type of alternative asset investing has been difficult for individual investors to access in the past, but there are now crowdfunding websites that provide individual investors (typically accredited investors) access to these markets. 

Costs associated with investments in wine, art, and other collectibles beyond the price of the collectible include commissions on purchases at auction, insurance, storage to ensure optimal aging and protection of the asset, and expertise and consulting that may be needed. There are platforms available for both accredited and non-accredited investors, with minimum investment amounts ranging from a low of $10 to as high as four to five figures.

Cryptocurrency

  • Cryptocurrencies are digital currencies that are not backed by a sovereign nation, and work via blockchain technology that creates a log of all transactions. Bitcoin is the most commonly known cryptocurrency for transactional use, and the market has matured to where owners can now generate interest on their cryptocurrency holdings through staking. 

Owning cryptocurrency is relatively easy and inexpensive, typically with a fee built into the price of the cryptocurrency by the exchange. It should be noted that while many see cryptocurrency as an important competitor to sovereign currencies in the future, cryptocurrencies are still subject to a great deal of volatility. 

The best cryptocurrency exchanges typically charge transaction fees that range between 0.00% and 1.15% and require minimum investments as low as $1 to get started. This article provides a more detailed overview of investing in cryptocurrencies, including the pros and cons.

Precious Metals 

  • Gold and other precious metals have been used as a currency, a symbol of wealth, and as an investment for thousands of years, in large part because precious metals have retained their purchasing power over time. There are many ways to add precious metals exposure to your portfolio, including owning the physical asset, futures contracts on individual metals, and ETFs that track individual metals or a precious metals index. 

Downsides to owning physical metals include not just the cost of the actual metals, but also additional costs for storing and insuring them. There’s also the issue that precious metals do not pay interest or generate revenue. Because of this, some investors choose to gain precious metals exposure indirectly by buying stock in mining companies that may pay dividends as well as rise in value. The best online gold dealers that offer storage for physical gold charge stocking fees of 5% to 10%, and will ship your gold for free on orders as low as $99.  

Peer-to-Peer Lending 

  • Peer-to-peer lending is where individuals lend money to other individuals, cutting the bank out of the lending process. Peer-to-peer lending is also known as “social lending,” because individuals often outline the reasons for borrowing, and lenders on these platforms will sometimes choose a borrower to lend to based on their story.

Peer-to-peer lending is facilitated by a platform provider that collects fees from borrowers and lenders on the site. The platform also vets both lenders and borrowers that use the platform and classifies borrowers into risk categories for the lenders to sort and easily review. 

How Does Real Estate Crowdfunding Work?

Real estate crowdfunding works through crowdfunding platforms, which seek to match individual investors with deal sponsors who want funding for their investments. The crowdfunding platform puts together due diligence and other materials for its investors to evaluate deals, and if an investor chooses to move forward, they can invest passively in a portion of the deal, which will commence once the deal has enough investors to raise all the cash needed. 

Is Real Estate Crowdfunding a Good Investment?

Real estate crowdfunding can be a good investment, but the specifics of the deals and the timing of the transaction are critically important to ensure the investment is right for you. Evidence that crowdfunding is a good investment can be seen in the overall results of some of the most popular crowdfunding platforms. 

Of platforms with more than 300,000 investors, overall returns have been strong. CrowdStreet shows a 17.9% realized internal rate of return (IRR) on the $4.2 billion invested in 798 deals;3 YieldStreet real estate deals have a 9% net annualized return;4 Arrived, which focuses on single-family rental homes, shows total returns on its more than 353 properties funded that range from -17.8% to +136%;5 and Fundrise shows an average income return to its customers of 4.81%.6 As you can see, real estate investing can show some very good returns, but each deal is its own individual investment that needs to be considered carefully.

What Is a Good Historical Rate of Return?

Rate of return is a relative measure of an investment’s performance over time. Over the past century, the stock market has performed better than real estate, but periods of corrective price weakness in the stock market have tended to be more extreme than real estate, making real estate a less volatile asset to hold. 

From 1968 to 2009, average annual returns were 7.5% on the S&P 500; 11.5% for small-cap stocks; and 5.4% on existing homes against an average inflation rate of 4.6%. All of these markets outpaced inflation, but it is not easy to compare each investment because of their relative risks, as well as differing tax treatment and the availability of leverage in different markets.7

What Are the Risks of Real Estate Crowdfunding?

Real estate crowdfunding investing entails risks. Each deal is different and has its own risk parameters. Some deals may be mature properties that pay investors income right away, while others are new construction projects that won’t generate passive income for some time. In addition to the types of properties, crowdfunding investors also have the risk of the sponsor of the deal, as that is the manager of the individual deal and the entity they will deal with once they have made their investment. Other risks are similar for all real estate owners, such as the building type, location, and the ability of the property to generate revenue and appreciate over time.

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