06/23/2015 05:31 pm ET Updated Dec 06, 2017

Is Real Estate Crowdfunding Right for You?


Crowdfunding for all kinds of projects, businesses and products is all the rage right now. It's making some major inroads into real estate investment as well. Basically, it is a process by which small investors can participate in very large projects with smaller cash outlays. Some real estate crowdfunding is allowing investments as low as $100, though most are at least $1,000 and many have six figure requirements.

However, even if $100,000 is required, crowdfunding may be the only way that an individual can get involved in a $100 million commercial development project. In the news last year, the Hard Rock Hotel in Palm Springs crowdfunded a 15% stake to a group of 85 people. It's becoming the thing in funding medium to large scale commercial projects, and if you're considering real estate investment in a more passive role than doing your own buying and selling, it could be right for you.

Accredited or Not

When it first made inroads into real estate, all of the online and offline companies offering crowdfunding were limited to offering only to "accredited" investors. These are people with at least a $1 million net worth exclusive of their homes. There are other requirements, including minimum incomes of $200,000 individually or $300,000 jointly. The goal of these SEC rules is to limit investments to those who supposedly have the net worth and financial savvy to participate knowing the risks involved.

However, as crowdfunding has become more popular, there are online sites where the smallest of investors who are not accredited can get involved. Sites like the well-known are offering minimum investment increments as low as $100 to local non-accredited investors. There are other sites doing the same. The keyword here is "local," in that investors can get into a deal in their market area, but can't invest around the country.

Crowdfunding Pros for the Small Local Investor

If you want to be able to point out to your friends as you drive by that you own a piece of that major hotel or shopping center, then this is definitely on the pro side of crowdfunding. You don't have to tell them just how small that piece might be. You can invest and participate in returns that are often in the double digits, but you can do so with only a few hundred dollars.

A whole lot of middle-people are cut out of this method of funding, which greatly reduces the fees involved. In many cases the individual investor is paying no fees or just a tiny amount, as the developers are paying some of the costs of attracting this money through the websites.

As an investor in a major local property, you have a neighborhood vested interest in its success on a local economic level. Now you can invest your money and have a financial interest as well. Enough local investors involved in these deals can have a positive impact on the local economy and the health of their investment.

Crowdfunding Cons for the Small Investor

No investment is without risk, and this is no exception. Drive around almost any major metropolitan area and you'll likely see empty strip malls. Perhaps the whole area had a major economic setback, or simply a major anchor tenant decided to leave. Whatever the reason, the investors in that property are sitting on a useless investment likely to generate no revenue or very little if leased to a warehousing or industrial tenant. Its original value was in the retail sector.

These investments aren't like savings accounts, and they are not insured by any government agency. You also cannot count on the advertised projected return on investment. Even if a project does start out generating 12% on your investment, local economic factors can reduce consumer spending or create other situations that can drop that return significantly.

However, everything considered, if you like the idea of diversifying a bit into a local project that you'll be visiting for shopping in the future, crowdfunding could be fun and profitable.