How to invest in real estate without buying property

Real estate investing has been a favorite way to make wealth for millennia and turn ordinary people into millionaires. You might think that the only way to invest in real estate is to become a landlord or flip houses, or at least I did. And if you’re like me, you don’t have the time or money to buy an investment property when you have your own mortgage to pay.

What you might not realize, is that you can invest in real estate without being in a landlord. Even better, you can avoid stock market volatility while earning a consistent dividend that slowly builds your net worth.

If you’re looking to diversify your investments so your not 100% reliant on the stock market to fund your retirement or you want to make your bank deposits work a little harder for you, crowdfunding real estate can be the income stream you’re looking for.

What Is Crowdfunded Real Estate?

You’ve probably had friends and community members ask for money via a GoFundMe campaign in recent years.

Crowdfunded real estate is very similar GoFundMe campaigns in the sense that individuals can contribute a few dollars to help a person reach a financial goal. The primary difference is that investing in crowdfunded real estate lets you invest a partial stake into private, high-dollar projects that only the rich and well-connected had access even a decade ago.

Depending on which real estate platform you use, you can invest in a basket of properties via a Real Estate Investment Trust (REIT) or individual projects that you personally vet.

Although crowdfunded real estate has only been a mainstream investment option since 2012 with the passage of the USA JOBS Act that legalized crowdfunding, it has provided positive returns for real estate investors in every income bracket. Like any investment, positive returns aren’t guaranteed but considering most platforms only accept 5% of all project proposals, it’s not like the Wild West are the pre-2007 home mortgage crisis when anybody can get approved for financing.

You might also prefer crowdfunded real estate to buying tangible real estate because less financial capital is required per investment property since other private investors are buying a stake as well.

What’s the Difference Between Crowdfunded Real Estate and Exchange Traded REITs?

Crowdfunded real estate is a secondary private real estate market which offers a higher potential return than the typical real estate investments you can buy through your stock brokerage, but it’s highly illiquid.

You can’t buy today and sell tomorrow might a REIT mutual fund or ETF. Instead, investing in crowdfunded real estate is a lot like buying an investment house, but you only have to invest a few hundred (or thousand) dollars instead of the entire cost of the house. You only get your money back once the project is complete or after waiting at least 60 days and paying an early withdrawal penalty.

With REIT ETFs like the Vanguard REIT ETF (VNQ) is very similar to a crowdfunded REIT except it’s highly liquid and can be traded instantly. The tradeoff for this flexibility is a lower dividend and a fluctuating share price that can make a $1,000 initial investment worth $900 if the REIT share price drops 10%.

Profits aren’t guaranteed with crowdfunded real estate, but since you’re a stakeholder instead of a shareholder, your profit potential is higher because of the extra financial commitment required.

How Much Money Can You Make Investing in Crowdfunded Real Estate?

Although your profit potential is still higher if you can own your own tangible investment properties, your level of risk is higher too because you have more capital invested in a single project.

If you have $70,000 to invest in a single real estate deal or you can invest it in a basket of real estate properties to limit your investment risk. Directly investing in tangible real estate means you can earn at least 14%, but you don’t realize the profit until you find a tenant or buyer.

Because you’re instantly invested in multiple investment properties, you can expect to earn an annual dividend of 8% to 12% on your investment each year.

How Much Should You Invest in Crowdfunded Real Estate?

This question hinges on several factors:

  • How old are you?
  • How soon do you need to access the money?
  • What are your investment goals?
  • What are your current investments?

Because crowdfunded real estate investing is like investing in a multi-year CD, you shouldn’t put all your investment money into one of the recommended investing platforms listed below.

You should only invest money that you don’t foresee spending until three to five years from now as that’s how long it can take the average investment to mature. You’ll still earn regular interest payments, but if you want the ability to withdraw your cash on a whim, you need to consider investing in a REIT stock that trades on the stock exchange.

As a general rule of thumb, you might decide to invest 10% of your total investment portfolio in real estate. That entire 10% can be invested in crowdfunded real estate, or you might decide to split it between public exchange-traded REITs too.

Most crowdfunding platforms offer taxable investment accounts and tax-advantaged IRAs that can save you some cash. Crowdsourcing returns are counted as ordinary income in most tax situations so an IRA can be the perfect option to maximize your returns. Because these investments are highly illiquid, they are a strong candidate for IRA accounts that you won’t withdraw from until retirement.

Can Only Accredited Investors Invest in Crowdfunded Real Estate?

Not anymore.

When crowdfunding real estate first became in vogue, most platforms only accepted accredited investors with a high net worth to invest in the projects. Although some platforms are exclusively for accredited investors, there are a few that are open to the “Average Joe” that aren’t part of the 1% by offering a private REIT that invests in a basket of investment properties with a minimum initial investment of at least $500.

Accredited investors still have access to more deals and can directly invest in single project that offer a higher income potential, but also require an initial investment commitment at least $5,000.

The Best Real Estate Investing Platforms for Non-Accredited Investors

We’ll first start with the investing platforms that accept non-accredited investors. You might have to live in a specific state to invest with a particular platform because of state crowdfunding regulations.

