Getting started investing in commercial real estate feels daunting no matter where you are. Maybe you’re investing for the first time and have heard that owning rental properties can produce great income. Or perhaps you’ve mastered the art of index fund investing to build a stock market portfolio valued over $1M.
Either way, chances are you’ve never been taught how to read a real estate syndication investment summary or understand the deal structure. Maybe you’ve never even heard of investing passively in real estate.
Well, the process has gotten even easier and is now open to a wider range of investors thanks to real estate crowdfunding regulation and technology.
From early-stage wealth builders to those real estate investors who’ve already amassed a portfolio of commercial real estate investments, crowdfunded real estate investments can be a fantastic piece to anyone’s real estate portfolio puzzle.
In this article, you’ll find all the frequently asked questions we get when talking to potential investors, both experienced and inexperienced, about the best real estate crowdfunding opportunities for their individual goals. We hope to make real estate investing as easy and transparent as possible so anyone (not just accredited investors) can add these types of alternative investments to their portfolio.
We’ve broken these questions into 4 groups:
- The Big Picture: What is Equity Crowdfunding?
- Ownership, Returns, and Fees: The Questions Every Wealthy Investor Loves
- Investor Communications in a Crowdfunded Investment
- Taxes and Crowdfunding Equity Investing
The Big Picture: What is Equity Crowdfunding?
What is Regulation Crowdfunding (Reg CF) and how does it relate to real estate investing?
Regulation Crowdfunding (Reg CF) is a framework established by the Securities and Exchange Commission (SEC) that allows private companies, including real estate firms, to raise capital from individual investors. It provides an opportunity for passive investors like yourself to participate in real estate deals through online real estate crowdfunding sites.
The difference between Reg CF and other passive real estate investment opportunities is that both non accredited investors and accredited investors are eligible to participate.
How does investing via real estate crowdfunding platforms differ from traditional real estate investing?
Unlike traditional real estate investing, crowdfunding investments allow you to invest passively in commercial real estate opportunities with a low minimum investment amount as a part of a larger group.
By investing in a crowdfunded real estate project, a larger commercial asset can be purchased and managed by professionals with no extra work required by the investors.
That’s right – no landlording.
Due to the scale of these investments, they can often produce higher returns than if you were to be an active real estate investor and manage your own portfolio of residential properties (and certainly allow you to avoid fixing toilets).
Additionally, crowdfunding offerings are open to both accredited and nonaccredited investors. They are typically facilitated through online platforms, providing ease of access and a streamlined investment process while also making it easier to follow all necessary SEC regulations.
How do Crowdfunding investment offerings compare to other passive real estate investment offerings?
Crowdfunding offerings are strikingly similar to our other passive investment offerings. In fact, the return structure is often the exact same as one of the investment classes in our accredited-only offerings. As an investor, you can expect to receive a preferred return plus a percentage share of cash flow going forward for the asset, including proceeds from the sale. This is the same in most of our offerings.
The main distinction is that, unlike previous funds, Crowdfunding offerings are open to all investors – whether you’re accredited or not – at a low minimum investment (typically $10,000). This structure allows as many people as possible to participate in and benefit from this opportunity.
Investors joining the fund through crowdfunding receive the same returns as investors in other accredited-only funds that are investing funds in the same asset. For example, our Goodegg Growth Fund I, a crowdfunding offering, will receive the same returns as the Class B investors in our Goodegg Wealth Fund II’s Encore at Metro Millenia asset in Orlando Florida.
What are the potential benefits of investing in a crowdfunded commercial real estate offering?
Investing in real estate crowdfunding deals can provide several benefits. It allows you to diversify your investment portfolio by gaining exposure to the real estate market with smaller investment amounts. This may help you start investing earlier.
Furthermore, it provides an opportunity to invest in specific commercial real estate projects that align with your investment goals.
With the evolution of Crowdfunding technology, investors also have the ability to invest directly into a single or small portfolio of assets with a team that they know and love. Since real estate is all about the team (who is underwriting the asset, who is managing the asset, who is selling the asset), retail investors can more thoroughly vet their investments and mitigate risk accordingly.
