Commercial Real Estate Crowdfunding: Is It A Good Investment?
Crowdfunding real estate has exploded recently–Why? Because crowdfunded real estate makes these once unattainable assets that offer historically more stability and higher returns than the stock market, now accessible to the general public. Looking for a crowdfunding real estate investment? You’ve come to the right place. We are going to explain what is crowdfunding for commercial real estate, talk about your options amongst the many crowdfunding real estate sites, and walk you through the pros and cons, so you can make an informed decision and see what all the hype is about.
What is Crowdfunding Real Estate?
Crowdfunding for real estate investments is a mutually beneficial method in which private companies can raise money for real estate projects and investors can more easily access such real estate investment opportunities, as relatively small minimums are required to invest in the ventures. A business can raise large sums of money quickly (as many people are willing to invest small amounts), and investors can become shareholders in a real estate property or multiple properties without taking on the complexities that come with owning it outright. This method utilizes the internet and social media platforms to attract a wide array of potential investors—the idea being anyone with as little as $500-$1000 (depending on the company) can get in.
How does Property Crowdfunding Work?
Property investment crowdfunding was originally only opened to accredited investors—meaning a bank, pension plan, insurance company or individual who earns a minimum of $200,000 annually or has a net worth of at least $1,000,000—guess that ruled most of us out. Crowdfunding with non-accredited investors came about from the passage of the Jumpstart Our Business Startups Act (JOBS Act), which allowed crowdfunding to aid small and mid-sized companies with their capital needs. So, with this legislation enacted, crowdfunding is revolutionizing the real estate investment game through the democratization of it!
Real estate crowdfunding is very similar to equity crowdfunding in the sense that an investor can buy into a business venture and become a shareholder. The investor does not need to buy the entire property. Instead, the investor can earn a portion of the profits generated from the real estate investment.
Real Estate Crowdfunding vs REITs: What’s the Difference?
A REIT, which stands for real estate investment trust, is a corporation that owns and/or manages income-producing commercial real estate. They have been around since the 1960s, and there are many types of REITs. Most will focus on a specific commercial real estate investment type: retail, hospitality, multifamily housing, senior living facilities, student housing, office, self-storage and industrial. By law, REITs are required to return 90% of profits to investors in the form of dividends i.e. passive income.
When an individual investor buys a REIT share, they are purchasing a share of the company that owns and manages the rental property. He or she is not investing in an actual property or properties. In this respect, it is similar to investing in the stock market. When you buy shares from a publicly traded company, like Starbucks, you are buying ownership stake in the company itself, not ownership in the the venti Vanilla Lattes.
Another similarity to the stock market, is that REITs’ shares are immediately tradable, so they offer liquidity which is something first time investors like, especially if you are a little strapped for cash, but still trying to invest. However, the ability to buy and sell fluidly means that the value of REITs can go up and down throughout the day and are subject to broader swings in market activity–again, just like the stock market. So, if the stock market plummets, the value of a REIT might follow suit, even if there has been no substantial change to the REIT’s investment portfolio. Thats a definite con, especially if you’re looking for something to diversify your current portfolio of investments that may already be in the stock market. Crowdfunding is allowing the general public to invest in the private market. So, you are not subject to the volatility of the stock market.
With respect to crowdsource real estate investment, you actually hold ownership stake in a piece of commercial private real estate–an opportunity that few individuals would have the capital and know-how to own outright. Another difference between REITs and crowdfunding is that crowdfunding is more illiquid by nature. While at first blush, this is a con for most first time investors, by committing to a longer term investment than say a REIT that can be traded at the click of a button, you allow the potential for substantial returns that no REIT can offer. Successful investing is predicted in letting the accumulation process work over a long period of time regardless of whether it is via the stock market, REITs, crowdfunding or any other avenue where you can invest.
In the last several years, crowdfunding has exploded in popularity, leading to the emergence of real estate crowdfunding platforms like Diversyfund, Crowdstreet, Fundrise, RealtyMogul and Realtyshares among others. It’s tough to decipher the best crowdfunding real estate sites. It’s worth noting, that crowdfunding can be used to raise both debt investments and equity investments for real estate projects or existing properties. Peerstreet’s investment strategy, for example, is investing in the loans made to borrowers, and as they pay back their loans, the investor makes money. In this case, as the investor, you are, in fact, the lender. In the case of School of Whales, you are investing in equity. So, you own a piece of each of the buildings included within the diversified portfolio of commercial real estate projects.
Crowdfunded Real Estate Pros & Cons
We started to get into some pros and cons when comparing crowdfunding real estate investments with REITs, but now I am going to break it down for you. Of course, any potential real estate investor looking into different investment platforms must do their own due diligence, as a pro for one person can be a con for another and vice versa.
Benefits of Crowdfunded Real Estate Development
- Low Minimum Investment: Prior to crowdfunding, commercial real estate being available to the general public as an investment opportunity was unheard of for as low as $500. Of course, the more you invest the higher your annual return; however, investing something is better than investing nothing.
- Direct Ownership Stake in CRE: Owning a stake in commercial real estate is an opportunity that few individuals would have the capital and know-how to own outright.
- Easy to Understand: It does not require a PhD to get the gist of the business model. You buy land or an existing building, develop it, sell it or lease it, and distribute the profits.
