Complete Guide to Real Estate Crowdfunding • Benzinga


Want to jump straight to the best? Diversyfund is definitely the best real estate investing platform for most people.

Real estate crowdfunding has made it possible for virtually anyone to begin taking advantage of the benefits real estate investing offers. If you’re interested in exploring crowdfunding as a way to invest in real estate, keep reading to find out how crowdfunding works, the types of deals available, and how to invest.

What is Real Estate Crowdfunding?

Real estate crowdfunding is an investing strategy that allows multiple investors to pool their money together for a real estate investment opportunity that they may otherwise not be able to take on alone. This strategy has become popular since the JOBS Act made it possible for certain small businesses to raise investment funds without registering with the SEC.

Crowdfunded real estate has opened up real estate investing to an entirely new demographic. The most profitable commercial real estate investments were previously reserved for institutional investors and individuals with a high net worth. Today, however, retail investors are able to get involved in the same opportunities as virtually any hedge fund or REIT.

Crowdfunded real estate has even become an investment option for people to add to their retirement portfolios. Many crowdfunding platforms allow investors to contribute funds from their self-directed IRA directly into real estate investment opportunities.

Commercial real estate isn’t the only asset class available through real estate crowdfunding, though. The real estate crowdfunding market has various types of real estate investment options available.

How Does Crowdfunding for Real Estate Work?

A real estate crowdfunding deal starts out with an investor finding a good opportunity and deciding to take on other investors to get the deal done. This first investor could be an individual investor, a real estate developer or a real estate investment company, who is called the sponsor. This process is also often referred to as real estate syndication.

Deal Structure

The sponsor will set up a separate legal entity for the real estate crowdfunding investment. This entity is typically either a limited partnership or a limited liability company (LLC).

Limited Partnership

A limited partnership is made up of two types of partners; the general partner and the limited partners. The deal sponsor is the general partner. They’re in charge of managing the investment and handling the operational tasks. The limited partners are the passive investors. The limited partners don’t play any role in the operation of the business or management of the asset. They’re simply just silent partners hoping to make a good return on their investment.

Limited Liability Company

An LLC is similar to a limited partnership, but the structure and rules differ slightly. Instead of general partners and limited partners, the LLC is made up of members. Separate member classes are created for the deal sponsor and the passive investors. The membership class set up for the investors is similar to limited partners. They don’t play an active role in the operation of the LLC or management of the asset.

The sponsor then creates a private placement memorandum, which spells out the terms of the investment. This will also include a subscription agreement, which is the agreement between each investor and the sponsor. Since the sponsor sets the terms of the investment, it’s extremely important to read this document thoroughly.

Crowdfunding Process

Once the sponsor has the entity in place and the terms of the investment outlined, they will choose a real estate crowdfunding platform to submit their deal to. Most crowdfunding platforms will conduct thorough due diligence on all of the crowdfunding investments that are submitted before making them available to investors.

Once a deal is published on the crowdfunding site, investors can review the private placement memorandum and contribute funds to the deal. These funds are usually held in escrow until enough money has been raised to complete the deal.

Types of Real Estate Crowdfunding

There are multiple types of crowdfunding investments available. Investment opportunities fall into two main categories; equity investments and debt.

Equity Crowdfunding

This type of crowdfunding is the most common. Investors have equity in the assets and receive their share in the profit that the crowdfunding deal generates. In a typical real estate syndication, the sponsor keeps a percentage of the equity for putting the deal together and the investors share the remaining equity. The sponsor usually keeps anywhere from 20% – 35% of the equity in the deal, so the investors share the remaining 65% – 80%.

Every crowdfunded investment is different, but in most cases, the investor receives a percentage of the cash flow based on the amount of their equity investment. In order to make the investment more attractive, many crowdfunding sponsors offer preferred equity.

Preferred equity crowdfunding investments are attractive to an equity investor because the investors in the deal get paid before the sponsor. For example, in a deal with a 6% preferred return, the sponsor only begins receiving a portion of the cash flow once the profit is high enough for the investors to receive their 6%. Once the return exceeds 6%, the sponsor can begin collecting their share of any amount above the 6% threshold.

There are also different types of equity crowdfunding investments. The most common types are closed-end funds, open-end funds, and private REITs.

Closed-end fund

A closed-end fund is the most straightforward type of crowdfunding real estate investment available. This type of investment is typically for a specific property that the sponsor intends to sell within a certain timeframe. With this type of real estate deal, the investors receive cash flow while they own the property. Then, when it’s time to sell, they receive their percentage of the equity back and the deal is over. If there’s a capital gain from the sale, the investors can receive more than they originally invested.

Open-end fund

An open-end fund doesn’t have a planned end date and is often not for a specific property. With this type of crowdfunding deal, investors are investing based on the merits of the sponsor and their overall investment plan. The sponsor may buy and sell different properties and use a portion of the profit to grow the total equity. This is similar to how hedge funds, publicly traded REITs and exchange traded funds operate.

Private REIT

Private REITs are becoming an increasingly popular option as a crowdfunded real estate investment. Instead of investing in a specific property, the real estate investor buys shares of a REIT that owns a portfolio of properties. A private REIT is similar to an open-ended fund but receives additional tax benefits by following specific rules put in place by the Internal Revenue Service. One of the most significant rules REITs have to follow is paying out at least 90% of their taxable income to investors in the form of dividends.

Our favorite private REIT is DiversyFund. With one of the lowest minimum investments available in crowdfunding, they make it simple to invest in a well-performing Growth REIT.

1 Minute Review

DiversyFund isn’t your average crowdfunding platform. You’ll find that the company puts a twist on the traditional everyday crowdfunding platform, beyond anything you can find online with a simple Google search. You only have to look under DiversyFund’s skin one layer to surmise that DiversyFund is a conscientious developer and sponsor and helps hedge risk through improved vetting.

DiversyFund offers a multifamily real estate investment trust, the DiversyFund Growth REIT, and its main goals are to increase cash flow and resale value. It’ll automatically give you access to multi-million dollar real estate assets.

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