Crowdfunding for real estate has become a hot topic among varieties of investors. Even those with small amounts of money to invest can now invest in high-quality real estate projects that were previously reserved for the wealthiest individuals. Crowdfunding in commercial real estate can be an appealing option for investors looking to broaden their holdings but apprehensive about getting in headfirst.
Commercial real estate is popular because of its ability to withstand downturns in the economy, whether or not it is financed through internet crowdsourcing platforms. That’s what we’re seeing right now. Commercial real estate values have remained stable despite the COVID-19 crisis, unlike the colossal changes in stock or bond markets. This does not mean, however, that commercial real estate will be spared the consequences of the current economic crisis. The long-term prospects for commercial real estate remain generally positive. As a result, those with funds to invest are investigating crowdfunding platforms to see if they can do so.
Recent Developments in Real Estate Crowdfunding
Throughout the past few years, the prevalence of bidding wars has steadily increased. Because of the persistent increase in value, many people who are interested in investing in commercial real estate are being priced out of the greatest offers and opportunities in the market. Especially as more international investors seek to lodge their cash in what is perceived as a reasonably “safe” asset class, many people could not invest on their own, so they changed to real estate crowdfunding platforms and direct investments with real estate sponsors who use crowdsourcing to fund their projects.
Investors have only recently begun to accept real estate crowdfunding as an investment option. Despite the initial skepticism, it is now widely accepted that online crowdfunding may be an effective tool. Particularly for individuals looking to acquire funds for commercial real estate ventures.
It’s only time before real estate crowdfunding continues to grow and change. The following are some of the most important developments we’ll be watching.
First: Institutional Capital
Because of how the platform is set up and the terms of the agreement, a person can participate in real estate crowdfunding by contributing as little as one hundred dollars, and people can learn many things about commercial real estate this way. But it is difficult for individuals trying to raise large amounts of funds for major projects to do it with such small investments.
Thus, accredited investors have emerged as the target of crowdsourcing platforms and funds. Sponsors frequently set a minimum crowdfunding threshold for their deals, such as $50,000 or $100,000.
Institutional investors, such as pension funds and life insurance firms, are now beginning to participate. While crowdfunding was initially leveraged by sponsors seeking smaller sums of finance, sponsors are increasingly discovering that the same technology can be utilized to attract institutional investors in larger projects. Sponsors can now use these networks to raise millions of dollars at once by pitching to institutional investors, who rarely give less than $10 million.
Expect more sponsors to employ crowdfunding to attract many investors, including accredited, non-accredited, and institutional investors. When raising financing, many sponsors begin by securing a significant institutional commitment, for example, $20 million of the $25 million in equity required to finance a project. The sponsor might highlight this big commitment when appealing to additional investors, who would invest smaller sums in reaching the final $5 million requirements. This strategy may become more common. It is because smaller investors often feel better about a business when they know that a great investor has put money into it and believes in it.
Second: More Sponsors Will Crowdfund Their Deals Independently
Sponsors will want to set up their crowdfunding capabilities as crowdfunding grows more popular and successful on internet platforms. Real estate sponsors are increasingly discovering the value of expanding their networks to create a virtually limitless supply of equity capital, even though they are barred by law from recruiting investors outside their close acquaintances and business connections.
At this point, the majority of project sponsors who know how successful online marketing can be have opted to post their projects on crowdfunding platforms. But it’s becoming more and more apparent to sponsors that by making themselves more known online, they can achieve two goals at once:
First, they can make their efforts to raise money on crowdfunding platforms easier. Secondly, they can raise more money directly from their websites as their reputation in the investment community grows.
So far, only a small number of sponsors have realized how important it is to be an early adopter of digital marketing to raise money. However, the potential lies in waiting for these sponsors is a blue ocean. We anticipate that the number of sponsors will increase dramatically as more people become aware that those who do not have a strong web presence will have a considerable advantage when it comes to the capacity to raise funds over those who do.
Third: Specialized eREITs are on the Rise
Many real estate crowdfunding platforms are now offering online “eREITs,” or online, non-traded real estate investment trusts. Similar to publicly-traded REITs, these eREITs operate in the same way. An eREIT model is a good option for investors who want to purchase real estate as a means of diversification rather than as a means of capital gain.
We’ll keep an eye on the leap between specialized eREITs and general, specialized eREIT activities. eREITs offered by Fundrise, for example, are divided into categories based on geographic location (West, East, Heartland) and investment approach (growth, income). We expect this expertise to grow, especially among young investors who want to play a more active role in the investment process. For instance, investors may steer clear of asset types like assisted living or hospitality in the wake of the COVID-19 crisis. You can have more control over your investments if you buy shares in a specialized eREIT.
Fourth: Ongoing Consolidation
An unprecedented number of platforms have emerged in the real estate crowdfunding sector since the JOBS Act of 2012. It permitted non-accredited investors to participate and sponsors to raise money from the general public. Investing was done through a slew of different websites. Not every platform will be around in the long run. Some won’t be able to make it to a long-term enterprise. Several enterprises have already gone out of business. It was a shock to the industry when RealtyShares abruptly shut down in late 2018.
RealtyShares’ demise, on the other hand, was not the result of CRE crowdfunding. It was due to the company’s inability to raise funds rather than crowdfunding real estate syndications is a bad idea. The impact of a real estate downturn, such as the one brought on by the coronavirus outbreak, has always been the industry’s greatest challenge. There is no better way to test a real estate investment premise than the economic cycle. Some platforms and sponsors will likely struggle to weather the storm.
RealtyShares failed due to several factors, including inaccurate economic modeling. Still, we think a slowdown in economic growth will be the main reason for the consolidation of real estate crowdfunding platforms.
Fifth: Enhanced Accessibility for Everyone
Initially, only accredited investors (those with a net worth of at least $1 million or $200,000+ income, minus their primary property) could access deals sponsored through real estate crowdfunding platforms. Regulations CF and A+ of the JOBS Act were allowed to go into effect in 2014, enabling non-accredited investors access. By using Reg A+, sponsors could generate up to $50 million every year by selling shares of their company in so-called “mini-IPOs.” The rise of eREITs, which often have lower initial investment thresholds, was also a result of this.
In equity crowdfunded projects, non-accredited investors can contribute $2,000 per year if their annual income is less than $100,000, and $10,000 per year if their annual income is larger than $100,000.
First, Regulation CF allowed sponsors to raise $1 million per year from anyone who was accredited or not, provided that the raising was handled through a regulated funding portal. Some industry leaders, like the SmallChange website, haven’t been able to reach their full potential because of too much red tape. This has a retarding effect on their rate of growth.
More and more businesses are discovering that they can solicit financial backing from individuals who have not been accredited investors as regulations continue to loosen up.
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