Brunswick, Georgia-based Dr. Kenyon Meadows recalls the first real estate crowdfunding offer he made. He plunked down $10,000 to be part of a $1 million offer to purchase a single family house in Los Angeles. He was very satisfied with the steady returns he got, and he started to enter the realm of major real-estate transactions as an investor. He recalls being intrigued by being able to partake in the same forms of purchases as the bigger players, but with much smaller amounts of money.
He’s not alone in thinking that investing of real estate is a successful and effective investment technique. According to a new report by Massolution, a consultancy and advisory company for crowdfunding businesses, this market is projected to rise to more than $2.5 billion. Real estate crowdfunding shows no sign of slowing, with 118 platforms and counting this year. There will be further growth, with estimates that it would overtake the venture capital market, with investments of $48 million topped back in 2014.
Real estate crowdfunding encourages investors to use technology to make purchases more effective. Real estate crowdfunding companies, in effect, are very open in their deals and are able to share more income with their investors thanks to reduced capital and operating costs.
Dr. Meadows said that another one of his first projects was a fix and flip scheme in a revitalizing area outside of downtown Charlotte. He spent another $10,000 at 12 percent interest as a loan and collected regular interest-only payments before the project was finished and sold 11 months later, returning his initial money. The information provided on the crowdfunding site suited him, including comparable sales, and strongly supported the suggested selling price for the product.
The JOBS Act, passed in 2012, helped him to move things forward by allowing entrepreneurs to receive money from everyday citizens. Investors like Dr. Meadows began to be involved in crowdfunding real estate because of the opportunity to get into ventures that would otherwise require larger sums of money. He said that he saw Jilliene Helman, CEO of Realty Empire on TV. He had some standard private loans for house flipping, and recalls being fascinated by the prospect of investing in similar transactions with even less money by crowdfunding.
Winter Park, Florida-based Dr. Alexander Jungreis also saw crowdfunding as a rare way to participate in bigger real estate ventures. He first learned about it on Wharton Company Radio, then approached William Skelley [CEO of the iFunding Crowd Funding Platform], and he bought into the company several weeks later on.
Investor Lawrence Black was first introduced to crowdfunding by Fundrise. These networks have taught him a lot, and when he first started, he didn’t know anything about this investment path.
To give you an example of how passionate developers are in crowdfunding real estate, Dr. Meadows has so far raised $250,000 on different sites with an estimated ROI of 10%, and Dr. Jungreis has invested $3 million to bring more. Lawrence Black has raised more than $500,000 on Fundrise, and has over $2 million on other channels in which he is heavily associated.
With real estate crowdfunding eventually opening up to non-accredited investors (thanks to Title III of the Work Act passed in October), further players will arise to bid for investors. And if you’re trying to emulate the success of those investors, it’s easy to get started.
Do Your Homework
First, make sure you know what you’re getting into. Black, Jungreis and Meadows all propose that investors practice due diligence. When more platforms are showing up, other businesses are seeking to differentiate themselves from the crowd. For instance, some businesses only work in certain regional areas, categories of assets, and even work with debt deals.
Just because many crowdfunding sites are open about their offers, it doesn’t mean that buyers should be blind going into any deal. Be sure to take a very careful look at the underwriting and understand things like the estimated ROI forecast, how long your money is tied up and the predicted risk for each house. For Dr. Meadows, he wanted to take part in short-term bond transactions because he thought like they were more stable, so he didn’t lock up his money for three or five years, which is a standard timeline for equity.
Take it One Step at a Time
When you’re new to the game, take baby steps and do not rush.
Dr. Meadows was really patient during the initial time when he was only spending a few thousand dollars a month. He prefer to adhere to the investment minimums necessary by every particular project. If you do this slowly, you will do as Dr. Meadows has done – invest in the minimums needed to further mitigate the risk. Dr. Jungreis could not do so, because he had established a friendship with the CEO and invested in the company itself. If you have these kinds of relations, go ahead by all means. But if you don’t, determine how slowly you want to start, particularly if you’ve never invested in real estate before. There are other tools out there to support you, including third party evaluation and compliance records.
Spread the risk
As with all investments, it’s not a smart idea to put all your capital into one form, particularly those that are potentially high risk. Dr. Jungreis acknowledges that crowdfunding is attractive to him so far, but it’s not a big part of his portfolio with just 10% in this form of investment.
For Dr. Meadows, he has around 20% of real estate in his investment portfolio. He is aware that these investment opportunities are new, but a limited allocation is fair and a great way to diversify from stocks and bonds.
If you’re looking to diversify, think of engaging in more than one crowdfunding site and a variety of separate ventures. When you invest in various ventures, you might also consider investing in different properties, such as single-family homes and retail stores.
These three investors are just stories from the millions who have seen traction with crowdfunding real estate. Take the guidance that they have taken into account, and you too will be able to achieve the same amount of success as they have achieved.