Introduction:
Would you like to know more about Real Estate Crowdfunding? Check out this guide to find out more information.
Hi! Welcome! We appreciate your curiosity about our real estate crowdfunding campaign. Crowdfunding is one of the most novel methods of investing in real estate.
Crowdfunding refers to the practice of raising money by soliciting numerous modest contributions from many different people online. By connecting investors and entrepreneurs through widely-available social media and crowdfunding platforms, crowdfunding has the potential to boost the business sector by widening access to finance beyond the realm of business owners, friends, and family.
In crowdfunding, investors can choose from various projects and contribute as little as $10. The most well-known crowdfunding sites include Kickstarter, Indiegogo, and GoFundMe.
Crowdfunding provides many paths for evaluating potentially profitable investment possibilities and allowing qualified investors to fund projects and invest in real estate assets. It is transforming the real estate industry.
The notion is that a vast number of people can each invest a tiny amount, which, when added together, amounts to a substantial sum of money. A modest number of little investments can quickly add to a significant overall investment.
In real estate, this indicates that the person raising funds can raise considerable sums of money outside their traditional sources, including friends and family, institutional capital, or private equity. The idea is to pique people’s interests and persuade them to put their money in something other than their traditional investing options, such as stocks and bonds.
Consequences of Crowdfunded Real Estate Investing
Although crowdfunded real estate investing appears simple, it is relatively tricky. Crowdfunding, at its most basic, is the pooling of a large number of relatively small investors to create significant capital resources.
On the other hand, real estate is a complex industry that you must comprehend. When investing in real estate through crowdfunding, you have several possibilities, so you must be well-versed in them before you invest.
We have put this helpful guide to comprehend real estate investment crowdfunding better. The first section of the tutorial goes through the history of real estate investing and the passage of legislation to legitimize crowdsourced real estate investing.
The second half of the article provides an overview of investing in real estate through crowdfunding, intending to assist you in making good investment selections. It allows you to begin your journey into real estate investing. When combined with a keen understanding of real estate and business, the guide will assist you in identifying and investing in high-quality real estate opportunities.
Real estate has regularly outperformed the stock market in terms of investor returns. While it does not replace stocks and bonds, it is an essential component of a well-diversified portfolio.
For decades, businesses and organizations have realized the value of connecting to a broader network. They saw the need to scale up an operation and bring more finance and knowledge to a venture. According to historians, the “The Longitude Prize” was the first public usage of crowdfunding. In 1714, the British government had a problem and utilized a type of “crowdsourcing” to discover a solution.
The tradition evolved and traveled over the Atlantic with the settlers. Bankers and financiers often sought out investors from the general public in the nineteenth century as they expanded the nation’s railroad network using syndicates, they created to raise money for these projects.
The topic is reported to have been initially mentioned in a 2006 article in Wired magazine by Jeff Howe. Howe describes how the corporations used the power of the public to acquire photographs and scientific insights for niche projects in the article. The phrase refers to a method of raising funds through online investing.
Companies such as GoFundMe, Kickstarter, and others have established an open arena for people to raise funds for new businesses and social causes. In 2018, for example, a legal defense fund received $22 million through crowdsourcing. While precise figures are complex, one source claims that $34 billion has been raised internationally through crowdsourcing.
Crowdfunding has traditionally been used in two contexts: by new businesses trying to launch a product or service and by individuals facing a financial crisis. Many victims of natural disasters, large medical bills, or other unfortunate events like house fires have benefited financially through crowdfunding sites in ways they would never have before.
Recently, crowdfunding sites like Patreon and Substack have broadened the field’s applicability by providing a means for creative professionals to receive ongoing financial support for their work.
Well-Known Crowdfunding Platforms
Crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe draw hundreds of thousands of users each year looking to develop or support the next big thing.
GoFundMe
By 2021, GoFundMe will have raised more money than any other crowdsourcing site. Since its inception in 2010, GoFundMe has attracted more than a hundred million donors and raised over $15 billion.
When trying to raise money for medical bills or losses due to disasters like a house fire, natural disaster, or sudden emergency, most people turn to GoFundMe. New businesses often use Kickstarter.
Another well-liked option is Kickstarter. On May 29, 2022, over $6.6 billion was pledged to over 220,000 projects on Kickstarter. There is no better crowdfunding platform for startups looking to gain exposure and financing than Kickstarter. In contrast to GoFundMe, Kickstarter may only be used to do public projects.