Non-accredited real estate investors can only invest in crowdfunded REITs that hold a position in several properties. If you want to invest in individual properties, you will need to do it the old-fashioned way by buying tangible property with cash in your local real estate market.

Accredited investors can also invest in private REITs if you want instant diversification, but you might prefer to further diversify your holdings by investing in individual projects that you will only find at platforms other than Fundrise and Rich Uncles.

Fundrise

Fundrise accepts any US resident at least 18 years old. The minimum initial investment is $500 to enroll in the “Starter Portfolio” that divides your investment into an East Coast, Midwest, and West Coast REIT and has a current return of approximately 7.12% with quarterly dividend payments.

Once your investment account balance reaches $1,000, you can begin investing in targeted portfolios that can earn up to 12% annually in investment income by investing in debt or equity holdings in a variety of residential, commercial, and industrial projects.

You can’t pick the individual projects, but depending on the advanced strategy you choose, you can invest in individual real estate markets like Washington, D.C. or Los Angeles.

Rich Uncles

You can invest in commercial properties or student housing with Rich Uncles, but how you invest might depend on which state you live in.

If you want to invest in single-tenant commercial properties, Rich Uncles invests in “triple net” (NNN) industrial, retail, office buildings where the tenant is responsible for paying the following expenses:

  • Property taxes
  • Insurance
  • Maintenance

You can expect a 7% dividend from their private NNN REIT, but membership is currently only available in roughly 24 states and a $500 minimum investment.

Even if you don’t qualify for the NNN commercial property REIT, you may still be interested in their newly launched student housing REIT that only requires a $5 minimum investment and is open to all 50 states. With this REIT, Rich Uncles invests in domestic and international student housing with at least 150 rooms and a minimum 90% occupancy rate.

Groundfloor

With a minimum $10 initial investment, Groundfloor delivers a historical return of 8 to 12% on commercial and residential properties that may need to “fix and flip.” And, Groundfloor lets non-accredited investors invest in individual projects–instead of a private REIT—with all loans only lasting 6 to 12 months.

The one downside is that Groundfloor is only open to lenders from a handful of states, but they are trying to expand to all 50 states in the near future so join the waiting list if you’re a non-accredited investor who wants to invest in individual projects.

RealtyMogul

RealtyMogul offers two different REITs that invest in commercial properties and multi-family apartments. Both REITs have a minimum initial investment of $1,000, but unlike Fundrise to holds a little bit of everything in their REITs, you can focus solely on residential or commercial.

Accredited investors can invest in individual projects to earn a higher potential yield. You might prefer this option if you prefer owning tangible real estate but don’t have the time or cash to finance an entire local project by yourself.

Real Estate Investing Platforms for Accredited Investors

Some platforms only accept accredited investors. As an accredited investor, you have the option to invest in individual projects that typically require a minimum initial investment of at least $5,000. Although you won’t get instant diversification by investing in a single project, you can earn a higher dividend and it’s also the digital equivalent of being able to control how you invest your money.

It only takes a matter of minutes to join each platform so you can join and browse to see which one offers the best available projects.

PeerStreet

Most PeerStreet loans only have a duration of 6 to 24 months and earn up to 12% annual interest. Although you have to invest larger sums of money in individual projects, the quick turnaround means you can continually reinvest your earnings into new projects and be able to withdraw your cash sooner than later after a loan matures.

You can also enroll in the automated investing option to let PeerStreet invest in the ideal mix of properties for you so you can get instant diversification and earn an optimal return from residential and commercial properties.

RealtyShares

You can also consider RealtyShares to invest in residential or commercial properties with either debt or equity financing with a minimum $5,000 initial investment.  RealtyShares pre-screens most loan applications so you only see the best 5% of applicants that are most likely to offer the positive returns that make crowdfunding real estate so attractive. You will need to pick each individual project to invest in and you might consider splitting your investment between debt financing (less risk but lower potential return) or equity financing (higher potential return but more risk).

EquityMultiple

EquityMultiple lets accredited investors invest in the three types of loans for commercial properties:

  • Syndicated Debt (6-24 months)
  • Preferred Equity (1-3 years)
  • Equity (3-7 years)

You can expect returns between 6% and 14% on these loan types and you can decide if you want to invest for short-term gains or longer-term investments that usually have a higher potential yield. Another reason to consider EquityMultiple compared to some of the other crowdfunding platforms is that the EquityMultiple team also co-vests in the deals so they risk their own personal money alongside yours.

Patch of Land

Another large platform is Patch of Land that offers 12% annual returns on loans with maximum 12-month durations. You will only find debt investments on Patch of Land which are more secure and have shorter loan durations which means your money isn’t tied up as long as some of the other investment opportunities.

Summary

There you have it, an alternative investment class that helps you avoid the volatility of stocks, bonds, and public REITs where declining share prices can erase the any dividend payments. If you want your spare cash to earn more passive income, investing in crowdfunded real estate can be just the option you’re looking for.

Not Sure How to Start Investing?

I opened up my first investment account back in 2012 after paying off a lot of debt. That account was with Betterment. Since then, I haven’t looked back. I love the simplicity and ease of use they provide. I think their system is good for any type of investor. If you want to get into investing, check out Betterment.