How to Withdraw From a Real Estate Crowdfunding Platform

Real estate crowdfunding platforms are websites where investors pool their money to invest in either individual real estate deals or private real estate funds, or eREITs. How to withdraw from a real estate crowdfunding platform is a key consideration for investors. These investments require long lock-up periods, ranging from several months to years, lack secondary markets, and levy higher fees and withdrawal penalties than stock trading. Adding to the confusion, each real estate crowdfunding platform has its own withdrawal methods. This article will explain the multiple ways to exit your crowdfunding investment and the pitfalls to consider. 

How to Withdraw From a Real Estate Crowdfunding Platform

The best real estate crowdfunding platforms are transparent and clearly explain how investors get paid back from crowdfunding. The easiest and most cost-effective way to exit a crowdfunding investment is when the individual deal or fund has expired. At that point, typically after several years, investors receive their initial investment plus any capital gains. Occasionally, deals go south and you’ll receive less than your initial investment at the project's end. The best real estate crowdfunding platforms offer early exits from the investment and transparent instructions to withdraw your capital. When available, exiting early from a real estate crowdfunding platform is not guaranteed and usually involves added fees and penalties. 

These are the primary steps to follow when withdrawing from a real estate crowdfunding platform.

Review Your Platform Withdrawal Options

Unlike investing in stocks, bonds, and ETFs, where you place a trade and sell your asset in a matter of minutes, real estate crowdfunding investment proceeds are not readily available. Each platform has distinct lock-up and withdrawal options. Because crowdfunding real estate investments are designed for long-term investors, review the withdrawal options before deploying your capital. 

Projects within one platform might also offer distinct withdrawal options. For example, Fundrise, our best overall Crowdfunding Platform, proposes quarterly distributions, but they aren’t guaranteed, and penalties are typically applied to early withdrawals. Other sites require capital lock-ups from several months to years and don’t have early withdrawal options. Check for lock-ups, penalties, and withdrawal requirements when researching a real estate crowdfunding investment.   

Contact the Platform or Sponsor

Private real estate crowdfunding withdrawals can be complicated, and investors may need to contact customer service for guidance. Although investing online is commonplace, you might prefer to chat with a live representative, when it comes time to cash out. In our survey of 19 real estate crowdfunding platforms, five did not offer live phone representatives. If phone access is important, investigate whether your preferred site provides easy phone contact before you invest.

When preparing to withdraw from your crowdfunding investment platform, there are a few things you can do to be proactive. 

• Many sites offer distinct offers with varying distribution options. Read the documentation for your particular investment offer to understand withdrawal options. Understand any forms needed by the company. 
• Check the Help vertical and Frequently Asked Questions section for withdrawal policies.
• Contact the company with any questions. Contact methods may include phone, live chat, chatbot, and email. It’s wise to check the customer service options before signing up for a real estate crowdfunding platform. 

Understand that withdrawals from a crowdfunding platform will typically take longer than withdrawing funds from an investment brokerage account. 

Consider the Investment Loss

Unlike a savings account, real estate crowdfunding investments have the potential for high returns, but could also incur losses. Losses include early withdrawal penalties or projects whose returns don’t meet expectations and are sold at a loss. The proceeds that you receive might be less than your initial investment. For example, you might invest $1,000, and upon liquidation, your proceeds don’t meet expectations, and your payout is only $800. This is a 20% loss. 

Private real estate crowdfunding investments are considered risky because of the long lock-ups, high fees, and potential for losses. Before investing, investors should conduct their own due diligence and be aware of the potential gains as well as losses.

Evaluate the Tax Implications

Real estate crowdfunding tax implications depend upon how the asset is owned, the type of income received, and the length of your holding period. To understand the tax implications of an investment in a particular platform, use the Help Center or FAQ and ask about the types of tax documents you will receive. The most common crowdfunding tax documents include a K-1, 1099-INT, or 1099-DIV. Upon selling the investment, you might incur a capital gain or loss, both of which must be listed on your tax return.  

A K-1 (form 1065) is an IRS form used in business partnerships to report each partner’s income, deductions, and credits from the partnership for a given tax year. A variety of types of income and expenses are included on the K-1, including ordinary business income, interest income, dividends, royalties, and capital gains. Each of these categories of income has its own tax treatment. The 1099 forms are more commonplace and easier to account for on your tax return. Many investors will need guidance from a tax professional to accurately report crowdfunding income, capital gains, and losses.   

Crowdfunding investments owned within an IRA will eliminate taxes on gains but also lose the tax benefits of losses. 

Complete the Withdrawal Process

The entire withdrawal process can take a week or longer, depending upon the type of withdrawal, i.e. account liquidation at termination of the deal or early withdrawals. Each platform has its own withdrawal options. Throughout the process, discuss the withdrawal procedure with a platform representative to ensure that you comply with the withdrawal protocols. Prepare all required documentation accurately, and on time. Make sure to consult your tax professional to understand the tax consequences of the withdrawal. Also understand that the market conditions when you withdraw can impact your returns and as with any investment, asset values go up and down.  

What Are the Exit Strategies for Real Estate Crowdfunding Investments?

Crowdfunding exit strategies depend upon the platform guidelines. Early redemption and lock-up and periods range from short-term at Groundfloor to several years. The following are examples of potential exit strategies.

