Thanks to advances in technology, equity crowd funding has become a safe and easy way to invest. It is even possible to invest in real estate using crowd funding. I was recently lucky enough to talk with with Dan Miller of Fundrise, a real estate crowd funding company. Dan and I talked about a number of points regarding crowd funding in a podcast. Some of the key points are also listed below.
Click below for the podcast
What is equity crowd funding?
Equity crowd funding is a type of investment where many different investors fund a project, company or person. It is different from investing in a stock or mutual fund, because there is a set interest rate the investor will receive on their money. Before you invest, you will know exactly how much money you will make as long as the investor does not default on his loan. Hundreds of investors could come together to help fund one project with relatively small investment amounts.
What are the risks and rewards of equity crowd funding?
There is some risk in crowd funding; the project, company or person could not repay the investment. If this happens there is a good chance the investor who loaned money, will lose their investment. However, many times crowd funding will offer returns of 8 percent or higher to make up for that risk. With real estate crowd funding, the investor also has their investment secured by the real estate they are investing into. If the project ends up going bankrupt, there is chance the investor will get some money back through a foreclosure process or some other type of liquidation of that asset. That process would be handled by the company that is running the crowd funding and not the individual investor.
How can you invest in real estate using equity crowd funding?
Fundrise is one of the first companies to begin crowd funding with real estate projects. Fundrise allows investors to invest in real estate projects with as little as $100. You can see the different investments that Fundrise has available on their website. It is very common to see returns of 10% or even 12% on the projects on Fundrise. You can sign up on the Fundrise website to start investing with them.
Can anyone invest in equity crowd funding for real estate?
As of right now, only people in Washington, D.C., Virginia and Maryland can invest with Fundrise, but they are working on expanding to the entire US. Unfortunately, unless you reside in these states you can only invest with them if you are an accredited investor. If you are an accredited investor you can invest from anywhere in the United States. There is no minimum net worth requirements to invest with Fundrise (provided you live in one of the aforementioned states) and you can invest with your IRA!
What is an accredited investor?
An accredited investor has to have a certain amount of income or net worth. For individuals the guidelines are as follows:
- A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
How do developers or project managers use crowd funding?
If you want to use crowd funding to raise money for a project, there is a vetting process. Fundrise reviews all companies who apply to make sure they are financially stable and that each project is viable. They want to make sure that the investors putting money into projects will get their money back. They have very high standards for who they will approve and many projects are turned down.
Crowd Funding is a very interesting investment platform and now that it is becoming available for real estate, it is even more interesting. I know of at least one other company that is beginning to use crowd funding for fix and flips, which will be discussed more in an upcoming article. For those looking to invest in real estate, but their market is conducive to investing in rental properties or they do not have enough money to buy a house, crowd funding may be a way to get started. For those of us who are in a different state than where Fundrise currently accepts investors, we may have to wait a bit before we can use crowd funding.