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The newest evolution in real estate investing is being conducted through the online marketplace. Through a host of brand new companies operating across the United States, small-time, unaccredited investors now have access to multi-million dollar real estate opportunities. Not surprisingly, the idea of an online crowdfunded real estate investment is getting a lot of attention.
The idea of investing in real estate online is nothing new, but the new model is turning the industry on its head. Traditional Real Estate Investment Trusts (REITs) rely on exorbitant fees for access to their valuable portfolios. Understandably, the minimum investment and annual fees put this type of investment beyond the means of many Americans.
Nowadays, new online investment firms, such as Fundrise and Roofstock, are offering similarly profitable portfolios for a fraction of the cost. By providing all their services online, these business models can reduce fees.
How Does Online Real Estate Investing Work?
There are a couple of different formats to invest in real estate online, but any trusted company should have the following characteristics:
First and foremost, online property investment services need to be entirely transparent. Unlike other real estate investment models, clients should have complete clarity on what they own and how much the investment company is making behind the scenes.
Removing the middleman means removing the majority of the costs. According to Fundrise, they have no upfront fee and only charge a 1 percent annual asset management fee during the first two years of the investment. This fee only comes into play if the investment turns a minimum 15 percent profit.
Roofstock is similar, as its free to join, shop, and bid. The low 0.5 percent management fee is only charged after a bid has been accepted. Traditional realtor fees are typically much higher, anywhere from two to seven percent.
Simplified Real Estate
The theory behind the new wave of property investment firms is that the marketplace is already crowded and complicated. Many small investors avoid traditional real estate because of the hassle. It’s not perceived as an easy investment to manage, especially for newcomers.
Companies like Roofstock control the deal from start to finish, relying on e-documents and e-signatures for the entire transaction. They source only rental properties which meet their strict criteria and ensure a property management firm is in place before the sale. This provides the new owner with less work and less stress upon taking control of the property.
Low Barrier to Entry
The new wave of property investment firms is built with the small investor in mind. Large multi-million dollar firms continue to do business with the wealthiest segments of society and have mostly neglected the rest.
Through all the new online companies developing crowdfunded solutions to property investment, there are tons of options open for small-scale investment. For example, Fundrise accepts investments of as little as $1,000; Realty Mogul does so for as low as $5,000.
Where to Look for Online Property Investments
Many of these have already been mentioned, but there are a handful of big players in the online real estate investing market. Roofstock and Fundrise are two of the most well-known. Both of these companies are focused on supporting smaller individual property investors through the convoluted real estate market. Their main priority is to provide a value-added service, and to remove the barriers of investing.
Unlike many of the other online real estate ventures, Roofstock focuses on real people investing in real rental properties. Unlike the real world, however, they source and vet properties themselves. Only once the properties have passed their inspection do they post them on their site.
Each property needs to meet a number of essential requirements. Some of their criteria include having tenants in place before the sale and having a property management company already lined up. They also ensure the property itself has been professionally inspected.
After years of experienced investing in commercial real estate, the founders of Fundrise came to a realization. They concluded that instead of investing in their futures, they had actually been lining the pockets of middlemen.
Fundrise took a risk and started out on their own. They source high-quality commercial investment properties and seek crowdfunded approaches. According to their numbers, Fundrise has over 800,000 individual investors and over $3 billion of real estate. Considering they only started a few years ago, these numbers speak volumes about their potential.
What is the Risk of Online Real Estate Investing?
Perhaps the number one risk to buying into online real estate investing is that most of the companies mentioned above are only a couple years old. While their initial returns are substantial, they do not have decades of proven experience or data to stand on.
Another primary concern is these new companies seem to target investors with limited investment experience. All investments, no matter if they are online or offline, should be completed by anyone who has done the proper research or under the guiding hand of an experienced financial advisor. Although many reputable companies are managing online real estate investments, it is nevertheless a market prone to scammers.
Take the time, before you invest, to thoroughly understand what you would be putting your money into or speak with a qualified professional. Explore the investment company before making any financial decisions, and understand that the underlying factor to all investing is a layer of risk.
Author: Jeff Gitlen