Due to loosened regulations, the general public can now participate in many crowdfunded real estate deals. Oddly enough, reading the SEC’s regulations opened my eyes to a few stipulations that I wasn’t aware of, but I will touch on those later.
Anyways, quite a few crowdfunding platforms have opened to the public and some, like Fundrise, have opened to non-accredited investors as well. The appeal of starting in real estate investing with only $500 is enticing to anyone beginning their financial freedom journey, but does it make sense?
Real Estate Crowdfunding Pros
One of the biggest draws to crowdfunded real estate is the historical performance advertised. Fundrise lists average annualized returns of 8-12% over the past 4 years which is decent compared to the average S&P 500 return of about 10%. But when comparing the dividend yields, Fundrise touts an average dividend yield of 7.17% which is double what the Vanguard Real Estate ETF (VNQ) returns. That is great for people looking for dividend income.
There are other factors to consider though. Platforms like Fundrise and others are actively managed with fees of 1.0% or more while the Vanguard Real Estate ETF only has fees of 0.12%. Let’s do some math:
Crowdfunded Real Estate Platform yielding 10% with 1% annual fees vs VNQ yielding 8.01% (10 year performance) with 0.12% fees. $500 after 10 years with the first option would turn into $1,172.87. $500 after 10 years with the second option would turn into $1,067.57. Well wait a second, it looks like crowdfunding would beat the ETF in this scenario!
Real Estate Crowdfunding Cons
Remember the SEC link from earlier? They have some limitations on how much you can invest in crowdfunding based on network and income.
If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.
They have a table that gives a few calculations, but for the majority of people who are reading this, their limit will be $2200.
With that said, it doesn’t sound like you can build a strong real estate empire with crowdfunding. Surely, you’d be building a strong empire for the people you are investing with, but the average person would be really limited in this asset class. Not to mention, your tax returns get a little more complicated.
The next question becomes, if you are not a high net worth or high salary individual, is your $500 (or $2200) being put to its best use in crowdfunded real estate?
You may very well put that money to use on education for yourself to help boost your salary or partnering with a friend or family member to do your own real estate deal. Maybe, just use the money for a well needed vacation. Food for thought.
I don’t want to make a decision for you either which way. I just like to present things to think about, especially when platforms begin advertising to beginners in the financial freedom journey.