Any project involving “any item claiming to diagnose, cure, treat, or prevent any illness or condition,” political fundraising, drugs or alcohol, contests, coupons, gambling, or raffles will be removed from the site.
Indiegogo was launched in 2008 as a crowdfunding platform dedicated solely to sponsoring independent motion pictures.
The most notable distinction between Indiegogo and Kickstarter is that the former allows backers to choose between a fixed and a flexible funding strategy. Unlike Indiegogo, where the campaigner can only get funding once the goal has been attained, Kickstarter requires backers to wait until the end of the campaign before releasing any funds.
Flex funding (i.e., getting cash as they arrive) might be a less stressful and more manageable option for candidates; nonetheless, candidates are still responsible for fulfilling their campaign commitments regardless of the amount obtained. Fixed money is more alluring to a backer since it involves far less risk.
Platform fees for crowdfunding campaigns are typically between 5% and 12%. Be wary of platforms that charge exorbitant fees before committing to one.
Congress approved the Securities Act of 1933 in 1933. It was created in the 1929 stock market crisis to protect investors. The Act was concerned with securities investments and subjected the seller of a security to a slew of anti-fraud laws and disclosure requirements. According to the Act, investors must have sufficient information to make an investment decision, mainly when selling securities.
Because of the SEC’s regulatory role, companies that wanted to go public by selling securities faced substantial legal fees and paperwork burdens. In simple terms, it meant that all companies, including those formed to develop and improve real estate, had to conduct an IPO if they wanted to advertise to the public.
This directly impacted the real estate business because real estate developers technically sell shares in their company when seeking equity capital. As a result, capital development in the real estate business became a private affair. Real estate investment securities might be sold under the 1933 regulations if the seller had a prior relationship with the investor. If such a partnership existed, a developer would not be required to register with government bodies.
As a result, most real estate investments were conducted inside a small group of individuals or certified organizations.
“The 1933 Act established a world in which real estate developers and syndicators kept a “little black book” with the names of wealthy persons and institutions with whom they had direct contacts and who invested with them.”
The project team would meet privately and present to these possible investors. There was no method for the ordinary person to invest in private real estate because it required personal connections. The investment was not marketable.
What is the definition of Real Estate Crowdfunding?
Real estate investments have historically provided investors with high returns. Since 1971, the average annual return on Real Estate Investment Trusts, or REITs, has been 9.72 percent, according to industry data. Real estate has generally returned 10.71 percent yearly since 2000, while the stock market has returned 5.43 percent.
However, many Americans believe investing in real estate is more complex than investing in stocks. This is because traditionally, real estate investments were more of a closed network than equities and, in particular, mutual funds. The Internet has changed the stock market over the last 20 years, but it has had little impact on real estate investment until recently.
Syndications were once used to pool investor resources in real estate. As SEC Chairman Edward N. Gadsby stated in 1960:
Simply put, “(A real estate syndicate) is just a group of investors who pool their resources to buy a certain piece of real estate.” Until 2012, money was pooled through private investment placement, avoiding the requirement for securities rules and the Securities Act of 1933.
Private real estate syndication has a long and rich history in the United States, benefiting investors and developers. Crowdfunding makes the concept public and transparent. Crowdfunding for real estate expands on Gadsby’s idea of syndication. It publicizes the procedure and opens the process through the Internet and advertising.
“Crowdfunded real estate investing harnesses the power of the Internet and technology to make real estate investment accessible and scalable for private investors, with the potential to dramatically alter real estate investing and the way developers fund individual projects.”
The Jumpstart Our Business Startups Act of 2012
When the 2008 financial crisis hit, Congress and President Obama looked for new strategies to stimulate economic growth. Because small firms have historically been a driving force in the economy, Congress considered legislation lowering the regulatory burden on small investors. Crowdfunding has become an essential topic of discussion.
In 2010, a coalition led by Jenny Kassan of the Sustainable Economies Law Center presented a petition to the SEC that has since become the most frequently discussed petition in the agency’s history, sparking the debate as mentioned earlier.
She said there would be a $100 cap on individual investments in securities offerings of up to $100,000. While her motivation was directed solely toward micro and small enterprises, the real estate industry benefited the most from her efforts.
The group wrote a petition and filed it to the Securities and Exchange Commission, arguing that the Securities Act of 1933 “imposes significant impediments on small enterprises.”
