Average real estate crowdfunding returns are between 11% and 15% but the real benefit is in diversification
I interviewed a real estate crowdfunding investor last week about his experience with the new asset class and got a lot of questions from readers. One of the most frequent was, “What kind of return can I expect with real estate crowdfunding?”
It’s a question the industry hasn’t done a good job of answering. As regulated brokers, most platforms shy away from talking about returns for fear of running afoul of SEC or FINRA rules.
The investor, a portfolio manager for a real estate investment firm, said his returns have been 9%+ over the several years he has invested. My own real estate crowdfunding returns, averaged over four investments, have averaged 14% but none have paid their final distributions.
I've been investing in real estate for decades but only for a few years in real estate crowdfunding. Real estate has always held a special place in my portfolio even if it doesn't live up to the passive income promises you hear on late-night TV.
So I decided to survey five of my favorite real estate crowdfunding platforms to find the average return on open and completed deals. It’s by no means an exhaustive study but I did look at nearly 100 crowdfunding deals to crunch the numbers.
What I found was a high average return for real estate crowdfunding but also an added benefit that most investors don’t realize.
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How I Found the Average Real Estate Crowdfunding Returns
I looked at deals across five crowdfunding platforms to get a sense for the average real estate crowdfunding returns. I split out all the returns by open investments and those that had already completed to get a better idea of the realized versus potential returns.
Streitwise is a unique real estate crowdfunding platform I've been following that is a new twist on REIT investing. Many of the crowdfunding sites are still only open to wealthy investors but the Streitwise real estate fund is open to everyone.
The Streitwise 1st Streit Office REIT invests in high-quality office properties and as of the date of this video, has paid a 10% annualized dividend. The fund is managed by seasoned real estate professionals that have acquired or managed over $5.4 billion in property and across all property types.
RealtyMogul listed five deals open for investment and 110 investments completed. The platform was one of the first in real estate crowdfunding but hasn’t been as aggressive as the others in building its investor base. Realty Mogul offers some real estate investments through funds it puts together and some direct investment in other deals.
RealCrowd listed seven open deals and nearly 100 closed deals for direct investment and property funds. I’ve never invested through RealCrowd so don’t know much about the platform.
There were a few platforms I didn't survey on returns or real estate deals. I found it very difficult finding actual returns on the Patch of Land platform and the fee structure completely turned me off the site.
What Can Investors Expect with Real Estate Crowdfunding?
Debt investments in real estate averaged 8.5% for open investments and 9.1% for completed deals. Equity investments in real estate crowdfunding averaged 16.4% for open investments and 19.1% for completed deals.
Of course, the average returns across property types varied quite a bit and depended primarily on the type of investment that was usually offered.
Since most single-family residential deals are for short-term debt, the return tends to be much lower than other types. Average returns for the other property types were much higher because of the use of equity investments which offer higher returns.
I averaged out the return for all deals and it was surprisingly consistent between open and completed deals. The average real estate crowdfunding return on open investments is around 14.7% for the five platforms I looked at and 14.6% for completed deals.
Given this study of real estate crowdfunding returns, I think investors can expect returns between 11% to 15% on a debt/equity portfolio of deals. Investing 25% of your real estate portfolio in debt investments and 75% in equity deals would yield a blended return of almost 15% annually.
On a blended portfolio of debt and equity, real estate crowdfunding investors should expect annualized returns between 11% to 15%
There are a couple of caveats with the returns information I found.
- Since real estate crowdfunding is only a few years old, most of the completed investments were for debt which tends to be on shorter terms and lower returns.
- I looked at 31 open real estate crowdfunding investments and 61 completed deals. That’s not a very big sample size but I think it’s enough to get a good picture of the market.
- Some of the returns for separate categories were only based on a few deals. There were lots of residential projects to average but only a handful of deals open or completed for other property types like office, hospitality and industrial.
And as the disclaimer goes, past returns are not a predictor of future returns. While the target returns for open crowdfunding investments are similar to completed deals, that doesn’t mean they’ll necessarily deliver on the potential.
Why Real Estate Crowdfunding is about More than Returns
Returns of up to 15% on a blended portfolio are extremely attractive. By comparison, you would expect returns to a blended stock/bond portfolio in the range of 5% to 7% annually.
Real estate crowdfunding is about more than just returns though. It’s about the diversification you get with real estate investing and the ease you get with crowdfunding.
As a physical asset, real estate provides a great risk hedge versus traditional stocks and bonds. You get an asset that provides consistent cash flow and is about as good an inflation hedge as you can find.
But it can be nearly impossible for individual investors to get access to enough properties to diversify away the risk of a specific property type or region. At a cost of tens of thousands or more per property, most individual investors are stuck with just one property type in one region. That leaves them exposed to a lot of risk.
By investing as little as $1,000 in each crowdfunding deal, you can spread your investments across dozens of property types and across the country. That means you don’t have to worry about one type of real estate, i.e. office, industrial or residential, falling apart and destroying your portfolio.
Final Thoughts on Real Estate Crowdfunding Returns
Real estate crowdfunding is still a relatively new way to invest and returns will vary depending on the overall economy. I’m sure returns will come down during the next recession as they do with almost all assets. Invest across a diversified portfolio of deals with experienced developers though and your average returns should still be positive.
Real estate crowdfunding investors have done well over the last several years and crowdfunding returns have outperformed REITs and other investments. While returns for crowdfund investments should remain high, the real benefit is to the diversification effects when added to a portfolio of stocks and bonds. Don’t neglect your chance to reduce the risk around your wealth and add this asset class for double-digit returns.