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Are you an avid HGTV viewer? I definitely used to watch a lot of the renovation shows when there was nothing else on, if I’m being honest….and then maybe when there was other stuff on. I used to sit there and get super excited about owning a home one day and maybe renovating it. But then, guess what happened…
I remembered that I was in college and completely broke. And what about today? Well, I’m still in college, and I’m slightly less broke. BUT I am invested in real property and help fund different projects (some of which are renovations)!
“He must be a millionaire,” you’re probably thinking. But I’m not! Which totally sucks, but I still get to invest in some of the things that millionaires would invest in. How can I do this? With a little something called crowdfunded real estate.
How does crowdfunded real estate work?
If you’re familiar with regular crowdfunding, then this concept should be fairly self-explanatory. But in the case that you aren’t or that you just can’t be bothered to think about it because work left your brain about as functional as that Tupperware you definitely didn’t notice wasn’t microwave-safe, I’ll explain it anyway.
I’m sure many of you have done this before, but do you remember a time when you bought something with a friend? Like when you were kids working extra chores so you could get a new game or toy or whatever? You put your money together because to buy it alone would’ve taken waaaaaay too long. But this also came with some consequences.
If you both bought it, then who keeps it? Well, you use it today, and then I’ll use it tomorrow. Or maybe it’s a communal thing like a lot of the stuff that my roommate and I bought for our apartment where you just use it if you need it. The point is that you have to share it since you both essentially bought shares of it. This is basically how crowdfunded real estate works.
Lots (and I mean lots) of people chip in money to buy property together by investing in this “crowdfund.” Then the crowdfund (I’m not sure if this is the proper name but just roll with it) buys property or real estate debt (we’ll talk a bit more about this in the reviews section). Then they do something to make money like rent it out or renovate and sell it (or in the case of debt, they let the person pay them back), and they split the profits among the investors.
Don’t worry, they keep meticulous records of how they specifically use your money to make sure you don’t have a reason to yell at them about not giving you your fair share. Because there’s always that one friend.
Now that you understand what crowdfunded real estate is, you may be wondering how it’s different from a REIT. Well, stop being so impatient. I’m getting to that.
Crowdfunded real estate vs REITs
The difference here is relatively subtle. If you’re talking non-traded REITs. In other words, not on the stock market exchange (cough cough you’d know that if you’d read my article 5 Places to Set and Forget Your Money to Let It Grow cough cough). Basically, in a non-traded REIT, they use everyone’s money for everything, so everyone gets a share of every pie.
Yuuuuup, we’re back to pie again!
Anyway like I mentioned before, with crowdfunded real estate, your money is specifically used for certain projects, and they keep track of it all. So if you have different performance goals, then they can take this into account.
Now the difference between a publicly traded REIT and a crowdfunding group is not only different in these respects but also in terms of liquidity and expected returns.
REITs allow for high liquidity by allowing you to trade your shares on the exchange. Meaning you can get your money out as fast as you can find some Class A suckerooney to buy your shares.
With crowdfunding, on the other hand, it can take quite a while (days, weeks, maybe months) to get your money out. This is because they actually specifically have your money tied up in real estate and can’t just sell the property since other people own it too. They have to use someone else’s money in the fund to take your place. This may sound like a bad thing, but the higher liquidity of REITs doesn’t come free.
The cost of having greater liquidity (getting your money out faster) is slightly lower expected returns. I’ll talk more about this in my next article where I get into the nitty-gritty money stuff like the return statistics and paying your taxes (Ugggh paying taxes? Do I have to??). But I felt like it was an important difference, so it should be mentioned at least briefly.
So if you’re wanting the best long-term performance, make sure you take this into account.
If you’re like me, then your ears perk up and you wipe the drool away from your bored face once you hear things like higher expected returns. And you think, “Say no more fam. Where do I sign up?” Well, wonder no more.
What are some crowdfunded real estate apps or
sites that I can use?
Alright, I tried to find the highest-rated companies that had fairly low minimum investments, and I came out with two favorites. This was pretty tough because a few of them had buy-ins of like $25,000, and I felt like if you had that kind of money laying around then there was probably something that I needed to learn from you. Anyway…
The first one I wanted to mention is Peerstreet which I kind of hesitate to put on my list since you aren’t actually buying property. But it has good reviews, and it’s open about how it conducts its business and the fees it charges. So I figured why the hell not?
How does Peerstreet work then, if you don’t buy into the property? Peerstreet is basically Lending Tree for real estate loans.
If you’re not familiar with Lending Tree, just imagine that instead of all of your friends chipping in for an actual house, they’re chipping in to let someone else buy/renovate a house. You’re like the bank when you take out a mortgage loan.
Why do I sound kind of disappointed by this model? Well, there’s nothing wrong with investing in loans. I just feel a bit robbed since I’m basically doing the same thing as buying a bond instead of buying into the actual property.
In addition to the loss of coolness from not investing in actual real estate, the returns are also….decent. It averages around 6-9% which is on par-ish with the stock market. Although I’d rather invest my money there personally.
The good thing is that they have an automated loan picking process if you don’t feel like picking out your own. Or if you think you can beat that 6-9%, you’re welcome to forgo the automated process and try for yourself.
I’ve spoken about Fundrise before in my article 5 Places to Set and Forget Your Money to Let It Grow, but I think it’s pretty neat. So bare with me as I do it again.
Fundrise is a crowdfunded real estate group that takes the money you invest and buys actual property with it. So you may get some apartment buildings that give good dividends from rent or even some renovation projects to be sold for profit.
Whatever the property is, you’re invested in it. You can even see some pictures of the property and their plans for it through your account on their website. (Not to get you too excited. There aren’t too many.)
And don’t be worried about shoddy buildings or ancient apartments, Fundrise does a good job of selecting quality projects to keep your portfolio from being too high-risk.
One of the reasons I recommend Fundrise (besides how neat it is investing in actual property) is that the minimum investment is incredibly low in comparison to similar groups.
Most crowdfunded real estate groups that invest in actual property have minimum investments from $10,000 to $25,000 or even $50,000, but Fundrise’s minimum investment is only $500. So for beginner investors without a lot of startup money, this is a great choice.
In fact, once you’ve invested $1000, you’re able to select a plan to better fit your goals as well as better properties. And it seems to be worth it. They boast average yearly returns of 9-12% which is better than most publicly traded REITs and certainly better than Peerstreet.
Unfortunately, as you might have guessed, this comes at the cost of lower liquidity. So if you get nervous or something unexpected happens and you want your money, that may not be easily done.
Fundrise is very upfront about this, so don’t say you weren’t warned. But don’t worry too much either. If you’re investing over the long term, chances are that you won’t want to take your money out.
However, I recommend checking out both Peerstreet and Fundrise despite what I’ve written and favored here today. Because U
Until the Next One,
After growing up in a poor household, Noah set out to learn as much about finance and personal development as possible so he could live a better life. He worked his way up from an online Virtual Assistant to now the CEO of an Austin based Media company in just a single year. He continues to learn the best ways to save his money, invest it, and achieve things he never thought possible, and loves teaching others how to do the same!
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