Real estate crowdfunding is increasing in popularity and has become more accessible than ever. According to Polaris Market Research, the global real estate crowdfunding market was valued at USD 10.78 billion in 2021 and is expected to reach USD 250.62 billion between 2022 and 2030 at a compound annual growth rate (CAGR) of 45.6%.

Real estate crowdfunding market size by region from 2018-2030 (in USD Billions)
Source: Polaris Market Research

Curious? In this article, we discuss how real estate crowdfunding works and the opportunities for investors.

What is real estate crowdfunding and why is it so attractive?

Crowdfunding has opened up new avenues for those looking to start their own business or project, but find themselves without the funds to do so. They may not necessarily have the best credit score either, which automatically disqualifies them from getting a loan through traditional avenues. This is where crowdfunding comes in. There are many different websites offering crowdfunding options that a person can use to raise funds for their venture. These crowdfunding sites are a great way for someone to get the investors that they need, without the hassle of approaching banks or venture capitalists.

Real estate crowdfunding works similarly. If someone wants to invest in real estate but doesn't want to own or maintain a building in their own name, they can become a shareholder through a crowdfunding company. Any profits directed to the real estate venture, such as those from rental income or flipping the property, are passed onto the investor.

In a nutshell, crowdfunding pools money in order for small and mid-sized investors to use the funds to invest in the future developments and growth of a company, such as buying equipment or building a manufacturing plant.

One of the key reasons why investors are looking to real estate crowdfunding as a viable alternative to real estate investment trusts (REITs) and real estate ETFs is due to the optionality provided. With crowdfunding, investors can choose between equity or debt investments, whereas traditional non-traded REITs are usually just equity investments that are only available to accredited investors.

Real estate crowdfunding exists with its own rules, risk, and regulations. The two available offerings are debt and equity investments, each with its own benefits and drawbacks. We will break down what each of these types of crowdfunding investments involves, before delving into their advantages and disadvantages.

What are debt and equity investments?

Debt investors can pool their funds to purchase debts, such as mortgages or bonds, which effectively makes them lenders for the property. The loan is secured by the property itself and investors receive a fixed rate of return determined by the interest rate on the loan and how much they have invested. In a debt deal, the investor is at the top of the capital stack, meaning they have priority when it comes to claiming a payout from the property. Even in the event of foreclosure, the investor could sell and recoup some of the resulting losses. Some deals involve unsecured promissory note options, but in general, the property provides security as in the case of a standard real estate loan.

In comparison, equity investors are shareholders in a company that owns real estate properties. Each investor’s stake is proportionate to the value of their investment. Returns are realized either from the rental income generated by the property (less any service fees paid to the crowdfunding platform) or from a share of any appreciation value if the property is sold.

Real estate crowdfunding capital stack

Before we break down the pros and cons of debt versus equity investments, it is important to contextualize how each of these plays a role in the capital stack, which relates to how the property deal is structured.

The capital stack for real estate is as follows:

  1. Senior debt;
  2. Mezzanine debt;
  3. Preferred equity;
  4. Common equity.

Debt investments receive distributions first, with senior debt topping the list. Typically, borrowers must make a monthly payment to avoid defaulting on the loan. The mezzanine is secondary to senior debt but is still an obligatory repayment. Targeted returns can vary depending on the level of leverage and risk involved.

Once debt investors receive their distributions, preferred equity investors are next in line to receive their shares. Common equity is at the bottom of the capital stack, meaning these investors get paid last, following debt servicing and preferred equity investors. Common equity investors receive distributions at the sole discretion of the owner or fund manager (the sponsor).

Capital stack flipped upside down from lowest to highest risk
Source: Financial Samurai

You may be wondering: Why have equity investors at all?

The answer is leverage. A property’s leverage is the total portion of its debt financing relative to its current market value. The advantage of leverage is that it can increase the potential return on investment. Take two investment scenarios for example:

A plan sponsor has CHF 10 million in equity to invest. Let’s say they put 50% leverage on a property, allowing them to buy a CHF 20 million property (CHF 10 million in equity and 10 million in loans). Either they put up the total equity investment themselves or raise CHF 5 million from individual equity investors. The latter option lets them invest only half of their own capital into the project.

Alternatively, the sponsor could also use that CHF 10 million (5 million in investor equity and 5 million of their own funds) and might decide to use 75% leverage to buy a CHF 40 million property.

