Real Estate Crowdfunding Returns

Real estate crowdfunding has become a popular way for investors to access property markets without the need for direct ownership. By pooling funds with other investors through online platforms, individuals can invest in commercial properties, multifamily units, and development projects with relatively low capital requirements.

Returns from real estate crowdfunding typically come from two sources: rental income (dividends) and property appreciation. Depending on the platform and investment type, annual returns can range from 5% to 15% or more, though they vary based on market conditions, property performance, and investment structure (equity vs. debt).

While real estate crowdfunding offers diversification, passive income, and access to institutional-grade properties, it also carries risks such as illiquidity, platform reliability, and market fluctuations. Understanding potential returns, fees, and risk factors is essential for making informed investment decisions.

How Real Estate Crowdfunding Returns Are Earned

There are several different investment strategies used in real estate crowdfunding opportunities, so the way the return on investment (ROI) is earned varies depending on the type of investment and the strategy being used. Here we'll look at the differences between equity and debt crowdfunding.

Equity Crowdfunding

Perhaps the most common type of crowdfunded real estate investment is equity crowdfunding. With equity crowdfunding, each investor purchases a share of equity in the project. Let's take a look at some of the ways returns are calculated with equity crowdfunding.

Cash-on-Cash Return

One way investors receive a return on their investment with equity crowdfunding is through the cash flow the property generates from the rental income. The deal sponsor typically distributes the cash flow (profits) generated from the investment each quarter after the property expenses, operating expenses, and debt service are paid for. 

Appreciation

With investment properties, such as commercial real estate, property values are tied to the net operating income (NOI) the real estate produces and the returns that investors expect based on risk and market conditions. 

The values of this type of real estate appreciate when the NOI increases and the overall risk decreases. Many real estate crowdfunding sponsors achieve this by making improvements to the property, increasing rents, and getting higher-quality tenants or longer-term leases. 

Equity

Most real estate deal sponsors launch crowdfunding campaigns to raise the capital for the down payment needed to acquire or develop the property and finance the rest through a traditional lender. 

Over time, as the rental payments are being used to pay the debt service on a property, the principal balance is reduced and the equity increases. When the property eventually sells, the payoff balance on the mortgage is less than what was borrowed on the property so the proceeds from the sale are higher.

Internal Rate of Return

In a typical equity real estate crowdfunding deal, investors will receive a cash distribution each quarter during the investment term and then receive a larger payout once the property sells and the returns from the appreciation and equity build are realized. 

The internal rate of return (IRR) is the total returns realized annualized over the entire holding period. For example, say you invest $25,000 into a deal that paid a cash distribution of 5% for 5 years and then was sold at the end of the 5th year.

Over the 5 years, you received a total of $6,250 in cash distributions, then received a payout of $43,750 when the property sold ($25,000 equity you contributed plus profit from appreciation and equity). 

Your total return on the investment would have been $25,000. Divided by the 5 years you held the investment, the realized IRR would be 20%. Even though most of the return was realized at the end of the investment, the IRR is averaged out over the total investment term. 

Equity Multiple

Another way returns are calculated with real estate crowdfunding is with an equity multiplier. This is calculated by dividing the total dollars received from the investment by the total capital invested. 

For the example above, this would be $50,000 / $25,000 = 2.0x equity multiple. 

Debt Crowdfunding

Investing in a real estate crowdfunding debt offering generates returns in a different way than equity deals. Instead of owning equity in a project, investors are basically lending money to an investor or developer on a deal. 

Returns on a debt investment are usually earned through interest payments made on the loan. Just like a bank earns interest on money it lends, investors receive interest on money they lend through debt crowdfunding. 

What is the Typical Investment Term for Real Estate Crowdfunding Investments?

It’s important to understand that real estate is an illiquid investment. Investors can’t simply sell their shares when they need cash like they can with stocks. Money that’s invested in a real estate crowdfunding investment will be tied up until the sponsor either sells or refinances the property. 

Most crowdfunding deals have terms between 5 and 10 years. This gives the deal sponsor enough time to increase the revenue and property value, build equity in the asset, and sell it for a profit. 

Depending on the deal, investors may have to wait a few years to even start receiving any cash distributions. This is often the case with crowdfunded development deals. It may take 2 years for the developer to complete the construction, then another year to lease the property and start receiving rental income. 

The cash returns may even start small during the first couple of years of the holding period, while the property is being renovated, and rise as more units are leased and rents increase. 

Debt crowdfunding investments often have shorter terms since the loans are usually used as bridge loan to finance construction or until long-term financing can be obtained. These deals may have terms as short as 6 months but are often 1 to 2 years. 

Popular Real Estate Crowdfunding Platforms

Managing Risk vs Return

While offerings with the highest target returns may be the most appealing, they may not always be the best investments. A project’s return is typically directly tied to its risk. Higher-risk investments usually offer higher returns, but they also come with a greater chance of a complete loss if the project doesn’t work out as planned. 

Lower-risk investments typically come with lower returns, but the chances of realizing those returns are greater. 

A good example is comparing a value-add opportunity where a real estate company is raising capital to purchase an apartment building that has 80% occupancy and is in need of major renovations, with an apartment building less than 5 years old that’s receiving market rent and has 98% occupancy. 

The value-add opportunity has a lot of room to increase rents and the property value. However, a lot has to go right in order for it all to work out. The renovations have to be completed within the planned budget and timeframe, or the project may run out of money, and investors either have to put in more capital or the bank loan may not get paid. 

The newer apartment building doesn’t have much room to raise rents or increase the property value because it’s already maximizing its income potential, so the potential returns won’t be as high. However, there’s not nearly as much that can go wrong so the risk to investors is less. 

It’s important to consider your overall investment goals and risk tolerance when choosing a real estate crowdfunding investment. All investments have their risks, so it’s important to manage those risks carefully. 

The Bottom Line on Real Estate Crowdfunding Returns

Real estate crowdfunding returns can be quite attractive if you’re careful about choosing the right investment offerings and the platform you invest with. 

Crowdfunding platforms like the ones discussed in this article have thorough due diligence processes to minimize the risks their investors are exposed to while offering investments with the highest potential returns.

Frequently Asked Questions