Representatives Patrick McHenry (R-NC) and Eric Cantor (R-VA) were among those who regarded crowdfunding as an innovative method for firms to raise money. The White House and legislators came around to supporting the $1 million and $10,000 limits on crowdfunded ventures.
Discover how the rules that brought us crowdfunding were intended exclusively to finance small businesses but unwittingly opened the door for you to invest in real estate like never before. Listen to the actual discussions while reading the book.
While several bills were introduced, Congress eventually passed the Jumpstart Our Business Startups (JOBS) Act in 2012, directing the Securities and Exchange Commission to rewrite crowdfunding and investment rules. President Obama signed the bill, ushering in a new era of real estate investing.
At the bill signing ceremony, Obama commented, “This package is exactly the kind of bipartisan action we should be doing to boost the economy.”
Accredited vs. Non-Accredited Investors in Crowdfunding
While the law has opened the real estate syndication market to crowdfunded investing, the federal government still supervises critical aspects of the activity, such as the distinction between accredited and non-accredited investors.
“The difference lies in the investor’s financial resources.” Accredited institutions are high-net-worth individuals and institutions, as opposed to a non-accredited investor, who is a single person who does not meet the net-worth and income standards. “
The premise behind the accredited investor is that they are a more experienced and savvy investor who can afford to take on more significant investment risks without jeopardizing their complete financial well-being. An accredited investor generally has a net worth of at least $1 million, not including their primary residence, income exceeding $200,000, or joint income with a spouse exceeding $300,000.
A qualified investor can also be:
- A bank and an insurance firm.
- A registered investment firm.
- A business development firm or a small business investment firm.
- A benefits package for employees.
- A charitable organization, corporation, or partnership that is tax-exempt.
- A company’s director, executive officer, or general partner sells the securities.
- An organization in which all equity owners are accredited, investors.
- A trust has at least $5 million in assets.
Many crowdfunded investments are only available to accredited investors; however, with the passage of the JOBS Act, the Securities and Exchange Commission developed guidelines allowing non-accredited investors to invest in crowdfunded investments, including real estate.
The threshold does impose certain financial constraints on large projects’ capacity to raise considerable funds through crowdsourcing. Before making an investment decision, you must understand the restrictions and various crowdsourced contributions.
SmallChange is a great place to learn more about this because it is one of the few ‘funding portals’ fully regulated as a crowdfunding platform under Regulation C.F. (for crowdfunding) under the 2012 Act.
The Extent of JOBS Act Investments in Various Forms
The Securities and Exchange Commission issued the first new regulations on crowdfunding in 2013, lifting an 80-year ban on public solicitation of investments. The rules quickly became a popular tool to raise capital within the real estate and startup communities, opening up a new avenue for capital flow through the economy.
It’s important to note that Regulation D offers two distinct mechanisms for crowdfunding. Developers can raise an unlimited amount from accredited investors and up to $35 million from “sophisticated” non-accredited investors under Rule 506(b).
Developers can assume the investor’s words of being accredited unless the developer suspects the investor is dishonest. No advertising or general solicitation is allowed, yet an infinite amount of money can be raised.
The other was Rule 506(c), which only applies to accredited investors. The developer or investment company must take reasonable steps to verify that the investor qualifies as an accredited investor, which means that the developer or company raising the money, while technically capable of doing so, will almost always rely on third-party verification of an investor’s status.
W-2s, tax returns, bank and brokerage records, and credit reports are examples of reviewing documents. Under 506(c), a broad solicitation to the public via open advertising on the Internet – and any other means of promotion – is permissible.
Regulation Crowdfunding (Reg C.F.) entered into force in 2016, opening up crowdfunding to non-accredited investors. In theory, the developer or real estate business can seek contributions from an unlimited number of individuals to meet its funding goals, but the amount of money is limited.
The approach is frequently utilized in conjunction with other forms of finance because a developer can only raise $1 million in 12 months.
Furthermore, if they make less than $100,000 annually, non-accredited investors are only allowed to invest 5% of their annual income. Platforms use this code section to give non-accredited investors access to new technology. Reg C.F., while opening up investment to non-accredited investors, has been criticized by some in the real estate industry who argue the $1 million cap is too low because most real estate ventures require significantly more capital.
