If you’re a long-time reader of this blog, you already know that I think investing in passive income is one of the best ways to grow your personal wealth and find financial freedom. So today, I want to introduce you to an investment strategy with long-term potential for passive income: real estate crowdfunding.
The term crowdfunding is likely not new to you, but real estate crowdfunding is not in the same category as sites like Go Fund Me or Kickstarter. It’s not a platform where you put your hard-earned money towards someone else’s entrepreneurial dream to get maybe some free swag when they find success. Real estate crowdfunding is a much more sophisticated concept that can earn something way better than product swag: passive income.
Historically, investing in real estate has largely been a rich man’s game. Most opportunities were only for the wealthy and well-connected or large institutional investors, like pension funds, university endowments, and hedge funds. So what changed? In a nutshell, the 2012 JOBS Act took down a lot of red tape surrounding the securities industry, opening the door for real estate firms to raise money for their projects through crowdfunding platforms. As a result, individual investors gained a new way to add private equity (meaning not traded on the public markets) real estate to their investment portfolios.
Investing in real estate with crowdfunding isn’t about assembling a giant team of landlords to share in the responsibilities of owning a property, like finding dependable tenants or fixing plumbing issues at all hours of the night. Instead, it’s a way for individual investors to contribute a percentage of the overall funding for a real estate project alongside others who are doing the same thing. This approach affords investors access to projects they may otherwise be unable to afford.
There are many different types of properties available for investment. Some commercial examples include apartment buildings in growing metros, hotels in the country’s most traveled regions, or even new lab space for the life sciences industry.
We’ve already covered the passive part (remember, no plumbing issues or tenant complaints!), but how do you earn income? It will depend on the business plan of the deal you invest in, but generally speaking, there are two ways real estate investments generate passive income. The first is with ongoing distributions (sometimes it’s a literal check in the mail!) paid to investors by the firm behind the deal, which tends to be more likely with properties with solid tenants and steady monthly rents, for instance, an office or apartment building. The second is through a share of the final sale price of a property, which is often the case when properties are under construction or undergoing major renovations.
As always, all investing involves risk. There is always the chance the project underperforms, and you lose your initial investment. Therefore, you should always research any potential investment and evaluate if it will work for you and your portfolio.
If your first thought was to google “how to invest in real estate crowdfunding,” don’t: I’ve already done the heavy lifting for you.
CrowdStreet is the nation’s largest online real estate investing platform, connecting accredited investors directly to institutional-quality real estate across the U.S. Starting in 2014, they’ve earned a reputation for working with best-in-class real estate firms. Since its inception, CrowdStreet Marketplace investors have invested more than $2.6 billion across 560+ deals, earning $360 million in distributions. Some of their recently funded deals include an apartment building in Nashville’s famous music row, a hotel renovation right next to the home of the Utah Jazz NBA team, and a new life sciences lab space in research-centric Boston.
Their online marketplace, where users can compare and review real estate investment projects, is easy to navigate. What I liked the best was how they provided so much information about each deal’s business plan and real estate firm. You’ll have to create an account to see all the details. They host a webinar with the real estate firm behind the project for every deal, so you can opt into those to learn more before deciding to invest. So there’s even a live Q&A session!