• Sale of property: When the property achieves its stated goals and is sold, investors receive their proportion of the proceeds. This typically occurs after one or more years of owning the property. While owned, you may receive distributions from the asset before it is sold. 
• Secondary market: Some crowdfunding platforms maintain a secondary market where investors can buy and sell existing shares before the property is sold. The secondary market cannot usually be guaranteed and investors should not invest based upon an assumption of exiting the investment early. 
• Early redemptions: Some companies, such as Fundrise, offer the potential for early withdrawals. The redemptions aren’t typically guaranteed and may include early withdrawal penalties or fees. 
• Immediate withdrawals: Three of the 19 crowdfunding investment platforms we reviewed offer immediate withdrawals. These platforms are Groundfloor, Lofty.ai, and DLP Capital. Even with an immediate withdrawal option, it might take a week or more to receive your capital. There is no guarantee that your shares will not be redeemed for a loss. 

Hold to Generate Passive Income

A frequent question is “How do you get paid from crowdfunding?” Similar to investing in the public financial markets, income generated from real estate crowdfunding investments is passive. Once you buy the investment, you receive a variety of passive income streams. Dividends, received from rental payments from your crowdfunded equity investments or interest payments from your debt investments, constitute regular cash flow. Once a property is sold, generally after several years, you might receive your initial investment and capital appreciation. 

Refinance

When mortgage interest rates decline or a crowdfunded property is improved, the loan may be refinanced at a lower interest rate. This reduces the interest expense paid by the borrower. As an investor in the project, this will proportionately lower costs, which increases profits. Increased property profits, rents, and capital appreciation ultimately benefit the investor with higher cash flow and a larger payout upon the property’s sale. 

Sale of Property

Many crowdfunding projects buy properties that need updates and renovations, which ultimately improve the real estate’s value. Over time, real estate investments can appreciate in value due to normal economic conditions, increasing investor demand, lower vacancy rates, or other factors. After repairs and updates are made, vacancy rates are reduced, and the lock-up period is reached, it’s likely you’ll receive a profit when the property is sold. As a fractional owner of the property, you will receive a proportion of the capital appreciation along with your initial investment. 

Occasionally, the projections aren’t met and the property is sold at a loss to its original purchase price. When this occurs, you’ll receive less capital than your initial investment. The only benefit of a capital loss, unless owned within an IRA, is to claim the loss on your tax return and potentially reduce your tax obligation. 

Secondary Market

The primary market implies that you’re buying an asset from the initial issuer. For example, you might buy a stock at an IPO, and then sell it in the secondary market on a stock exchange. In crowdfunding, the primary market is buying shares in a crowdfunded real estate deal at the initial offer. If a secondary market exists, you could buy or sell shares in a crowdfunded investment from an existing investor at a market price.

While the stock market is a widely traded secondary market, most real estate crowdfunding platforms don’t offer secondary market trading. That means that after you buy your shares in the project, you own them until the lock-up period ends, unless there are early distribution provisions. Investopedia research hasn’t discovered a secondary market for any of the real estate crowdfunding websites we’ve covered, although Fundrise, EquityMultiple, and Groundfloor offer redemption options that are immediate to less than one year. 

Buyout Offers

A buyout is a financial transaction where one party buys all or the majority of shares in a company or specific project. A buyout offer presents a proposal to the owner, including the price and terms of the offer. A buyout offer might occur when the purchaser believes the asset is undervalued, or that the buyer can create greater profits in the future. 

Real estate crowdfunded buyout offers are rare. An investor might find that the overall crowdfunding platform is presented with a buyout offer from another company. Another buyout offer circumstance might occur when a buyer presents an offer for a specific real estate project. Should these circumstances arise, you’ll need to comb the buyout documents, assess the pros and cons, and decide if accepting the offer makes economic sense for you.

What Are the Disadvantages of Real Estate Crowdfunding?

Investors want to know the risks of real estate crowdfunding. Real estate crowdfunding investments aren’t regulated like publicly traded stocks, bonds, and funds, and they lack ready liquidity. Since crowdfunding is a relatively new investment category, the firms lack the longevity of investment fund providers. It’s much easier to set up a real estate crowdfunding offer than to list a fund or stock on a public exchange. Investors must dissect the offer documents to ensure that they understand the investment and the potential risks and capital loss. This makes real estate crowdfunding more suitable for sophisticated investors.

• Property management risks include unforeseen vacancies and maintenance costs reducing profits. 
• Lack of liquidity means that your money is tied up for several months to years. 
• Lack of regulation in a newer industry means that it's easier for bad actors to slip through the cracks.
• High fees and lack of transparency are commonplace when investing in this industry. 

Illiquidity

Asset liquidity reflects how quickly you can sell an asset and receive the proceeds. A publicly traded stock or ETF can be sold within seconds. The proceeds are cleared or available for reinvestment within three days. Private investments, including real estate crowdfunding assets, are illiquid and cannot be sold immediately. The offer documents for each investment describe how long your money will be locked up or illiquid. Review the offer documents, understand the distribution terms, and realize that there might be circumstances where your money could be tied up for longer periods than expected.

Long Lock-Up Periods

Most real estate crowdfunding investments require a minimum lock-up of three months and a maximum of several years. Long-term projects require lock-ups of seven to 10 years. Although some platforms offer early distribution possibilities, these are not guaranteed. The long lock-up periods are customary for private real estate crowdfunding. A problem of real estate crowdfunding is the inability to access your capital should the need arise. If you think you’ll need your investment capital back soon, this is not the best investment for you. 

Long-term Investment Horizons

Investors with long-term investment horizons seeking to diversify their portfolios beyond typical stocks, bonds, and funds might be appropriate candidates for real estate crowdfunding investing. When you deploy funds into a real estate loan fund or a commercial property equity position, it’s likely that the money will be needed for the term of the loan, or until the commercial property is sold. To gain significant capital growth, appreciation, and return of principal from a real estate investment, use funds that you won’t need within the next few years. Exiting the property before the predetermined end date may be difficult or impossible, and can lead to losses.