The final part of the JOBS Act-authorized crowdfunding regulation is known as Regulation A+, which is a type of simplified, expedited, stripped-down IPO. One of the few “funding portals” wholly regulated as a crowdfunding platform under Regulation C.F. (for crowdfunding) under the 2012 Act is SmallChange, which is a fantastic place to learn more about this. Tier two allows the company to raise $50 million, and there are no limits on personal assets.
According to a Securities and Exchange Commission white paper, the real estate business is one of the top industries using Regulation A+ due to the increased usage of the laws by real estate syndicators.
However, given the “risk considerations and valuation issues associated with such instruments, as well as whether further unregistered online REITs enter the Regulation A market,” the agency is doubtful about the continued use of Regulation A+ in crowdfunding.
Is it necessary to be an accredited or unaccredited investor?
Crowdfunding allows both accredited and non-accredited investors to put money into real estate. Some websites have strict requirements for using their platform, such as conducting interviews and requiring financial information before a person can use it. Other media have created investment vehicles for non-accredited investors, with minimum investments as low as $100 or even less.
The new restrictions have revolutionized real estate investing in the United States, and the number of ways for investors to participate in real estate has increased dramatically.
You should take the time to research each platform and assess your alternatives, as there are opportunities for both accredited and non-accredited investors. Investing in real estate is a splendid way to broaden one’s investment horizons beyond the stock market.
Here is a comprehensive list of all real estate crowdfunding platforms.
What Is the Process of Real Estate Crowdfunding?
Like any other investment venture, real estate crowdfunding investment begins with research. Real estate is highly diverse, and the discerning, prudent investor must understand the industry and the various opportunities. Similar to mutual funds, different investment vehicles have been created for the real estate crowd investor.
With the proper research and work, crowdfunded real estate investing has the potential to grow a portfolio and generate wealth. A person can make money and invest it in the burgeoning real estate economy. The challenge for any crowdfunding investor is understanding the real estate market.
First, you must choose an appropriate platform for your financial situation and net worth.
You must find a platform that allows you to participate as an investor, whether you are accredited or not. However, you must exercise caution because many companies have entered the crowdfunding industry, and you must choose a transparent and credible platform.
You wouldn’t want to throw your cash into a poor investment, so the platform you use should give you all the data you need to make a sound decision.
Think carefully about how much you can stand to lose before investing in real estate. Your $500,000 might go a long way toward ensuring the success of many different products. As a result, if you put all your eggs in one basket and that basket goes bust, you could lose all you’ve fought for.
Benefits of Real Estate Crowdfunding
Can the traditional and the modern approaches to investing coexist without sabotaging each other? That’s the big question crowdfunding raises in the real estate industry, and thus far, the responses have been encouraging. Crowdfunding and the real estate industry complement one another well, providing new opportunities for investors to gain a foothold in the lucrative global real estate market.
Crowdfunding for real estate uses online social networks to attract many small investments from many individuals. Individuals now have easier access to the vast U.S. real estate market thanks to new regulations made possible by the JOBS Act of 2012. Crowdfunding for real estate allows people to put money on individual properties, often as little as $500 or $1,000.
A significant drawback of crowdfunding is the requirement of being a qualified investor to participate in most campaigns.
For those considering crowdsourcing as an investment strategy, what should they know about the merits and cons of this method? It boils down to how much information investors are willing to take in online, or risk, on both ends. The analysis finds that crowdfunding is an attractive option for both real estate developers and investors because of the high potential rewards and negligible risk.
Investors can get a foot in the door of the real estate market for relatively modest sums of money, which is one of the many advantages of real estate crowdfunding.
You will have the opportunity to interact directly with building proprietors and managers, giving you a say in the construction and design of your future home.
Openness
The best investment prospects in the United States’ real estate market are no longer determined by a developer’s or real estate professional’s little black book. Previously hidden away, syndication content is now readily available online. You can go over the data and dig deeper if necessary. You can attend even the most closed-door meetings without knowing anyone there.
Crowdfunding platforms require information to be succinct and organized sensibly. The materials are not drafted to please SEC lawyers and regulators.
The best platforms and developers will present you with many opportunities to learn about them and their investing philosophy and value proposition, as well as clearly outline why they need your money and how much you can anticipate returning.
Reduced Need for Substantial Expenditures
The significant initial cash requirement is one of the primary barriers to entry into real estate investing. You can now invest in high-quality real estate with significantly fewer entrance requirements than in the past. Depending on your circumstances, you may opt to invest a decent amount of money.
