How Much Does Real Estate Crowdfunding Cost?

Real estate crowdfunding is a way for investors to pool their money with others to purchase real estate at a fraction of the cost. While investment opportunities provide current income and price appreciation, many real estate crowdfunding platforms often require sizable minimum investments, have relatively high fees, and lock up capital for long periods of time. This article will focus on these issues so that potential investors have an understanding of the costs associated with this type of real estate investing. 

How Much Does It Cost to Invest via Real Estate Crowdfunding? 

While owning real estate has the benefit of generating cash flow, there are also fees that cut into the profitability of that cash flow. Every real estate transaction is unique. Even though the crowdfunding company’s fees may be consistent, there are often different fees that investors pay for owning different property types, so investors need to carefully consider the fee structure to ensure revenues will be enough to provide a good return after all fees.

• Platform fees: Crowdfunding companies often charge a fee for deals that are done through their platform. Sometimes, these are called platform fees or technology fees. These fees are typically paid for by investors, even if they are passed on to deal sponsors when a deal is completed. Platform fees across the landscape of companies we reviewed range from 0.15% to 4.25% per deal.
• Management fees: Management fees for crowdfunded real estate deals consist of two classifications. One is the management fee paid to the crowdfunding platform. This works as an assets under management fee. If the company is running a fund, this may be higher than the fee charged for properties already purchased through the platform. An example might be a 2.5% fee on assets under management for actively managed funds, and 0.25% on assets already purchased by the investor. The other type of management fees are the fees paid to the various management companies that help with the property. The most common management fee is to the general building manager, who is typically paid a percentage of a property’s gross rent revenue. This can range from 5% to 25%, depending on the type of property. In addition to general management fees, there may also be additional fees that need to be paid, such as to construction managers. 
• Minimum investments: The minimum investment amount varies across real estate crowdfunding platforms, depending on the type of deal you’re investing in. Some of the more basic funds have minimums as low as $10, but for platforms that connect investors with individual real estate deals, minimums can range between $5,000 and $200,000, with $25,000 being a commonly used minimum investment amount. 
• Penalties: Some real estate crowdfunding platforms do not offer the opportunity for an early withdrawal from deals, but some do. Those companies that do let you out may charge a penalty that can range from 1% to 10% for selling your investment early; often, these penalties are higher the sooner you exit the deal. 

Why Invest in Real Estate

There are many benefits to investing in real estate. Properly selected real estate investments can generate income, appreciate in value over time, provide tax advantages, and can even be leveraged. Further, real estate is often not correlated at all to other major markets, providing a certain level of diversification. 

Cash flows from real estate investments can be predictable because buildings have tenants that pay known sums in consistent intervals, and the cost of buildings and improvements can be depreciated over time, which reduces taxable income. Real estate assets can also be used to borrow against, which can produce funds to pay out to investors or to invest in other properties. 

Not all real estate deals are successful, however, and there is a risk of losing all of your capital, so careful selection of investments is imperative. 

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Alternatives to Real Estate Crowdfunding

Besides real estate crowdfunding, here are other alternative investments to consider:

Fine Art and Collectibles 

Investing directly in fine art or wine represents the purchase of art, wine, or some other collectible. This type of investing requires a great deal of capital, but also a certain level of expertise that many investors do not have. Further, collectibles are typically illiquid assets that do not generate income, can be volatile in price due to whims of the marketplace, and can’t be converted to cash as quickly as stocks or other investments, so they tie up capital. This type of alternative asset investing has been difficult for individual investors to access in the past, but there are now crowdfunding websites that provide individual investors (typically accredited investors) access to these markets. 

Costs associated with investments in wine, art, and other collectibles beyond the price of the collectible include commissions on purchases at auction, insurance, storage to ensure optimal aging and protection of the asset, and expertise and consulting that may be needed. There are platforms available for both accredited and non-accredited investors, with minimum investment amounts ranging from a low of $10 to as high as four to five figures.

Cryptocurrency

Cryptocurrencies are digital currencies that are not backed by a sovereign nation, and work via blockchain technology that creates a log of all transactions. Bitcoin is the most commonly known cryptocurrency for transactional use, and the market has matured to where owners can now generate interest on their cryptocurrency holdings through staking. 

Owning cryptocurrency is relatively easy and inexpensive, typically with a fee built into the price of the cryptocurrency by the exchange. It should be noted that while many see cryptocurrency as an important competitor to sovereign currencies in the future, cryptocurrencies are still subject to a great deal of volatility. 

The best cryptocurrency exchanges typically charge transaction fees that range between 0.00% and 1.15% and require minimum investments as low as $1 to get started. This article provides a more detailed overview of investing in cryptocurrencies, including the pros and cons.

Precious Metals 

Gold and other precious metals have been used as a currency, a symbol of wealth, and as an investment for thousands of years, in large part because precious metals have retained their purchasing power over time. There are many ways to add precious metals exposure to your portfolio, including owning the physical asset, futures contracts on individual metals, and ETFs that track individual metals or a precious metals index. 

Downsides to owning physical metals include not just the cost of the actual metals, but also additional costs for storing and insuring them. There’s also the issue that precious metals do not pay interest or generate revenue. Because of this, some investors choose to gain precious metals exposure indirectly by buying stock in mining companies that may pay dividends as well as rise in value. The best online gold dealers that offer storage for physical gold charge stocking fees of 5% to 10%, and will ship your gold for free on orders as low as $99.  

Peer-to-Peer Lending 

Peer-to-peer lending is where individuals lend money to other individuals, cutting the bank out of the lending process. Peer-to-peer lending is also known as “social lending,” because individuals often outline the reasons for borrowing, and lenders on these platforms will sometimes choose a borrower to lend to based on their story.

Peer-to-peer lending is facilitated by a platform provider that collects fees from borrowers and lenders on the site. The platform also vets both lenders and borrowers that use the platform and classifies borrowers into risk categories for the lenders to sort and easily review.