Understanding the Basics of Real Estate Crowdfunding

For decades, investing in real estate has been accessible only to ultra-high-net-worth individuals, institutional investors, and individuals with deep connections to the industry.

With investment minimums often ranging in the hundreds of thousands, real estate investing historically has remained closed off to all but the most wealthy. That changed for many industries, real estate included, with the introduction of the Jumpstart Our Business Startups (JOBS) Act in 2012. This legislation changed how the SEC oversaw small businesses and their ability to advertise securities offerings. Financial startups and investing firms began allowing individuals to participate in real estate investments with smaller amounts of capital, offering them the opportunity to make attractive returns, specifically through the concept of crowdfunding. Let’s dive in and explore what real estate investing is through crowdfunding, how it works, and the specific advantages of investing with a real estate platform like Finresi.

Think GoFundMe, but with Real Estate!

You’re probably familiar with the term “crowdfunding” through private fundraisers and donations like those on GoFundMe or Kickstarter. But how can you invest in a real asset (it is “real estate,” after all) in small increments? Similar to a Kickstarter campaign, real estate crowdfunding involves raising capital from many individuals, often through an online platform. These projects can range from residential properties to commercial developments and even large-scale portfolio projects. These investments are typically fractional investments made on the larger underlying asset. By pooling resources from multiple investors, crowdfunding platforms enable individuals to participate in real estate investments that traditionally were only available to institutional investors.

Step by Step: How The Process Works in Real Estate

Typically, the real estate crowdfunding process follows these steps:

1. Project Sourcing, Underwriting, and Listing: The real estate crowdfunding process begins with the project itself, of course. Typically, real estate developers or sponsors identify potential projects and bring them to their potential investors, often through a platform like Finresi or a group of individual private investors. On many crowdfunding platforms, each listing has gone through underwriting and includes detailed information about the property, the investment strategy, projected returns, and associated risks.
2. Investor Participation: Investors can browse through the available projects and choose those that align with their investment goals. Many platforms offer investment minimums as low as $5,000, making access to investing in large projects much more accessible.
3. Use of Funds: With some online platforms and direct originators, the pool of funds may be used to fund the purchase and renovation of the project. Other platforms, like Finresi, purchase loans directly from originators and open up the investment for investor participation.
4. Project Execution: Throughout the project, online platforms typically provide investors with regular updates on progress and performance. If a project is extended, extension fees are often distributed to investors on a proportional basis.
5. Exit Strategy and ROI: Investors earn returns based on the project's performance. Depending on the type of investment, this can come in the form of rental income, monthly interest payments, or profits from the sale of the property–it all depends on the project and the structure behind the investment.

How can you get started?

Taking an innovative approach to a traditional asset class, crowdfunding platforms like Finresi have paved the path forward for investing in real estate, opening up opportunities to a broader range of investors. By removing barriers like large investment minimums, providing more visibility into the projects, and taking a pooled approach, online real estate investing has opened access to the historically closed real estate investment market. Like any investment, it comes with its set of risks and challenges. Prospective investors should carefully evaluate their risk tolerance and conduct thorough due diligence before participating in real estate crowdfunding. This way, they can make informed decisions and maximize the outcomes of their own individualized investing strategies.

Sign up today, or browse open investment opportunities to see how you can invest in pre-vetted real estate projects with as little as $5,000.