Unlike with certain other types of investments, you don’t need the services of a broker or investment manager to participate in this market. You can get started in real estate investing with only a few mouse clicks.
Taking in Rent Is Not Necessary
Generally, investing in real estate used to be simplified by purchasing rental homes. The downside is having to deal with tenants and collect rent, despite the potential profitability of the business. Crowdfunded investments eliminate the need for you to go through all that hassle.
In a crowdfunded real estate contract, the property management firm or developer acts as the landlord and collects the rent. There is no need to follow up with tenants about rent payments that are late or to be on the search for fresh, reliable tenants constantly. You are an investor only and have nothing to do with the day-to-day running of rental properties or their management, but you will still benefit from any profits.
Build a Portfolio with a Wide Range of Investments
Diversifying across asset classes with other risk-reward profiles is generally considered desirable with any investment portfolio. The risk-reward profile of real estate is similar to that of other assets (such as equities and bonds). Although the stock market is the go-to for most investors, diversification may be achieved through purchasing real estate. Throughout history, the stock and real estate markets have gone up and down with economic cycles.
Traditionally, real estate investments have been made through a kind of investment known as “direct investment.” It could be a direct purchase of a property or a partnership investment.
You can exercise discretion if you invest in a specific property or project. You are in charge of using an old cliche. As an investor, you have the freedom to direct your funds where you see fit, increasing your opportunity for personal involvement.
When you make a direct investment, you get to decide on the location and kind of the project. Only two examples are a business warehouse in Iowa and an office building in Nevada. Your actions will determine the outcome.
Your investment can have any form you like, and your money can be held there for as long as you want. In a nutshell, if you go this particular route, be prepared to put in a lot of time and effort because you are the one in charge. This route is the optimal choice if you value discretion.
When you invest indirectly, you buy into another person’s endeavor rather than directly into their own. You are passing control over to the person or organization that controls your money.
They may spread their investments around to increase their returns, and they’ll give you all the details you need to verify their due diligence before investing yourself.
Commercial real estate developers are property owners and managers who distribute earnings to their investors. Unlike direct investment, indirect investment in real estate development gives you less input into the project. However, once you’ve invested, you won’t have to worry about the day-to-day operations, which frees up much of your time.
Investing in property in the modern era can be done with a single mouse click. Crowdfunding makes it possible to buy an investment instantaneously. The only tools you need are a computer, a web browser, and a mouse. Within a few hours at most (and often just a few minutes), you can do all of your homework and make your purchase on the Internet.
While the JOBS Act’s streamlined process for transferring capital into real estate investing is a fantastic perk, it should give prospective investors pause before rushing in without doing their homework.
Is It Possible to Make a Profit Through Crowdfunding for Real Estate?
Real estate crowdfunding investors seek a high rate of return to offset the higher levels of risk they assume and the diminished access to their funds. The preferred return varies widely depending on the project you invest in, ranging from 8% (40% of all projects) to 10% (30 percent of all projects).
The returns offered by real estate crowdfunding platforms and independent sponsors should be comparable to those delivered by traditional real estate investment vehicles.
Core and core-plus real estate (big downtown or trophy assets with credit tenants) will generate lesser returns than value-add, opportunistic, or ground-up developments, but they also carry far fewer risks.
In the early phases of recovery, when risk is also thought to be higher (because of memories of the recession) but is not so high (ironically), projected returns are likely to be higher. The longer the cycle goes on, the lower the returns are. PeerStreet and other platforms, for instance, used to give returns of 12-14 percent on their hard money loans until the market cycle prolonged and competition tightened, reducing those rates to 6-9 percent.
How to Participate in a Crowdfunding Offering for Real Estate
Before investing in real estate through a crowdfunding platform, it’s essential to set a budget. The size of your portfolio and your preferred method of diversification should not factor into your final decision.
Of course, you should seek the counsel of a professional investment advisor, lawyer, and accountant for guidance suited to your unique situation.
Minimum investments in real estate crowdfunding are significantly lower than previously, giving you the chance to diversify your portfolio in ways your financial advisor might not have thought of.
Crowdfunding sites that deserve your trust will give you all the facts you need to evaluate the chances they present. You should be able to look at a sponsor’s past performance and future returns projections to determine whether an investment makes sense. After making a purchase, you should receive updated information on the investment to track its performance.
