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Real Estate Crowdfunding: Should You Invest?

Imagine this: You have $5,000 and want to invest in real estate. Although you might be able leverage that cash and borrow extensively to squeeze your way into a rental property, that’s a risky move on such a limited sum, assuming you can even make it work.

But a new business, RealtyShares*, is inviting people to get into the game of development investing with as little as five grand. RealtyShares currently touts three recent projects it has funded, from a $500,00 strip mall in Las Vegas to a $1.09 million townhome development in Deerfield, Illinois, just north of Chicago.

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The question is, can this work to turn a reliable profit for investors? At least RealtyShares is making a killing: It announced $20 million in Series B funding in February.

That investment, though, should bring some comfort to prospective investors, as it’s based on a proven financial fact: Real estate has a long history of profitability. At least one expert maintains that it’s a preferred vehicle of the wealthy.

“Roughly 90 percent of millionaires-yes, 9 out of 10-created their wealth through real estate,” says Kurt M. Westfield, managing partner of WC Companies in Tampa, Florida. “Not stocks. Not gold. Not baseball cards or other seasonal or whimsical investment vehicles.”

But on the other hand, it’s not as though RealtyShares can boast any kind of track record-nor can any business of its kind just yet. That’s because RealtyShares uses equity crowdfunding to get investors of limited means in on the real estate game.

*Money Under 30 has an affiliate relationship with RealtyShares, and may receive a commission if you sign up.

What is crowdfunding?

Crowdfunding lets small-time investors fund big projects.

Crowdfunding (or equity crowdsourcing) is a new concept. What is it?

The Jumpstart Our Business Startups Act went into effect in May, 2016 and, for the very first time, allows “non-accredited” investors to back private companies. Before that, to invest in private companies, investors needed to be “accredited,” meaning they needed to have at least a $1 million net worth or have earned at least $200,000 for at least two years. (Editor’s note: Realtyshares still requires investors to be accredited.)

In the planning stages for the better part of four years-ever since President Obama signed the JOBS Act in 2012-crowdfunding awaited the green light from government regulators. Now that it’s a go, the investment channel provides an accessible mode for individuals interested in putting real estate in their portfolio-and, boosters say, reaping returns that can surpass 10 percent annually.

“At a time when the stock market has been particularly volatile and where yield is hard to find because of low interest rates, real estate is a sector where you can find relative stability and strong performance,” says Charles Clinton, CEO of EquityMultiple, an online real estate investment platform based in New York City.

Yet even Clinton acknowledges, so far as the JOBS Act and real estate go, that “the industry frankly isn’t old enough to have much statistical evidence in one direction or another.”

And therein lies the rub-and a big one.

Crowdfunding means capital and opportunity, but also lots of risk

The major reason the JOBS Act got help up was that government regulators feared what might happen should gullible, mom-and-pop investors get caught up in an unsavory scenario. And if there’s one field where unsavory characters have been known to lurk, it’s real estate. (Come on: This is the field that invented euphemisms such as “cozy” for cramped and “larger than it looks” for really cramped.)

Writing in June on cre.tech, Jordan Wirsz pointed out the dangers where real estate and crowdfunding intersect: “Real estate capital raisers are more often than not, self-promoting real estate developers and investors….Believe it or not, the most problems any capital raiser will have are not with the investor who invests $1 million, but the investor who invested $5,000.”

How come? “The lack of sophistication and understanding, in addition to the lack of experience in risk management and risk knowledge, is a dangerous combination,” Wirsz writes.

Yet even if the new crowdfunding environment proves turbulent as a whole, real estate may actually prove itself a port in that storm.

“Historically, real estate has generally been a very stable investment,” says Allen Shayanfekr, CEO and co-founder of Sharestates, a real estate crowdfunding platform in Great Neck, New York. “Like all investments, real estate is cyclical in nature, but generally less volatile when compared to other investment classes.”

It need not be much of a gamble, either. If a hot property in an urban metropolis starts in the six digits, investors can get started on Sharestates for $1,000 (less than a well-appointed doghouse in the Hamptons). The Sharestates website looks much like a variation of a personal finance portal, as investors can look at color-coded, horizontal-line graphics that report the risk rating of each featured property, from A-plus to D-minus.

Real estate, you might say, is also grounded in ways other non-stock investments are not. There’s supporting evidence enough in markets such as New York and San Francisco and Boston, where apartments prove scarce year after year.

“Building compound wealth through rental assets has taken off,” Westfield points out. “With an average annual appreciation of 3 percent and rental rates rising, income properties have started filling more investors portfolios.”

Then again, there was also this little thing called the subprime mortgage crisis.

Even RealtyShares, in a line graph it provides, shows how a $10,000 investment that had turned into $26,000 by 2007 plummeted to about $16,500 in 2009. Even though investors were still up 65 percent, the drop caused even the most hardened wheeler dealers to reach for the airsickness bags.

It’s highly doubtful such a crisis-which almost brought down the U.S. economy, after all-will repeat itself in this generation. Yet that doesn’t mean there aren’t other ways to lose money in real estate.

That’s where it can help to think of crowdfunded real estate investment as analogous to stocks. The best bet is to always invest in companies you know about, in sectors you know about (or, at the very least, your financial advisor knows well). Warren Buffett, among others, follows this dictum to a fault, and it’s hard to shoot holes in the billionaire’s playbook.

Should you invest in real estate crowdfunding?

Real estate crowdfunding offers an easy way to invest small amounts and get a potentially exciting return. But investing in real estate is inherently risky, and crowdfunding is a brand new concept. That might make you think twice and proceed very carefully.

This definitely is not the kind of investment to dump your life’s savings-or even a substantial percentage of your assets-into. But if a few thousand dollars represents a small percentage of your portfolio and you’re looking for a high-risk, high-reward opportunity, RealtyShares and other new real estate crowdfunding platforms, including Fundrise and EquityMultiple, are ready to take your money.

Learn more about RealtyShares: Invest in real estate with as little as $5,000