2023 was a tough year for commercial real estate. The Fed raised the interest rate 11 times and the cost of borrowing money increased tremendously. Commercial developers had a hard time getting reasonable loans. Many developers had to renew commercial loans at a higher rate and this caused a lot of problems for them. The construction cost also increased greatly due to inflation and labor shortages in the construction industry. In addition, the office vacancy rate remained very high. Workers don’t want to go back to the office full-time. Employers responded by closing or compacting offices to save money. As a result, many office building developers are in trouble. One bright spot is the apartment remodeling sector. They seem to be doing okay. They were able to raise rent to compensate for the increasing cost.
Anyway, let’s take a look at my real estate crowdfunding portfolio. In 2023, I had about $118,000 invested in 5 projects – 3 apartments, 1 senior housing fund, and 1 office building. Guess which one didn’t perform very well…
Real estate crowdfunding basics
First, let’s go over the basics of real estate crowdfunding. This is a relatively new way to invest and many investors are not familiar with how it works.
Or you can just skip to the next section to see the performance directly.
It takes a lot of money to invest in a property. When I purchased our duplex, I had to come up with a 25% down payment and get a mortgage for the rest. Also, it’s usually more difficult to get the best mortgage term for an investment property. I collect rent and pay the bank every month. The bank makes money by collecting interest on the money they lend. In real estate crowdfunding, investors lend money to developers so they can acquire a property. They’ll fix it up and sell it.
There are 2 main ways to invest in real estate crowdfunding.
- Equity – A big commercial project costs millions of dollars to acquire. The real estate developer usually can’t come up with all of the down payment so they borrow from investors. Once they have enough for a down payment, they’ll borrow the rest from a bank (like a mortgage.) Investors receive an equity stake for this. Then, the developer improves the property and raises the rent to increase its value. After several years, they’ll put the property on the market and sell it with a big markup. Investors receive a portion of the rental income during the active phase and a big payout after the property is sold. CrowdStreet is the leading platform in this space. They connect investors with seasoned companies who know what they’re doing. The commercial properties on their marketplace are big multimillion-dollar projects.
- Debt – Another way to invest is to lend out the mortgage directly. These projects are usually smaller, under a million dollars. Most of these debt investments fund single-family home flips or small apartments. The investors receive a fixed interest payment every month.
I tried both ways and I like investing in equity projects much more. If the project works out well, the return is way higher. Another reason, I like equity projects more is because the companies usually have more experience. At CrowdStreet, most developers have been in business for over 10 years. The smaller debt loans are usually for small companies without a lot of history.
*Real estate crowdfunding is a relatively new way to invest. I plan to limit my investment to 10% of our net worth. As we all know, the real estate market can crash and we could lose some money (like any investment.) The good thing about real estate investing is the underlying properties still have value. Even if a project fails, we’ll recoup some money.
2023 Real Estate Crowdfunding Performance
Let’s get the bad performer out of the way. The Midwest office project isn’t doing well. This project began in 2001 and was a victim of the COVID pandemic. Construction was delayed due to COVID and worker availability. In 2023, the developer initiated a capital call to help complete the project. I think they had to renew the bridge loan. Some investors didn’t participate in the capital call and the developer had to raise some additional funds from external sources. After the capital call, the developer was uncommunicative and investors were in the dark about the status of the project. Fortunately, it looks like the project just completed the renovation. I saw a news article about it. Hopefully, they can lease some offices and exit this project in 2024. I’m somewhat pessimistic about this project. I just hope we recover most of our investment.
The 3 apartments and 1 senior living fund did well. This is why I like renovation projects. Developers can increase the rent to compensate for rising costs and slow down renovation as needed. There is still a housing shortage in the United States so apartment owners have the advantage.
For comparison, here are the other projects that I participated in. These were completed in the good times, before 2022.
Real estate crowdfunding so far
2023 was a rough year, but I’m generally happy with our real estate crowdfunding investment so far. Most of the projects I invested in generated good profits and I learned from the losses. Real estate crowdfunding helps diversify my investment and generate passive income.
For 2024, I’m not planning to add to our crowdfunding portfolio because my dad is building a house in Thailand. I already sent him some money, but he’ll need more funds soon. We need to clear the plot of land, build a fence, route electricity and water, install a septic system, get permits, and more. It’s nuts. I’ll have to put off investing in crowdfunding for a while. Hopefully, the Midwest office building will exit soon and generate a little profit.
Sign up to invest
If you’re interested in real estate crowdfunding, sign up with CrowdStreet to see the projects on their marketplace. There aren’t too many projects at the beginning of 2024. Real estate developers are still reeling from high interest rates. Things probably will improve after the Fed lowers the interest rate a bit. I recommend holding off on investing in real estate crowdfunding until then.
Other real estate crowdfunding platforms that I work with.
- Fundrise– Non-accredited investors can invest in iREIT here.
*Accredited investor needs to have over $200,000 of income over the last 2 years or has a net worth of over $1,000,000.
*Disclosure. We may receive a referral fee if you sign up with the websites above.
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.