Many crowdfunding platforms only offer a large portfolio of assets, very similar to mutual funds in the stock market. It can be difficult to vet the real estate professionals, or teams, who are responsible for managing the asset – and protecting your hard-earned capital.
What should I consider before investing through a real estate crowdfunding site?
Before investing, it’s crucial to evaluate the underlying real estate assets and business plan. This includes the geographic location, market potential, and track record of the real estate sponsor or company. Luckily the new crowdfunding platforms are making this easier and more transparent. Previously, you could only invest in a large portfolio of assets with this type of real estate crowdfunding site, without ever speaking to the management team.
Now, you have direct access to the team behind the investment, as well as detailed information about how that team plans to manage the property (and your hard-earned capital).
Therefore, you should also consider whether or not you can have confidence that the team can successfully implement the strategy behind the investment. The actual website has little to do with the management of your funds or the likelihood that you’ll see those projected returns. It is all about the team.
You should carefully review the offering documents, including the business plan, financial projections, and associated risks, to make an informed investment decision. You should also speak to the sponsorship team and ask any questions you may have about their track record, their responsibilities, and more.
How do I choose the right real estate crowdfunding investment for me?
Always begin evaluating real estate investment opportunities with your personal investing goals in mind. This is true for investing through a crowdfunding platform, directly with a sponsorship team, or as an active investor in rental properties.
Are you looking for long-term wealth building or short-term cash flow? Do you want to spend time actively managing your real estate or do you want to invest passively?
You don’t want to find yourself with zero cash flow if your primary investing goal is to begin building passive income streams now to quit your job. Similarly, you wouldn’t want to join an investment class with high preferred returns and no share of the sale proceeds if you are wanting to grow your nest egg for future retirement.
Even a great investment opportunity can be a bad one if it doesn’t meet your needs.
When considering a real estate crowdfunding investment, take the time to understand the investment structure, including the terms of the investment, potential returns, and any associated fees. Additionally, consider your risk tolerance, investment timeframe, and overall investment strategy to select an offering that aligns with your investment objectives.
Finally, look for the communications you can expect from the team, or sponsor, managing the investment. The best real estate crowdfunding sponsors will treat you like every other investor. You’ll want to know that they will update you with any changes to their plans or warn you if they foresee any challenges. We’ll outline our communication strategy in a question below.
What level of involvement or control will I have as a passive investor in a real estate crowdfunding investment?
As a passive investor, or Limited Partner (LP), you typically have limited control over the day-to-day operations of the commercial real estate project. However, you should review the offering documents to understand any rights or voting privileges you may have as an investor, such as the ability to vote on major decisions or receive regular updates on the project’s progress.
This minimal control is actually a benefit. Active real estate investing can drain hours and hours out of your week unexpectedly. For investing in rental properties, we may include the mortgage loan cost, the check for the plumber, or yard maintenance fees in our calculations of returns, but rarely do we include our own time.
As a passive investor in a real estate syndication, you perform all your due diligence upfront when evaluating the deal and the team behind the asset. Other investors do the same, and you leverage the power of a group to buy a larger asset that can benefit from economies of scale. Once you wire your funds, you don’t have to do any more work.
While you have limited control, you also have more freedom. It is your job to determine what the ideal balance is for you.
What are the risks associated with real estate crowdfunding investing?
Investing in various asset classes in real estate comes with inherent risks. These may include the potential for project delays, changes in market conditions, or the inability to generate projected returns.
It could also include natural disasters or global pandemics because now we know that those can happen.
It’s important to carefully review the offering documents and consult with your legal and tax advisors to assess the risks and determine if the investment aligns with your risk profile.
It is also important to ask the sponsorship team what they plan to do in the event that something unexpected occurs. Ask what they have done in the past and how they might navigate challenges in the future. This will help you understand the risks and how they may be mitigated at individual properties.
A final note on risk. The evolution of technology has allowed owners and operators of larger deals to easily follow all legal requirements to make real estate crowdfunding safe for the everyday investor. This simply means that there are processes in place that further protect you, the investor, from fraud or potentially losing all of your money. This doesn’t mean that real estate is a safe investment when using a crowdfunding platform. As a savvy investor, you know that no investment is “safe” and everything includes risk. It’s up to you to decide which risks you are comfortable taking.