You can also obtain relevant information on external websites and the platform itself. A wide range of groups monitors building and real estate activities in the United States. You may believe purchasing an apartment building in a college town, or an office building in a rapidly expanding area is a wise financial move. The investment strategy must make sense both locally and globally.
Differences in Debt and Equity Real Estate Investment
Choose between a loan or equity position when investing in real estate. While both offer lucrative returns on investment, they are unique in their ways.
When you invest in a development or real estate company and receive stock in return, you become a partial owner of the business.
Pros:
- You will be rewarded with a portion of the company’s after-tax earnings for your efforts.
- Allows for periodic distributions of funds.
- Costs are reduced by as much as 99%.
- The more significant piece of the crowdfunding pie.
Cons:
- You are the second person to be paid out of this transaction.
- There is a greater possibility of loss, but you must be willing to take it.
- Longer investing horizons are the norm.
- Investment in Debt
Debt investments involve lending money to a developer who will use the funds to purchase and renovate a property for resale.
Pros:
- The duration of events is decreasing.
- Person or organization receiving paid before others.
- Less danger.
- Predictableness increases.
Cons:
- Profits are down.
- Commonly, the fees are roughly 2 percent more.
- The rate of interest on a loan determines the rate of return.
Active vs. Passive Real Estate Investment
To begin, you must define your investment goals and objectives. Alternatively, you can take an “active” role in the development process by purchasing land and overseeing construction yourself. You could invest passively using a crowdfunding platform or team up with a seasoned builder. Whether or not you prevail depends on your skills and willingness to take risks.
For example, if you’re a passive investor in real estate, you won’t have to personally guarantee any bank loans, which is a significant risk for active investors. Looking at the negative side, this means your maximum loss will be equal to your initial investment.
Suppose you want to actively participate in the real estate market by purchasing and developing properties on your own. In that case, you should be severe that doing so will likely require you to take on debt and guarantee bank loans, leaving you personally responsible for the repayment of the total loan amount should things not go according to plan.
Investing, Either Straightforwardly or Indirectly in Real Estate
Investing in crowdfunded real estate often falls into two categories: direct and managed, comparable to passive and active investment strategies.
Direct Real Estate Investment
Traditionally, real estate investments have involved making a direct financial commitment. You either join a partnership or buy a property outright when you invest.
When you invest directly, you get to pick the exact property or project you want to back. You might declare that you are in charge now. As an investor, you get to decide where your money goes and can take a more active role in the process.
You get to choose the location and kind of the project you put money into when you select the direct investment route. There are options to choose from, such as an office building in Nevada or Iowa. Everything depends on you.
You get to decide how long your money will be invested and how the investment’s finances will be set up. In short, this choice takes a significant time and money commitment because you are in charge. This is the ideal course of action to take if you value discretion.
Indirect Real Estate Investment
When you invest indirectly, you buy into another person’s venture rather than directly. You are giving up your freedom by surrendering your power to the entity that manages your financial resources.
They will save you the hassle of conducting original due diligence by investing in several sectors to maximize returns. They will also offer you thorough information to check their due-diligence work-product before investing.
Real estate developers specialize in acquiring, developing, and managing real estate in exchange for financial returns for their investors.
Direct investors have a lot more say in how their money is used throughout the construction phase of a real estate project. In contrast, indirect investors have little to no voice in the process but are relieved of day-to-day administration duties once their investment has been made.
Statistics on Real Estate Crowdfunding
Over the next decade, crowdfunding will alter the real estate syndication industry. Hundreds have now used crowdfunding, and more businesses are turning to it to fund their endeavors.
Here are some numbers to consider:
- Expert in online real estate investing, Jilliene Helman projects a tenfold increase in crowdfunding for commercial real estate in the United States over the next five years, from $2 billion to $10 billion.
- It is projected that by 2025, the crowdfunding market will be worth more than $300 billion.
- Crowdfunding for real estate increased by 156 percent in 2014, reaching just over $1 billion. The budgets for these efforts varied widely, from just under $100,000 to well over $25,000,000.
- Funding volume-wise, North America dominated the globe in 2014, accounting for 56% of the global total, while Europe accounted for 42%.
- Among the most rapidly expanding fields for crowdfunding is real estate. Around $3.5 billion was raised through crowdfunding for real estate in 2016.
- According to a report from the industry, crowdfunding for U.S. real estate in 2016 was predicted to be $3.5 billion.