- Potential for High Returns: Real Estate, and especially commercial real estate, historically outperforms the stock market in returns in the long run.
- Low Correlation to the Stock Market: the performance of individual commercial properties tends to have little correlation with the stock market. Commercial properties tend to lag any downturn in the economy, and often outperform other asset classes during a recession, so it is a great diversification opportunity if you are currently invested in the stock market.
- Illiquidity: there are real benefits to an investor tying up their capital in an illiquid investment. By committing to a longer term investment, the potential for substantial returns is greater–Louder for the people in the back!
Drawbacks of Crowdfunding for Commercial Real Estate
- Illiquidity: The flip side being, some investors are not comfortable with investing their money and essentially forgetting about it for the next 3-5 years. That said, there are usually provisions to allow investors to exit crowdfunded deals early, even if doing so results in a penalty or fee.
- Question of Fund Manager’s Expertise: Crowdfunded real estate deals can be launched by just about any real estate company. As such, the management expertise of the fund managers can sometimes be questionable. It is important for any investor to do their due diligence on who will be managing the portfolio.
- Risk (if not diversified): Some ventures in the crowdfunding space are in just one project or they let you pick one project in which to invest. Having all your money in one project makes you vulnerable to real estate market cycles, as well as solely dependent on the success of this one project! Ever heard the saying, “don’t put all your eggs in one basket?” Well, that definitely applies to investing!
Is Commercial Real Estate Crowdfunding a Good Investment for You?
You have probably heard the saying “slow and steady wins the race?” Well, that’s kind of how crowdfunding for real estate investing works. Real estate tends to attract “patient” investors, since the cash turnover (the time when you start the project until the time you sell it) is long. At the same time, since the projects are big, the payout tends to be big as well—thus, the whole “winning the race” thing. Real Estate investment offers significantly less risk than the volatility of the stock market and historically yields better returns. If you are stock market kind of investor, real estate offers an opportunity to diversify your investment portfolio, so that not all of your assets or passive income is dependent upon the performance of the stock market.
When you invest in real estate, you are buying a real, tangible asset. There is a collateral backing up the investment i.e. the land itself. If there were an unfortunate turn of events, the value of the land will be there to protect the original investment.
How Do I Get Involved in a Crowdfunding Real Estate Investment?
Earlier I explained how crowd investing real estate works and how to crowdfund real estate from the lens of a business. Now, I will walk you through how you can get involved.
- Individual investors invest anywhere from $500 and up in a commercial real estate fund. You can do this from the comfort of your own home via the plethora of commercial real estate crowdfunding sites.
- Depending on the fund, you are either able to pick the specific project(s) in which you invest or this money is pooled into a diversified portfolio of multiple commercial real estate projects.
- Once the fund reaches its minimum required amount of capital to be raised, the money is deployed to the commercial real estate project or projects.
- You will likely receive status updates along the way to let you know whats happening with the projects in which you are now a stakeholder.
- Once the real estate projects are complete, and the properties start making money, you will be paid a certain percentage of the profits at a cadence (quarterly or annually) specified in the offering agreement.
Attending some meetings, getting involved or even joining a real estate investment group is a great way to sift through the many crowdfunding platforms and get industry expert opinions on the best crowdfunding platfroms in which to invest.
Why School of Whales is One of the Best Real Estate Crowdfunding Platforms
There are a lot of options to choose from in terms of crowdfunding websites for real estate. School of Whales is the best real estate crowdfunding platform because of 1.) the exceptionally low investment minimum of $500, making School of Whales perfect for first time investors looking to test the waters, 2.) the diversification factor–the funds are pools together and invested in multiple projects to mitigate risk and maximize stable returns 3.) Access and community, all investors have access to their properties and can actually take hard hat tours of the construction sites lead by our COO 4.) the School of Whales mantra: Profits with a Purpose–we invest in projects that will have lasting positive impacts on the communities in which they serve 5.) The School of Whales founders and fund managers, who have a combined 60 years experience in commercial real estate development, amongst other business ventures, that have earned them the the title of Financial Whales, and 6.) the educational component, School of Whales aims to create a community of first-time and established investors alike, to learn and grow together
Above all else is the mission, Profits with a Purpose. School of Whales focuses on transformational projects. With the money raised from fellow Whales, the fund will support developers and projects that are creating a positive impact on neighborhoods and transforming their communities.
The team at School of Whales isn’t interested in purchasing trophy properties in highly developed areas that will slowly gain profit as rates in the area rise, nor is School of Whales interested in flipping cookie cutter projects in favor of higher-paying, higher-end stores willing to pay an increased rent cap. Instead, they’re looking for diamonds in the rough, which are properties that need a lot of love, but have tons of potential, such as historic buildings or developing vacant land from the ground up. Buying a “diamond in the rough” property and repurposing it for viable use in modern times means acquiring the property below market value to sell or refinance for a significantly higher market value.
With each project and subsequent investment, School of Whales is fostering financial knowledge and discipline at all levels for fellow Whales. Each Whale can learn as much (or as little) as they choose about the projects they invest in and real estate investment in general through School of Whales’ dedicated investor resources.
School of Whales differentiates itself from competing commercial real estate crowdfunding sites: When you invest with School of Whales you’re not just making money, you’re making a difference and learning along the way.
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