Crowdfunding means combining multiple investors’ financial resources for an investment in a real estate project, usually using an online crowdfunding platform.
As a form of real estate syndication, crowdfunding a real estate purchase, development, or other project, occurs when a sponsor, most often through an online presence, solicits investors to fund a real estate project. In most instances, all investors who want to participate must comply with federal and state securities laws.
The sponsor, whether an individual or a group of individuals, operates as a business entity. They invest their own money in the project—usually 5-20% of the total cost. They also offer the remainder of the required investment as opportunities for any qualified investors. The sponsor has an increased share of income because of their active role (sweat equity) in the project.
But before the sponsor shares in profits, investors each receive a ‘preferred return.’ Typically, 5-10% of the profits are paid out to each investor as preferred returns. The sponsor then starts sharing in the profits, along with the other investors.