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Are two different investment mindsets – one old and one new – compatible without causing each other to go bonkers?
In the real estate commercial market, crowdfunding poses a key question, and it is one that is mostly being answered positively.
It seems as though crowdfunding and real estate are making quite the pair and providing investors with a new way to leverage investments in the global real estate market.
Key Takeaways
- Developers can use crowdfunding to attract a wide array of potential investors through the use of social media platforms.
- JOBS Act changes allow individuals greater access to the U.S. real estate market through the expansion of real estate crowdfunding.
- Investments in real estate crowdfunding have the biggest advantage of allowing investors to commit much lower amounts of capital to a single project, sometimes as low as $500 or $1,000.
- Investing with crowdfunding has the downside that you have to be accredited for most of these projects.
Mostly for Wealthier Investors
It is estimated that the combined market size is more than $11 trillion on iFunding, a real estate crowdfunding site.
As the conference moderator, Markley Roderick, a lawyer with Flaster/Greenberg PC, gave a presentation on JOBS Act regulations at a recent industry conference in New York City.
In addition to crowdfunding, peer-to-peer lending (among other investment channels) offers direct access to the real estate market to most affluent investors (net worth of $1 million or more).
As the U.S. Securities and Exchange Commission is looking into ways to make investing in real estate easier for investors of all income levels, Roderick says wealthy investors are already investing on crowdfunding sites such as iFunding, Realty Mogul, CrowdStreet, and Fundrise.
The market could be worth trillions of dollars if a small percentage of them invested only a small amount of their assets in real estate, explains Roderick.
Real Estate Crowdfunding
Real Estate Crowdfunding
By using social networks like Facebook, Twitter, and LinkedIn, crowdfunding uses friends, family, and colleagues to spread the word about a new business and to draw investors.
A crowdfunding campaign has the potential to broaden the pool of investors from whom funds can be raised beyond the traditionally narrow circle of insiders, owners, and relatives, as well as venture capitalists.
Modifications to the laws around how and who can buy real estate through crowdfunding have made it easier for more people to do so.
Crowdfunding is already being embraced by the real estate industry, touting the relatively low risk associated with investing in the U.S. real estate market.
In its fall statement, the Commercial Real Estate Development Association reminded us that crowd fund-raising for real estate is not a new phenomenon; at the time, there were multiple players in the field.
There is no standard minimum investment amount for any of these platforms, and all are geared toward accredited investors with specific income and/or net worth requirements.
The JOBS Act, on the other hand, makes crowdfunding much more accessible to smaller investors.”
Is crowdfunding a good investment? What are its pros and cons?
Essentially, it comes down to risk for both sides; specifically, the number of information investors want to take in online.
In the report, real estate investors and developers are able to spread their risks and reap significant returns through crowdfunding.
Pros & Cons of commercial real estate crowdfunding
Benefits
- A small amount of money can get investors into the real estate market.
- Participate directly in the development and management of the real estate.
- Investors have the option of choosing which projects to invest in.
- Myriad projects are available, so choosing isn’t a problem.
- Investments are smaller for any one project.
Drawbacks
- At this time, all investors must be accredited investors in the United States.
- Compared to peer-to-peer and direct real estate investment funding, crowdfunding has a higher default rate (from real estate developers).
- A lack of liquidity, as a consequence of the absence of a secondary market, makes it difficult for investors to sell easily.
- Real estate investors face the same risks as anyone else.
- If a market declines, investors will probably lose money.
How to Get Started in Crowdfunding?
Julienne Helman, chief executive officer at Realty Mogul, suggests going with a company that will be around for a while if you want to start crowdfunding in real estate.
The first step is to partner with a crowdfunding platform that will last. “Well-capitalized means that the company will survive.
There are many crowdfunding companies out there that are run by college students who are not capitalized themselves.” I am concerned by the number of them that are headed up by recent graduates.
Working with a crowdfunding company means doing your due diligence, according to Darren Powderly, co-founder of CrowdStreet.com.
According to Powderly, investors should research the platforms they use when seeking investment opportunities.
“Not every platform is created equal, and many business plans are being tested in order to capitalize on this emerging trend.”
Powderly explicitly advises investors to check the reputation and experience of the founders and senior management of crowdfunding platforms and firms.
“Financial, real estate, and technology knowledge are key to operating a reliable and trusted platform,” he says.
“Investors should focus on platforms that deliver excellent customer service – both during and after the fundraising process.
There are already over 50 platforms operating in some form or another, but there are only a few that are emerging as leaders in the space.
Investors should research multiple platforms and choose their Top Three based on their investment objectives and user experience preferences.”
Investing in real estate in this manner has the main advantage of requiring less capital per investment, which is one of the advantages of crowdfunded investments.
Diversification can be made simple by finding projects that only require $500 or $1,000, making it easy to diversify.
In addition, this method usually doesn’t require investment fees, as opposed to closing costs or realtor commissions that come with traditional real estate investments.
Transparency is Critical
Transparency is Critical
Powderly recommends partnering with crowdfunding platforms and sponsors that provide risk management education while acknowledging the risks.
Most real estate crowdfunding platforms today only allow accredited investors to invest, as defined by the Securities and Exchange Commission.
Taking into account their overall investment portfolio, accredited investors should invest amounts they feel comfortable with.”
You should only invest in offering from sponsors you can trust. Make sure they’ll protect your interests no matter what.
Powderly recommends seeking out the advice of your trusted investment adviser if you do not understand how your money is being used, the risk factors of the investment, and the factors that influence your return on investment.
Don’t rush into making an uninformed investment decision. There will be plenty of other investment opportunities to choose from.”
It is expected that a professional real estate crowdfunding platform will offer investors ample communication opportunities, including direct introductions to sponsors of the specific listing.
A New Regulatory Environment
A number of types of business ventures, including real estate investments, have been made possible thanks to the passage of the JOBS Act in 2012.
Investors in real estate were not able to advertise or solicit investors before recently.
By amending Regulation D, the JOBS Act set a new standard for how investment capital can be raised by companies without registering their securities with the
Security and Exchange Commission (SEC).
The previous Regulation D, Rule 506 prohibited a sponsor or other party from soliciting or advertising private investment opportunities, specifically limiting fundraising efforts to only pre-existing relationships.
Those raising capital from accredited investors under Rule 506(c) can advertise their private-investment opportunities to issuers, sponsors, syndicators, and others under certain conditions.
The rule took effect on September 23, 2013.
As a result of the new federal legislation3, crowdfunding firms now have the option to direct-market to a large pool of potential investors by means of social media and the Internet.
Investors have also been able to access direct real estate investments more easily through this vehicle.
Using this online service, investors can now research, browse, and make informed decisions about private real estate opportunities for the first time.
The Bottom Line
Investing in real estate with crowdfunding promises to be a revolution.
Even though it is just getting started, it has already attracted a large amount of investor interest.
Despite the inherent risk in real estate crowdfunding, investing in real estate can provide you with competitive returns and diversify your portfolio.
It is important to remember that at the moment accredited investors in the United States are still required, but as this market grows, it is expected that it will become more accessible to average Americans.
Learn more through the site The Boo Money
