Are two different investment mindsets two different investment mindsets – one old and the other new – coexist with each other without making each other insane? This is the issue being asked through crowdfunding on the property sector and being answered generally in a positive way. This strange combination of real estate and crowdfunding is combining very well and providing investors a fresh way to increase their investment in the real property market.
The most important takeaways
Crowd funding for real estate projects permits developers to seek out a vast variety of investors making use of social networks through platforms that use technology.
New regulations updated of the JOBS Act affords greater access to crowdfunding for real estate giving individuals access to the huge U.S. real estate market.
One of the major benefits of investing in crowdfunding in real property is that investors are able to put a smaller amount of capital for a one property, often as little as $500 or $1000.
One disadvantage to investing through crowdfunding is that for the vast majority of the projects, you must the status of an investor who is accredited.
Mostly for Richer Investors (For the moment)
In fact, the real-estate crowdfunding website iFunding estimates the total size of the market to be more than $11 trillion! At a recent event for industry professionals at New York City, Markley Roderick an attorney from Flaster/Greenberg PC and the conference moderator, discussed new regulations related with the Jumpstart Our Business Startups (JOBS) Act of 2012. The rules permit mainly wealthy investors (with an income of more than $1 million) to gain entry into the market for real estate by way of crowdfunding or peer-to-peer lending (among other investment options).
As the U.S. Securities and Exchange Commission is looking at ways to allow investors from all income levels to have access to the market for real estate on the internet, Roderick says that wealthier investors are already investing in crowdfunding platforms such as iFunding, Realty Mogul, CrowdStreet and Fundrise. “If only a tiny percentage of investors invest just an amount of their wealth in real property, the market could exceed trillions” Roderick explains. Roderick.
Real Estate Crowdfunding
Crowdfunding uses social networks, such as friends, familymembers, and colleagues that are linked to social media websites such as Facebook, Twitter, and LinkedIn to spread the public aware of a new business and attract an assortment of private investors. Crowdfunding could dramatically increase the pool of investors from which funds can be raised , and it is not limited to those who are typically owners, insiders family members, and venture capitalists. Recent changes to laws regarding who is able to make investments in real estate this manner, and the way they can be done, could be able to participate in greater crowdfunding.
Real estate industry organizations are already jumping on the crowdfunding train, boasting relatively low-risk access to U.S. real estate market. “Crowdfunding in real estate isn’t something new,” the Commercial Real Estate Development Association informs us in a statement issued during the autumn of 2001; “Numerous players have entered the market. While each platform have their own distinct niche and strategy, and has different amounts of investment minimums and a focus on certified investors that have met the criteria for net worth or annual income. However crowdfunding as a result of the JOBS Act will open the market to a wider range of smaller investors.”
What are the advantages and disadvantages to crowdfunding as it relates to investors? In short it boils to risk on both sides, specifically how much information investors would like to learn on the internet. As per the study both real estate developers as well as investors can benefit from substantial profits from crowdfunding and both have the ability to take on a variety of risks.
Pros and Pros and Real Estate Crowdfunding
Pros
Investors have access to the real estate market by investing very little money.
Work directly with real estate developers and management, and be able to participate during the course of the project.
Choose which real estate ventures they would like for their investment.
The ability to access a variety of projects means that choice isn’t an issue.
The smaller investment size is applicable to any one project.
Cons
You must be an U.S. accredited investor at this point.
The risk of default on investments (from real developers of real estate) is higher with crowdfunding than peer-to-peer or direct real estate investment financing.
Lack of liquidity, due to the lack in a second market makes it difficult to sell options for buyers.
The risk of investing is similar to those of every real property investor. If the market falls the investor is likely to lose funds.
How Do I Start?
To begin crowdfunding, Jillienne Helman, chief executive officer of Realty Mogul, advises going with a firm that’s likely to exist for some time.
“First make sure you partner with a crowdfunding firm that will be able to survive,” she says. “That means it is well-capitalized. The thing that scares me is the amount of crowdfunding businesses that are led by two college students who recently graduated from college and who haven’t yet capitalized themselves.”
