Crowdfunding is based on the idea of peer-to-peer lending, the practice of lending money to unrelated individuals through the marketplace without having to go through a financial intermediary. These funds can be faster and cheaper than through an institutional lender.
Returns on real estate investments have been outstanding for investors who could qualify as accredited in the past. Smaller investors had little or no access to these opportunities, and real estate developers found it hard to finance smaller projects of local interest. Crowdfunding has changed all that, giving developers a new way to connect with a large number of smaller investors, at a lower cost than most other financing.
Fundrise is one crowdfunding portal that has attracted real estate investors through pre-vetted projects that Fundrise funds upfront. Crowdfunding sites are more likely now to pre-fund investments they select. Sponsors can receive capital in as little as two weeks.
Crowdfunding offers a wide variety of investment options, including equity, debt, or preferred equity for the investor. An equity investment is where the investor receives a share of any profits. The goals for financing residential real estate deals may be 20-25% returns.
Debt provides money back with interest payments, and represents 55-60% of all capital that goes into real estate deals.
Preferred equity investors are typically paid back before common equity investors, and are entitled to receive a "preferred return."
Investors may earn returns through cash flow, appreciation, or development.
Some of the top players in the real estate crowdfunding scene include
- Patch of Land
- How extensive is the vetting and due diligence processes?
- How attractive is the market?
- Does the return offset the risk?
- What is the track record of the sponsor?
- What assumptions are the parties making in the pro forma?