Ownership, Returns, and Fees: The
Questions Every Wealthy Investor
How Do Returns Work With Crowdfunded Real Estate Investments?
Returns come in several forms for real estate investments. Crowdfunding investors have the potential to receive distributions (or regular payments), typically on a quarterly basis. These may also be called preferred returns. That means they are paid out first, according to the structure of the investor classes.
Distributions come from the asset’s ongoing annual income, like rental income paid by tenants or parking fees on site. The property’s expenses will be deducted from this income, like the mortgage loan, the property management fees, and more. Depending on the business plan and capital stack structure, distributions may be paid out immediately, or accrued and distributed at a later date.
Another type of return these types of real estate funds also may benefit from is potential appreciation or the proceeds from a sale. These are often split with the ownership team (or General Partners), such as in a 70/30 split (70% to Limited Partners – that’s you – and 30% to the ownership team or General Partners).
Returns are not redeployed or reinvested as equity. The specific terms and expected returns will be outlined in the offering documents provided by the real estate crowdfunding platforms or real estate sponsors.
Are real estate crowdfunding investments equity investments? Am I an owner?
Yes! Congratulations! You are a partial owner of a commercial property!
This is a big distinction between donation-based crowdfunding and equity crowdfunding. With previous crowdfunding platforms, you typically donated funds to support a cause, a start-up business, or just some person’s weird dream (like making an Ostrich Pillow, which raised $195k).
With real estate crowdfunding platforms investors access actual equity, or ownership, of the individual properties.
This is how it works. When the group of investors goes to purchase property, they create an entity. This is often a limited partnership (LP) or limited liability company (LLC). Each partner (both investors and owners) gets an ownership share of that company. Most active investors also purchase residential properties using an entity to reduce liability.
This ownership even applies for the individuals who’ve contributed the minimum investment. They are also partial owners. Everyone can gain access to the benefits of owning real estate when investing through real estate crowdfunding platforms – if you chose the right platform (i.e. the right team who is managing the deal and using a platform to open it up to you).
What are the fees associated with real estate crowdfunding?
The fees for a real estate crowdfunding deal are very similar to other fund deals we offer at Goodegg. For instance, legal costs are required to create documents and ensure that we’re following all SEC regulations while raising capital.
The real estate crowdfunding platforms that streamline this process and the legal requirements also charge a fee, which we incorporate into our projections. The best real estate crowdfunding platforms allow us to decide whether or not to pass along any of these fees to investors directly. We always opt to make them part of the deal so that your investing dollars will be invested rather than directly going toward fees. Prospective investors will want to ask any ownership team how they handle these fees.
How much can I invest in a Goodegg crowdfunded deal?
The maximum and minimum investment amounts for real estate crowdfunding deals can vary. Every deal is unique. However, the amount you personally are able to invest is determined by a series of calculations determined by the SEC.
Note here, if you are an accredited investor, these limits don’t apply to you. You can invest however much you want.
Ok, let’s look at some math.
Calculation For Non accredited Investor: Total crowdfunding Investment Amount Allowed
If you are a nonaccredited investor, the amount you can invest is influenced by your net worth and income, as determined by the SEC’s regulatory guidelines. Let’s break those down.
For individuals with either an annual income or net worth below $124,000, the investment limit within a 12-month period is calculated as the greater of $2,500 or 5% of the higher value between their annual income and net worth.
In cases where both your total yearly income and net worth equal or exceed $124,000, non-accredited investors can invest up to 10% of the higher value between their annual income and net worth, with a maximum investment cap of $124,000.
Here is a graphic we’ve created based on the SEC rules as of July 2023. Hopefully, this helps break down those minimum investment amounts allowed per year for all real estate crowdfunding investing you plan on doing.
Luckily, the real estate crowdfunding platform that sponsors use to facilitate the process will help you input your financials and spit out the calculated amount you can invest each year in all your crowdfunding deals.
This calculation is separate from the investment minimums that sponsors set for each deal. You may or may not be able to invest in a particular deal, depending upon these calculations.
It’s crucial to understand these limitations as a non-accredited investor and consult with a financial advisor to ensure compliance and make informed investment decisions based on your unique financial situation.