For the second example, assume both properties experience the same 10% appreciation in value before the sponsor sells. Even though the first investor has a higher split (50/50), the investment amount is half that of the second investor. Consequently, the first sponsor would make a profit of CHF 2 million, while the second sponsor would make CHF 4 million, even with a 25/75 split after the sale of the property. The result is that the second sponsor makes more from the sale because the investment amount is much higher.

But what if the deal is not successful?

Higher leverage can result in higher returns, but by the same token, it incurs higher risk. This is where sponsors need to determine how to structure the capital stack, which will vary depending on their risk tolerance and goals.

Benefits and drawbacks of equity investments


1. Unlimited earning potential

There is no ceiling on what an investor can earn. If the value of a real estate property increases exponentially, the investor will benefit proportionately. However, with higher returns comes higher risk, which we will look at when considering the drawbacks below.

2. Lower fees

Crowdfunding real estate debt investments typically involve fees of 2% or higher, as well as a loan origination fee. Equity investments tend to be a little lower: generally less than 1-2% (in some cases they may even be equal to zero) with no upfront service fees. Rather than paying upfront fees plus monthly service fees, investors may be able to simply pay a single annual fee to maintain their position in the property.


1. Secondary distributions

We have covered how the capital stack and distributions are structured above. Equity paybacks always take place after the debt side has been covered. Due to the sequence of return payouts, there is an innate risk of never even getting to the equity portion. As crowdfunding is still not as regulated as public securities, this can mean that teams and projects are not always vetted as thoroughly, which can lead to a loss for investors.

2. Unsecured debt

Property transactions usually involve security for debt investments, whereas unsecured equity investments have no collateral fallback. This requires some consideration, particularly within the context of secondary distributions.

3. Longer holding period

Equity investments have longer holding periods compared to debt. Hold times vary, but they can be anywhere from 1-10 years. Investors aiming for a high level of liquidity in their portfolios need to keep this in mind.

Benefits and drawbacks of debt investments


1. Shorter holding period

Debt investments usually have a holding time in the 6-24 month range, but these periods can vary. This is advantageous for investors who do not want their assets tied up long-term and seek access to capital within a shorter time horizon.

2. Secured against the property

The property or promissory notes securing debt investments are like insurance policies for loan repayment. Remember that loans can still default, but even if this were to happen, investors can recoup some of their losses through a foreclosure action.

3. First in line for distributions

Debt investors are at the bottom of the capital stack, meaning they get paid back first when the property is sold. However, it is important to note that if there is foreclosure, debt investors will need to cover some of that cost.

4. Fixed income

Debt investments involve obligatory, steady payouts. Investors usually earn between 3-8% and beyond annually, with monthly (sometimes quarterly) payouts.


1. Higher fees

Debt and equity investments tend to be the antithesis of one other: If equity has lower fees or carries higher risk, it is relative to debt which tends to be the opposite. Most real estate crowdfunding platforms do not charge investors fees for access alone, but participation almost always involves a cost, such as a platform taking a percentage off the topline. This can impact debt investment returns, in particular, due to the nature of these being fixed payments. And as mentioned earlier, there can also be a loan origination fee.

2. Capped returns

Debt investments don’t have many fluctuations regarding returns. For some investors, this is a perk because it provides a fixed income, whereas other investors may be itching to see their returns climb. That is where debt investments do not offer much in the way of variability.

3. Exposure to prepayment risk

Debt investors are susceptible to early amortization. This can happen through higher monthly payments, refinancing, or even selling the property. Any of these scenarios may interrupt cash flow for debt investors. It is essential to know that even debt investments incur risks and deviations.


Part of the beauty of real estate crowdfunding is the optionality it provides. Debt and equity investments are different sides of the same coin. The juxtaposition of their benefits and drawbacks can help investors make informed decisions to optimize their portfolios. The primary disparities between the two methods of crowdfunding covered in this article include holding periods, secured versus unsecured, capped or uncapped returns, distributions, fees, and taxes.

Before making any investment decisions, investors should sort through the dichotomy of debt and equity investments based on their goals by doing their due diligence and studying the available data. By understanding their risk tolerance, analyzing deals closely, and crunching the numbers, investors can decide for themselves whether an equity or debt investment is better in respect of a particular property deal.

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