What is Real Estate Crowdfunding?
Key Takeaways
Real estate crowdfunding allows individuals to invest in property with as little as $1,000.
There are both equity and debt-based crowdfunding models available to Canadian investors.
It’s crucial to understand regulatory requirements and potential risks before investing.
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According to the Canadian Real Estate Association (CREA), over $300 billion worth of real estate transactions took place in Canada in 2023. While this shows the strength of the market, it also highlights how difficult it can be for the average person to afford direct property ownership.
Rising prices and limited inventory have made traditional real estate investing challenging for many Canadians.
Real estate crowdfunding is changing that by making it possible for individuals to invest in real estate without having to buy an entire property. Instead, people can pool their money together to invest in a property or development project. This creates new opportunities for Canadians to grow their wealth through real estate, even with a modest budget.
Sutton Group Property Management put together this article to explain what real estate crowdfunding is, how it works in Canada, and what you should know before getting involved.
Understanding Real Estate Crowdfunding
Real estate crowdfunding allows multiple investors to collectively fund a real estate project. These projects can range from residential housing developments to commercial buildings.
Rather than needing hundreds of thousands of dollars to buy property on your own, you can invest as little as a few hundred or thousand dollars into a shared project. Understanding all of these details is where partnering with a property management company can help.
Each investor owns a portion of the project. Depending on the structure, you might earn a share of the rental income, interest payments, or a portion of the profits if the property is sold at a higher price. The goal is to make real estate investing accessible to more people, not just those with high net worth.
Crowdfunding can be used for both new developments and existing properties. Sometimes the project may involve building a new condo tower. Other times, it could mean upgrading or managing an existing rental building. Either way, the investment structure allows many individuals to share in the costs and potential returns.
The Mechanics Behind Real Estate Crowdfunding
In Canada, real estate crowdfunding typically falls into two categories: equity-based and debt-based investments.
Equity-based crowdfunding gives you partial ownership in a property or development. As an equity investor, you may earn rental income and share in any future profits if the property is sold.
Debt-based crowdfunding means you are lending money to the developer or property owner. In return, you receive interest payments, but you do not own part of the property.
These investments are usually offered through registered platforms that connect investors with property developers or managers. Each project includes detailed information such as expected returns, investment timelines, risk factors, and financial goals. There are plenty of real estate metrics landlords need to know.
Minimum investments typically range from $1,000 to $5,000. Investors must agree to keep their money in the project for a set period, often three to five years. During this time, returns are distributed based on the project’s performance and structure.
Pros and Cons of Investing Through Real Estate Crowdfunding
Real estate crowdfunding isn’t the right choice for everyone. As with everything, there are pros and cons to it. Here is some of them:
Pros:
Lower entry point.
Passive income.
Diversification.
Transparency.
Cons:
Liquidity issues.
Limited control.
Market risk.
Returns are not guaranteed.
For Canadian investors, another potential downside is the eligibility requirement. Many real estate crowdfunding opportunities are only open to accredited investors, although some provinces allow non-accredited investors to participate under specific exemptions.
Navigating the Legal Landscape of Real Estate Crowdfunding in Canada
Real estate crowdfunding is regulated by provincial securities regulators, including:
Ontario Securities Commission (OSC).
Alberta Securities Commission (ASC).
British Columbia Securities Commission (BCSC).
Each province enforces its own rules, but they work under the framework set by the Canadian Securities Administrators (CSA). To protect investors, the CSA introduced National Instrument 45-110, which governs start-up crowdfunding, including real estate-related ventures.
Most crowdfunding platforms must register as exempt market dealers and follow rules on disclosures, reporting, and investor eligibility. There are several ways for investors to legally participate:
Accredited Investor Exemption.
Offering Memorandum Exemption.
Start-up Crowdfunding Exemption.
Before investing, Canadians should carefully read the legal documents associated with each deal. These documents outline how the investment works, what rights the investor has, and how profits or losses will be distributed.
Tax season considerations are also important. Income from real estate crowdfunding is usually taxed as investment income. This includes interest payments, rental income, and capital gains. Depending on how the investment is structured, you may receive T3, T5, or T5013 slips for your tax return. Always consult a Canadian tax advisor for proper guidance.
Bottom Line
Real estate crowdfunding in Canada provides an accessible way for individuals to invest in the property market. It allows people to diversify their portfolios and earn passive income without taking on the full cost and responsibilities of owning property outright.
By investing alongside others, Canadians can take part in residential and commercial real estate opportunities that were once out of reach.
However, investors must consider the legal regulations, limited liquidity, and market risks before getting involved.
Sutton Group Property Management understands the unique challenges and opportunities of real estate investing in Canada. Whether you’re exploring crowdfunding for the first time or managing an existing real estate portfolio, our team can provide expert advice and services tailored to your needs.
We offer property management solutions, investment insights, and regulatory support to help you succeed in today’s market. Contact us today.