New Rules for Real Estate Crowdfunding
Crowdfunding for real estate is a billion-dollar industry.
And guess what…
This creative financing technique will continue to grow thanks to the JOBS Act which has made it possible for qualified investors, like you and I, to participate in real estate investment with this amazing platform thanks to new, lower investment rules.
What the heck is crowdfunding?
It is often hailed the “democratizing” of fundraising because it allows more people to participate.
No more $25,000 a seat, and there are only 100 seats baloney. This is 25,000 people each pitching in $100.
When most people think about crowdfunding, they usually imagine a group of funky artist or philanthropists pooling finances together to back the launch of a super cool new recycled bike, a giant art installation, a company determined to save the planet from alien destruction, or…
Kanye West’s career…
By the way… this is not crowdfunding, this is begging. Don’t do it like Kanye.
“Crowdfunding is a method of collecting many small contributions, by means of an online funding platform, to finance or capitalize a popular enterprise,” said David M. Freedman and Matthew R. Nutting, coauthors of Equity Crowdfunding for Investors, in their publication A Brief History of Crowdfunding.
Here is an over-simplified breakdown of the concept
With traditional fundraising there are few steps between coming up with an idea and producing it, but risks are high:
Idea –> Pitch to banks or investors –> Get funding –> Execute idea
With a creative, non-traditional fundraising concept, like crowdfunding, there are more steps for executing the idea, but the individual risk is less:
Idea –> Set up a crowdfunding initiative –> Reach a funding goal –> Get funding –> Execute idea
(From our Friends at Fundable https://www.fundable.com/crowdfunding101/history-of-crowdfunding) I wonder if my obsession with crowdfunding comes from the fact that I’m of Irish descent!
Crowdfunding is now a major player in the real estate investment sector.
See the last square on the infographic above? The one about President Obama’s JOBS Act? That Act opened the door for real estate investment to participate in the crowdfunding market.
And in just a few short years…
“Across the globe, investors and homebuyers are using crowdfunding as a way to own and profit off of commercial real estate or finance the purchase of their own homes. Real-estate crowdfunding was a $1 billion industry in 2014 and is expected to grow to more than $2.5 billion this year,” said Catherine Clifford, a senior writer at Entrepreneur.com, in her article Real-Estate Crowdfunding Set to Top $2.5 Billion This Year.
(Clifford reports extensively about crowdfunding all sorts of stuff)
Companies offering crowdfunding platforms have jumped on the tidal wave of interested investors.
As a result,
There are over 100 real estate crowdfunding sites today. Some are rock star quality, but many offer poor investor protections, inadequate volume, and or hidden fees. Some aren’t even true crowdfunding sites, but actually real estate broker sites in disguise.
So, you need to be careful.
Or, just listen to me.
Have I ever steered you wrong?
RealtyShares.com is a favorite platform. I’ve invested heavily in this site and encourage you to use it too.
They’ve returned approximately $16 million to the more than 10,000 investors using their platform.
It’s a great way to optimize your investment portfolio AND see how big time investors position and market their deals.
- Minimums as low as $5,000
- Choose and invest in individual properties
- Invest in residential and commercial, debt and equity
- Investor fees are maximum 2% of the invested amount
“Unlike some other crowdfunding platforms, RealtyShares isn’t aimed at the consumer market. Like AngelList, it is focused fully on helping accredited investors easily find opportunities for investment. Its main goal is to reduce the friction between project sponsors and real estate developers looking for capital and investors who are looking to diversify their portfolios,” said Tech Crunch contributor Ryan Lawler in his article RealtyShares Gets $10M From Menlo To Grow Its Platform For Crowdfunding Real Estate Projects
Realty Shares does this by actually doing the underwriting work for outside investors.
Here is how it works…
Investors, such as myself, use Realty Shares as an alternative and modern way to invest the money we are determined to make money on!
On Realty Shares, I pool my money with likeminded investors to buy real estate and I expect the rate of return to be higher, with less risk, than traditional investment strategies.
The returns are pretty darn good.
They vary by each investment project. But, depending on whether the deal is commercial or residential, and figuring in the risk profile and everything you would do on any other investment deal, returns can range from 8% to 20%.
The key is considering the risk.
Large equity development investments might be willing to accept more risk for a greater return.
Smaller investors might accept a lesser return to avoid risk and they might even consider a debt offering.
I said 8% to 20% return rate!