Darren Powderly, the co-founder of CrowdStreet.com is of the opinion that performing due diligence can be more essential when it comes to real estate than other investments, so it relates to working with a crowdfunding business is concerned. “From the perspective of an investor it is important to investigate the platforms which they’re searching for investment opportunities” adds Powderly. “Not each platform identical, and a variety of business plans are being evaluated in order to profit from this new trend.”
Powderly specifically recommends investors examine the founders and top managers of the crowdfunding company or platform to ensure they have a good reputation which is based on their previous professional experience. “Key experience in finance and real estate as well as technology is vital to ensure an effective and reliable platform” Powderly adds. “Investors should choose platforms that provide exceptional customer service not just during the fundraising process , but as well after the deal has been completely funded and concluded. While there’s more than 50 platforms that are in some form of operation but there are only dozen or so rising as the leaders in the market. Investors should investigate multiple platforms and choose their top Three according to their goals for investment and preference for users’ experience.”
If you decide that you want to put your money into real estate in this manner one of the primary benefits is that you are able to put aside a lesser amount of capital per of your investments that are crowdfunded. You’ll find a range of projects that be as low as $500 or $1,000, which makes the process of diversification simple. Another benefit of choosing this option is that you pay no investment costs, which is in contrast to the extra costs you’d have to cover with typical real estate investing, such as closing costs and commissions from realtors.
Transparency is crucial.
Powderly suggests looking at crowdfunding companies and partners who recognize the risks and offer an educational approach to managing risk. “Most websites for crowdfunding in real estate today allow accredited investors as defined by the SEC in order to put money into the platform,” he says. “Accredited investors should invest in amounts that they feel comfortable with in light of their overall investment portfolio.”
Another suggestion: Only choose to invest in products and services from sponsors that you trust, and you are confident will look to your highest interests both in good and bad times.
“If an investor is unable to comprehend how their money being spent and the risks associated with the investment, and the influences their investment return then they should seek advice of a trusted adviser to their investment or rethink this investment” says Powderly. “There are numerous other investment opportunities to consider and you shouldn’t be pressured into making an investment decision that isn’t well-informed.”
A reputable property crowdfunding website will offer investors a variety of ways to share information about the crowdfunding platform and even make introductions directly to the person who sponsors the specific property listing.
The New Regulatory Environment
The trigger for the introduction of the crowdfunding platform for real estate investment as well as other kinds of business ventures was the passing of the JOBS Act in 2012. Up until recently, the capability to solicit and advertise investors interested in real estate investments was not permitted. It was until the JOBS Act (Title II) drastically changed the manner in which investors can raise capital through the modification of the existing Regulation D rules, specifically the rules regarding how businesses can market the sale of their shares without needing to register their securities in the U.S. Securities and Exchange Commission (SEC).
In the past Regulation D, Rule 506 placed restrictions on fundraising which specifically limited the amount of fundraising to existing relationships, and prohibiting a sponsor or another party from soliciting or advertising these privately-owned investment options. The new rule 506(c) permits issuers, syndicators, sponsors and other parties who seek funds through private investment to market the private investment options to investors who are accredited, subject to certain conditions. The rule took effect on September. 23rd, 2013. The new legislation from the federal government represents significant changes for companies seeking to raise funds for a real property acquisition or development. In essence, Title II gives crowdfunding companies the ability to directly market to a vast number of potential investors through social media as well as the Internet. The legislation also provides an entirely new avenue for investors to be able to gain access to direct investment opportunities.
As Powderly states For the first time in history investors have direct access to a variety of real estate investments that are private that they can peruse as well as research, making an informed decision about investments online.
The Bottom Line
The rise of crowdfunding in the property industry promises to be a revolutionary change. It’s just beginning to take off, but is already attracting huge amounts of attention by serious investors. Although crowdfunding in real estate is a risky proposition but real estate investments can be a great way to diversify your portfolio as well as provide an attractive return. Keep in mind that at present, you must be a registered investment to invest in real estate U.S., but as this market grows in popularity the hope is that it will also become more accessible to ordinary Americans.