Please note that the information provided here is based on general knowledge and may not reflect the specific terms and conditions of Goodegg Investments or regulatory requirements. It’s important to review the relevant regulations and consult with a professional for accurate and up-to-date guidance regarding your investment options.
Each deal will have its own investment requirements and limitations, which may be influenced by regulatory restrictions or the preferences of the real estate sponsor. It’s important to review the offering documents for each investment opportunity to understand the minimum and maximum investment amounts.
Is Real Estate Crowdfunding A Liquid Investment?
These are illiquid investments. When your capital is placed in a crowdfunded real estate deal with Goodegg Investments, just as it would be if an investor joins any fund we offer. This means you will not have access to your initial capital.
Your entire investment will be deployed and working hard for the full length of the hold period, which is typically 5 years.
For this reason, you should never invest money you could possibly need in the next 5 years, such as your emergency fund. You won’t be able to pull that capital out of a crowdfunding deal, or any real estate offering we have open.
Investor Communications in a Crowdfunded Investment
How is my investment tracked and managed in a real estate crowdfunding deal?
Real estate crowdfunding sites typically provide the initial portal where you can calculate your allowable investment amount (see question above regarding investment minimums and maximums), sign the paperwork, and wire your funds. From there, the sponsor decides how you will be able to track the deal.
You may log back into that same website to get your investor updates (see communications question below) and track progress. Or, you may be sent to the sponsor’s main investor portal to receive communications along with all their other investors. Here, you’ll be able to track your investments, view project updates, and access relevant documents. The platform and the real estate sponsor should communicate with investors regularly, providing updates on the project’s performance and financials.
What type of communication will take place with investors throughout this investment?
Investors in our crowdfunding offerings will receive regular updates on asset acquisition and management. These are the same communications for all our other investments.
As soon as your investment is approved, you’ll hear from us immediately. We’ll keep you in the loop as we identify and move through the acquisition process for the asset. After the deal closes, you can expect to receive monthly updates from us, along with quarterly financials for all your investments.
What is the exit strategy for a real estate crowdfunding investment?
Each real estate deal and individual asset will have a different exit strategy. It’s important to review the offering documents to understand how and when you can expect to receive returns on your investment.
Common exit strategies may include property sale or refinancing. A typical hold period is 5 years for most passive real estate investments with Goodegg, but it can be earlier or later depending on market timing.
Taxes and Crowdfunding Equity Investing
Are there any tax implications associated with investing in a Reg CF real estate offering?
Investing in real estate offerings, including crowdfunding deals, may have tax implications. This is why most people love real estate investing! You get the same tax advantages as a non-accredited investor as our accredited investors in the same deal.
It’s advisable to consult with a tax professional to understand the specific tax considerations based on your individual circumstances. They can guide you on potential tax benefits, such as depreciation deductions, or any differences that commercial properties may have over individual rental properties.
This is also a great question for interested investors to ask the Goodegg team when you hop on a call with us. We can help you understand a specific deal’s cost segregation and depreciation plans that may impact your tax bill. Of course, your CPA will help you take that information and apply it to your specific tax situation.
Is a Crowdfunding investment eligible for 1031 exchange?
The eligibility to use a 1031 exchange depends upon the specific deal structure and asset. Typically, our deals are not eligible to deploy a 1031 exchange as they are not set up to receive funds this way.
If you are considering selling your property, it might help to know that, with a high year 1 depreciation, the tax shelter you could get from selling a property outright and investing those funds into an real estate syndication could be comparable to the tax benefits you’d get via a 1031 exchange.
Look at the specific deal investment summary to know what losses are projected for year 1, often as a result of a cost segregation study after acquisition. Of course, we highly recommend you consult your own CPA to discuss your specific situation.
If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101 – or to get a free hardcover copy of our book – Investing For Good.
We’ve also pulled together a comprehensive resource for interested investors who want to work toward becoming accredited investors. There are many ways you can set yourself up to build wealth as a non-accredited investor and achieve the illustrious status of accredited in a record amount of time.
If you’re ready to invest right now, we invite potential investors to check out our open deals page to learn more about our current or upcoming investment opportunities. Remember, these are equity investments – not donations!