- By 2025, the crowdfunding market is expected to be worth $93 billion, according to the World Bank.
- From the sponsors’ view, real estate crowdfunding has been incredibly successful, with the amount of money raised growing exponentially. Here are three recent cases illustrating the benefits of real estate crowdfunding to both real estate developers and investors.
- In under 17 hours, Origin Investments was able to raise $105.
- J. Jeffers & Co. collected $14 million via real estate crowdfunding from 400 investors in a single webinar.
- In April 2019, Crowdstreet, a crowdfunding platform for real estate, raised $500 million.
Where can I find the most successful real estate crowdfunding campaigns?
Stability is essential for any property investment. Real estate prices have fluctuated dramatically in many U.S. markets, including Phoenix, Miami, Las Vegas, and San Francisco.
Before the crisis of 2008 to 2009, these locations enjoyed large asset appreciations but lost significant value after the catastrophe. As a result, real estate investments in these areas may be riskier and less profitable.
Major cities in the central coastal states, such as Los Angeles and San Francisco in California and New York City and Chicago in Illinois, are attractive to institutional and foreign investors. Institutional investors also prefer other major MSAs (Metropolitan Statistical Areas) like Chicago as ‘gateway’ cities. Cities that attract wealthy investors are typically more stable, see smaller drops in asset values during recessions and bounce back more quickly than other places.
When prices reach end-of-cycle levels, however, investors shift their focus to secondary and tertiary locations in search of better value.
Real estate investments could be investigated in the Midwest, for instance. As an illustration, consider Cleveland, Ohio. According to the Case-Shiller Housing Index, home prices in the city only fell by 7 percent during the 2008-2009 global financial crisis, and they have risen by a healthy 64 percent since 2010.
In contrast, Las Vegas had a drop in home prices of 140% following the crisis and a subsequent rise of 99%. Despite the demise of its manufacturing sector, Ohio ranks only 16th for the cost of doing business, and its unemployment rate has dropped considerably over the past decade.
To what extent should one participate in crowdfunding for real estate?
In terms of overcrowding in the housing market, no set amount would be optimal to invest. While the government limits the total amount that can be raised and invested through crowdfunding sites, it is ultimately up to you to devise the most effective approach.
Many people have become wealthy by investing primarily in real estate, despite the advice of some financial experts that you should only invest 10 to 20 percent of your cash in this way.
When deciding how much to spend, your age and comfort level with taking risks are relevant factors. While real estate has generally been a safe investment with a solid track record of return, there is always the risk of unforeseen repercussions from any given investment or economic shift. For instance, the housing market suffered greatly in the wake of 2008.
Problems with Real Estate Crowdfunding
Individual investors who want exposure to the real estate market are increasingly turning to crowdfunding platforms. During the stock market crash of 2020, publicly traded real estate investment trusts (REITs) fell even farther than equities. To be sure, there are dangers associated with real estate crowdfunding.
The following are some of the most common justifications given for real estate crowdfunding:
- Their agreements yield higher expected rewards relative to risk.
- Crowdfunding assets are less volatile than REITs because they do not move in tandem with the stock market.
- Multi-family, commercial office, debt, and equity investments can all be targeted to certain states and property types.
- The fee is lower than those charged by private real estate funds.
- The commercial and multi-family property markets have outperformed the residential market.
Let us discuss everything one by one.
Risk #1: Due Diligence
Due diligence restrictions are the number one danger of real estate crowdfunding. Many crowdfunding platforms specifically seek out retail investors who lack professional training in commercial real estate or finance.
The problem arises when evaluating a real estate crowdfunding platform deal without this expertise. It’s improbable at best. This means trusting the crowdfunding platform to thoroughly research and analyze each investment opportunity.
Even if you are a real estate investing whiz, you probably won’t know enough about the local market to make informed selections about individual properties. Real estate investors need to focus on a specific city or region to get the best offers. If you live in Dallas but know little about the Denver real estate market, you won’t be allowed to conduct thorough due diligence on a commercial building there.
Risk #2: Money Isn’t Guaranteed
It’s vital to note that most real estate crowdfunding investments are unsecured, so the money would likely be lost if something happened to the platform. Lawyers warn that investors should keep a watch on the changing nature of the security of investments, even if most investors are aware of the risk.
