We’ve all heard of crowdfunding or kickstarting—websites that allow people to pool their money to support new innovations and projects like smartwatches, video games, and even potato salad. But crowdfunding as it applies to real estate may not be something that you see every day –although perhaps it will be soon.
What was once a way to get backers for niche ideas has grown into a giant industry. Crowdfunding is huge–and it’s showing no signs of slowing down. It’s even making its way into real estate, with everything from real estate books, to real estate transactions themselves being funded on crowdsourcing websites.
Have an idea for a book? Why not set up your own Kickstarter page to fund the project like this man recently did. Know a great solution? You can set up your own page, like the React Mobile personal safety solution that helps to make home showings safer—or Panda, software for a simple turnkey website solution.
Crowdfunded Real Estate
But while books and tools are great, perhaps the biggest change that crowdfunding is making to the world of real estate is in the form of crowdsourced funding for real estate itself.
Crowdfunded real estate, or equity crowdfunding, operates on the same principles as the type of funding that you see on Kickstarter. But instead of funding French Toast Pancake Waffles, you pool your money to fund the construction of a Manhattan skyscraper, or a luxury home development in Palm Springs.
However there’s one main difference between crowdfunded gadgets and equity crowdfunding: equity. When you back an invention on Kickstarter, you’re not usually expecting much in return other than a small reward. But with crowdsourced equity funding, you’ll be looking for a return on your investment –a share of equity in the real estate project. Many of these projects offer annualized returns that hover around 5 to 20 percent, not too bad as far as investments go. There are risks, of course, that need to be taken into account before investing. But it’s worth noting that out of the more than 500 deals crowdfunded in 2014, so far only 2 percent have become problematic, according to a Massolution report. Of course, these figures will undoubtedly change as more data comes in. The industry, after all, is still relatively young.
Growing in Popularity
According to the Massolution report, there are now 85 active real estate crowdfunding websites in the U.S., with more on the way. Prodigy Network, Realty Mogul, and Fundrise are three main players in the field, with projects ranging from high-rises in New York, to office space in Seattle. There’s also Realty Shares, a platform that’s focused on connecting accredited investors with investments.
The report from Massolution also shows that crowdfunding investors injected $1 billion into the U.S. real estate market last year. By the end of this year, that number is expected to reach $2.5 billion.
“Advances like $100 investments, debt participation and availability to foreigners are contributing to this projected surge,” says Vanessa Grout, a lawyer and real estate advisor who markets and develops high-end real estate for Miami-based CMC Group. “For accredited investors who like the idea of pooling small sums to purchase large properties, crowdfunding is an excellent way to get into the game.”
While it’s not an entirely new concept (largescale investors have been pooling their resources to back real estate ventures for years), what’s new is the fact that investing in equity crowdfunding is becoming more accessible to the masses. Crowdfunded real estate was once limited to accredited investors, meaning that the investor had to have a net worth of more than one million dollars or an annual income of over $200,000 in order to invest, something that only about 7 percent of the U.S. population qualifies for. But following the JOBS (Jumpstart Our Business Startups) Act in 2012, nonaccredited investors are now able to take part in deals that are under $5 million.
Will crowdfunded real estate turn the industry on its head? It’s doubtful. There will always be real estate deals that will take place independently of crowdsourcing. Is crowdfunding the best way to invest your money? We can’t say for sure. Before investing in any project, crowdfunded or otherwise, it’s important to carefully weigh the potential losses and projected returns—and consider your comfort zone when taking on risk. On most real estate equity funding platforms, the investment options include legal documents with detailed risk factors that should be reviewed carefully before taking the plunge.
The facts show that this form of investing is growing, and the full extent of its reach has yet to be seen. Since it’s still relatively early on in the game, and the SEC has yet to finalize regulations on investment crowdfunding, new laws could potentially open the floodgate for even more investment opportunities.
Still, crowdfunded real estate is changing the way that many people are investing and presents another viable option for those who like the idea of owning a tangible piece of real estate, one that will also generate cash-flow. It may not be the right investment option for everyone, but with its low entry point, potential for high returns, and reasonably low level of risk, it’s catching the attention of many.
What are your thoughts on crowdfunding? Have you invested in crowdfunded real estate?
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