Can two different markets in investment – one traditional and one new – get along without making each other crazy?
That’s the main question for crowdfunding and the real estate industry, and one is being addressed in positive ways, as the odd couple seems to team up very well and offer investors a new way to maximize gains from the booming U.S. real estate sector.
iFunding’s real estate crowdfunding site esitmates the combined global market value at $11 trillion.
Markley Roderick, a lawyer with Flaster/Greenberg PC has addressed the legislation linked to the 2012 Jumpstart Our Business Startups (JOBS) Act. The rules allow mostly affluent investors (with a net worth of $1 million or more) to gain direct access to the real estate market through crowdfunding, or peer-to-peer loans (among other markets).
In the U.S, wealthier investors are now investing on crowdfunding platforms such as iFunding, Realty Mogul, CrowdStreet and Fundrise, while the SEC is finding ways to allow investors of all income levels to enter the real estate market online.
If only a small number of them spend a small amount of their assets in real estate, the market would amount to trillions of dollars, Roderick believes.
Crowdfunding and immovable property markets are a natural fit. In a word, crowdfunding makes use of the easy accessibility through social media platforms like Facebook, Twitter, and LinkedIn to large networks of friends, family, and colleagues to get the word out about a new company and to draw investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom to raise funds beyond the traditional circle of owners, relatives and venture capitalists.
Real estate business associations are now jumping on the crowdfunding bandwagon, venturing fairly low-risk access to the U.S. real estate market to wealthy Americans for the time being.
Crowdfunding for real estate is not a totally new trend, according to the Commercial Real Estate Development Association, since numerous players went into the field already. Although each of these platforms have their own niche and strategy, with different levels of minimum investment, they are all geared towards accredited investors who meet specific net worth and/or annual revenue requirements. In comparison, under the JOBS Act, crowdfunding would open the game to even smaller investors.
What are the pros and cons of investor crowdfunding? In a word, both sides are at risk; specifically, how much online investors wish to absorb.
According to the study of the above-mentioned Association, both developers of real estate and investors can produce substantial financial returns through crowdfunding, and both can spread their risks.
- Investors with limited sums of capital get access to the real estate market.
- Investors get to work directly with developers of real estate, and have a say in the process.
- Investors may opt to invest their money in what real estate ventures they want.
- Investors have access to a variety of projects, so choosing isn’t an problem.
- The probability of loss is the same as with any real estate investor. When the economy goes south, it’s possible an investor will lose money.
- Investment default risk (from real estate developers) for crowdfunding is higher compared with peer-to-peer and direct investment in real estate.
- A lack of liquidity, such as the absence of a secondary market, limits easy access for investors to selling opportunities.
To get started with real estate crowdfunding, Realty Mogul’s chief executive Jillienne Helman advises to go with a company that will be around for a while.
First, she advises we collaborate with a crowdfunding organization that will stay. That means being well-capitalised. What scares her is the number of crowdfunding companies out there that are headed by two students who have just graduated from college and are not capitalized themselves.
Darren Powderly, CrowdStreet.com’s co-founder, says doing your due diligence is more important for real estate than for other investments, as far as working with a crowdfunding company goes.
He believes that from the investor’s point of view, one should be careful to study the sites they are searching for investment opportunities on. Not all platforms are created on equal footing, and multiple business plans are being tested to capitalize on this emerging trend. Powderly specifically advises investors to investigate the founders and senior management of the crowdfunding platform or firm to ensure they have a sterling reputation based on past business experience.
To operate a trustworthy and effective network, key industry expertise in banking, real estate, and technology is essential. Investors will gravitate to sites that offer outstanding customer support – not only during the funding process, but also after the deal is completely funded and closed. Despite the fact that some mode of activity includes 50+ platforms, there are just half a dozen or so emerging as leaders. Based on their investment priorities and desired user experience, investors should review various platforms and pick their Top Three.
Transparency is Important
Powderly advises on finding crowdfunding sites and partners that understand the risks while offering a risk management strategy focused on awareness. Many platforms for real estate crowdfunding today only allow accredited investors to invest, as defined by the SEC. Accredited investors are encouraged to invest sums they are comfortable with, considering their total portfolio of assets. Another tip: just invest in deals from sponsors you trust, and whom you trust will work to your best interests in good and bad times.
If an investor does not understand how their money is being used, the investment risk factors, and what factors impact their return on investment, then they will seek their trusted investment adviser’s advice or pass on the investment. There will be plenty of other investment options to choose from, so don’t get pressured into making an uninformed investment decision. A qualified real estate crowdfunding platform will provide investors with sufficient opportunity to consult on the bid, including making introductions directly to the sponsor of the specific property listing.
Is This Doable, and How?
Along with other forms of business projects, the catalyst for introducing crowdfunding for real estate investment was the passage of the JOBS Act in 2012. Until recently there was a limit on the right to advertise and attract investors for real estate investments. The JOBS Act (Title II) dramatically changed the way in which investment capital can be raised by amending existing Regulation D rules, specifically those rules concerning how companies can offer and sell their securities without having to register the latter with the United States SEC.
In the past, Rule 506 of Regulation D imposed limits on fundraising activities, strictly restricting fundraising to pre-existing partnerships only and prohibiting a sponsor or other entity from actively soliciting or advertising such private investment opportunities. The new Rule 506(c) requires issuers, promoters, syndicators, and others who collect private investor capital to advertise, under certain conditions, certain private investment opportunities to accredited investors. The law became effective on 23 Sept. 2013. The new federal law marks a significant shift for supporters raising funds for purchasing or improving immovable property. Title II effectively gives the green light to the direct market of crowdfunding companies to a wide pool of potential investors via social media and the Internet. It has also provided a new way for investors to access direct investment opportunities in real estate more easily.
As Powderly notes, investors have direct access, for the first time ever, to a range of private real estate products that they can browse, study and make well-informed online investment decisions.
Crowdfunding aims to be revolutionary in the real estate industry. It is just beginning, yet generating incredible rates of interest from serious investors already!