The risk of insolvency for a real estate crowdfunding sites can be mitigated by having a separate bank function as custodian for all funds. If a real estate crowdfunding platform would disappear tomorrow, Pershing, which manages over a trillion dollars in assets, would still be around.
If there are tough times, at least there is an underlying real estate asset to sort out in real estate crowdfunding, which is not the case when lending money to individuals through P2P platforms.
Risk #3: Insufficient Knowledge
Investors should be familiar with the many investment options available in the equities and debt markets and the related risks. If you invest in equity, you stand a greater chance of losing it all than if you were to use debt to finance the same investment.
It is crucial that they fully comprehend the terms of the agreement, including the repayment schedule, method, and total. Take the time to read everything posted on the real estate crowdfunding website.
An integral part of becoming familiar with the details of a deal, according to legal professionals, is deciding whether equity or debt investment is preferable for the particular investor.
You should research online and talk to locals to understand how they feel about things like jobs and economic growth in their location, in addition to reading what is offered on the site.
If you want to learn to invest wisely in real estate through crowdfunding, learn more.
Risk #4: A High Loan-to-Value Ratio is a Danger in Real Estate Crowdfunding
Investors should carefully analyze the loan-to-value ratio and stay away from deals when it is too high. In a market downturn, the risk to an investor’s principal increases proportionally to the loan-to-value ratio. An investor with a 95% LTV would lose all of their money if prices dropped by 5%.
Diversification is the key in real estate through crowdfunding. Minimum investments are often under $5,000, making it far simpler to amass a diversified real estate portfolio.
If you want to buy the median home price in NYC of $1.2M, you’d have to come up with a $240,000 down payment and then take on almost a $1M mortgage! A very high degree of concentration risk exists there. With $240,000, you could quickly build a 20 property real estate crowdfunding portfolio to reduce risk.
Another critical step is determining whether you want to finance a real estate purchase or purchase it with your own money. The upside potential of stocks is more significant, but so is the danger. There is less potential reward from investing in debt and less risk.
Because the JOBS Act of 2012 sparked the industry’s growth, real estate crowdfunding is still a relatively new phenomenon. The government’s best interest is safeguarding citizens against scams and other financial deception. Because of this, increased government oversight is generally favorable.
However, too much government regulation slows innovation and may raise fees for the end investor. My predicted outcome is a more liberal definition of “accredited investor” from the government. More people will be able to take part in real estate crowdfunding deals as a result. But the government might also tighten up on who qualifies as an accredited investor.
Since most real estate crowdfunding platforms are losing money, their operations are vulnerable to closure. Your funds should remain secure even if the venue is shut down. You may rest assured that the platform’s investors will not place a lien on your properties. You are not investing in the real estate crowdfunding platform but individual real estate ventures.
While the overall process of moving investments to a fund administrator is expected to be smooth, investors should expect some disruptions along the way. The coverage teams responsible for following up with sponsors may be reduced.
Make sure you understand what would happen to your funds in the event of the platform’s demise before committing any capital. In addition, investigate the company’s most recent funding round to learn how much time they have until they run out of money.
My suggestion is to find a sponsor or a real estate investment platform that allows investors to deal directly with the sponsor. Therefore, most of the risk associated with the platform is avoided. However, you should investigate the sponsor further.
Crowdfunded real estate investing is revolutionizing the real estate sector. It represents a radical shift in an industry that has seen little innovation in decades. You can use cutting-edge tools to access alternative investment options and see your savings grow.
Crowdfunded investment in real estate projects represents an untapped opportunity for investors, making this a perfect time to grasp as much as possible about the process. You must do the legwork and make an educated decision, but opportunities exist to invest in small and large businesses.
Real estate industry associations are already on the crowdfunding bandwagon, boasting comparatively low-risk access to the U.S. real estate market. “Crowdfunding for real estate is not a new phenomenon,” the Commercial Real Estate Development Association reminded us in a statement published in the fall of 2021; “Numerous participants have entered the industry. Although each of these platforms has its specialty and approach, with varying amounts of minimum commitment, all are oriented toward accredited investors who meet particular standards for net worth or annual income. Contrastingly, crowdsourcing under the JOBS Act will open the field to many smaller investors.”
What are the positives and cons of crowdfunding for investors? It comes down to risk for both sides, specifically, how much information investors want to invest online. According to the survey, real estate developers and investors can reap considerable financial gains through crowdfunding and diversify their risks.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.