Other notable crowdfunding platforms I’ve found to be reputable include:
- Fund Rise
- Realty Mogul
- Real Crowd
- Ground Breaker
- Peer Street
- Crowd Street
- Patch of Land
Whichever platform you fancy, be sure to do a little investigating to make sure the company fulfills your needs.
Ask yourself questions like:
- What sorts of real estate projects has the platform done?
- How many similar projects have they done?
- How long have they been in business?
- What is the worth of the properties that they currently have under management?
Also be sure to research the market you’re looking to invest in. While the platform should conduct its own due diligence, conducting your own research will help you understand whether the offerings are actually right for you.
Despite being a relatively new investment strategy, Crowdfunding is a hit in the real estate sector.
It “is rapidly reshaping the way individuals find and invest in properties. This shift has brought benefits not only for investors but also for real estate companies and for the real estate market as a whole,” said Clifford.
“In terms of the kinds of investments we currently offer, the choices are far-ranging and varied, with options designed to fit the portfolio of any accredited investor who’s seeking to gain entry into the market. In addition to equity and debt investments involving a range of property types, including office, industrial, retail and hospitality facilities as well as multi-family residential properties, we also feature multiple fund offerings to provide an additional layer of diversity to our investors,” said Nav Athwal, Founder & CEO at RealtyShares.com
Crowdfunding has increased and improved real estate investment access.
With the passage of The JOBS Act, many difficult barriers preventing real estate investors from participating in the business were removed!
Crowdfunding platforms like Realty Shares and the JOBS Act have, actually, fundamentally changed the way property can be purchased.
“Specifically, Title II of the Act eliminated the restriction on general solicitation. For the first time in nearly 80 years, small businesses and start-ups were able to raise capital and advertise their offerings in a much more public way. That concept quickly carried over to the real estate industry and real estate crowdfunding took off with hundreds of millions of dollars raised through crowdfunding for real estate in 2015,” said Athwal, in his December 2015 Forbes article How Crowdfunding Has Changed Real Estate Investing
What is this JOBS Act?
JOBS is a clever little acronym for “Jumpstart Our Business Startups,” and it’s a compilation of six pieces of legislation from the Obama administration aimed at increasing the ability of small businesses to access capital and generate jobs.
Articles II & III were key for real estate investors
Article II focused on access to capital for job creators and Article III focused on crowdfunding. Both impact real estate investment.
“Through crowdfunding, instead of having to rely on connections to pinpoint real estate deals and having to put $100,000 or more into a single deal, investors can access these deals from the convenience of their laptop or tablet… I’ve witnessed firsthand the quick adoption by first time and veteran real estate investors of this new way of investing in a far too familiar asset class. In addition to better access to pre-vetted deals, crowdfunding platforms also make it possible to begin investing with as little as $1,000,” said Athwal.
Lower investment rules
Before the JOBS Act, only accredited investors who had a net worth of $1 million or more or earned $200,000 a year were able to invest through crowdfunding platforms.
Title III allows non-accredited, yet qualified, investors like most of us access to the real estate investing crowdfunding arena on an even playing field as the people sitting on stacks of gold bars –
or accredited Investors.
Other good news about crowdfunding…
It used to be that if you were interested in investing in a property clear across the county you might go into a deal knowing very little about the property in question. You have a basic website, maybe, and the investment’s progress updates might come across your desk once or twice.
Realty Shares and similar crowdfunding platforms generally operate with a goal of providing investors as much detail about an investment as possible. If the platform is any good, property investments should be vetted beforehand and investors should have a wealth of information available to further help make investment decisions.
Private money from outside your three buckets
I’ve said it before and I’ll say it again:
There are 3 “buckets” of potential private money leads…
Bucket #1: The people who know you love you and trust you. Your friends/family/acquaintances
Bucket #2: The people who are already investing in real estate. Like flippers or developers who have cash they’d like to park.
Bucket #3: The people who are already making private loans to real estate investors.
And now, it looks like I need to add a 4th…
New rules of crowdfunding provide a platform to market your deals to a wider segment of private money investors. No longer does your deal have to be restricted to who you know.
Again, if you want to get your hands in this bucket, I have established a partnership with Realty Shares because I believe in their business model, investor protections, and return rates. So much so, that I feel comfortable sharing their services with you.
Here is where you can sign up, just click on the image…
Let me know if you have any questions below.
Have fun. Create value.