Understanding Real Estate Crowdfunding

Are two different investment mindsets two different investment mindsets – one old and the other fresh – work with one another without driving one another insane? This is the main question being asked through crowdfunding on the property sector and is being addressed generally in a positive way. This strange combination of real estate and crowdfunding is combining very well and providing investors a fresh way to make money from investments in the international real property market.

The most important takeaways

Real estate crowdfunding permits developers to seek out a vast range of investors making use of social networks through platforms for technology.
The new regulations that resulted in 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 to a one property, often as little as 500 or even $1,000.
The only drawback to investing in crowdfunding is that, for the majority of the projects, you must become an approved investor.

Mostly for the Wealthier Investors (For Right Now)

In fact, the real estate crowdfunding website iFunding estimates the total size of the market at over $11 trillion! In a recent conference for the industry at New York City, Markley Roderick an attorney from Flaster/Greenberg PC and the conference moderator, discussed new rules 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).

The U.S. Securities and Exchange Commission is looking at ways to allow investors with all income levels have access to the market for real estate through the web, Roderick says that wealthier investors already invest on crowdfunding websites such as iFunding, Realty Mogul, CrowdStreet and Fundrise. “If just a tiny fraction of investors invest just an amount of their wealth in real property, the market could become trillions in dollars” Roderick says. Roderick.

Real Estate Crowdfunding

Crowdfunding utilizes social networks, such as friends, familymembers, and colleagues that are linked to social media sites like Facebook, Twitter, and LinkedIn to spread the word out about a brand new company and to draw an assortment of private investors. Crowdfunding is a way to dramatically increase the potential 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 the laws regarding who is allowed to make investments in real estate this manner and in what way can they do it have opened the way to increasing the number of crowdfunding.

Real estate industry organizations are already jumping on the crowdfunding wave, promoting an extremely low-risk approach to the U.S. real estate market. “Crowdfunding in real estate isn’t something that is new,” the Commercial Real Estate Development Association informs of us in a press release issued at the end of 2001; “Numerous players have entered the space. While each platform has its own specific niche and strategy, and has different amounts of investment minimums however, they all target certified investors that have met certain criteria for net worth or annual income. However crowdfunding, under the JOBS Act will open the space to more small investors.”

What are the advantages and disadvantages that crowd funding for real estate projects has for investors? In short it boils to risk on both sides, specifically how much information investors are willing to consume on the internet. As per the study both real estate developers as well as investors can benefit from substantial economic benefits from crowdfunding and both can reduce their risk.

Pros and Pros and Real Estate Crowdfunding

Pros

Investors can access the real estate market by investing tiny amounts of money.

Have direct contact with developers of real estate and management, and be able to participate during the course of the project.

They can choose the real estate sector they wish for their investment.

Access to a myriad of projects means that choice isn’t an issue.

Smaller investment amounts in every single project.

Cons

You must be an U.S. accredited investor at the moment.

The risk of default on investments (from real developers of real estate) is higher with crowdfunding as compared to peer-to peer and direct investment in real estate.

Lack of liquidity, due to the lack the existence of an alternative market hinders the easy access to selling 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 to Begin

To begin crowdfunding, Jillienne Helman, chief executive officer of Realty Mogul, advises going with a firm that’s likely be around for a long time.

“First first, you must find an organization that can last,” she says. “That means that it’s well-capitalized. The thing that scares me is the amount of crowdfunding companies which are run by two students who have just 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 crucial when it comes to real estate than other investments, so when working with a crowdfunding business is concerned. “From an investor’s point of view it is important to investigate the platforms which they’re looking for investment opportunities” adds Powderly. “Not each platform identical, and a variety of business plans are currently being tested in order to profit from this new trend.”

Powderly specifically suggests investors look into the founders and the senior managers of the crowdfunding company or platform to ensure they are reputable 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 offer outstanding 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 becoming leaders in this market. Investors should investigate multiple platforms before settling on their top Three according to their investment objectives and preferences for users’ experience.”

When you’ve made the decision to make a real estate investment in this manner one of the major benefits is that you are able to set aside a smaller amount of capital per of your investments that are crowdfunded. There are a variety of projects that be as low as $500 or $1,000, which makes the process of diversification simple. Another advantage of taking this method is that you pay no investment costs, which is in contrast to the extra costs you’d be required to pay for typical real estate investing, such as closing costs and commissions from realtors.

Transparency is crucial.

Powderly suggests looking at crowdfunding companies and partners who acknowledge the risks while offering an educational approach to managing risk. “Most Real estate-related crowdfunding sites today allow accredited investors according to the SEC to make investments,” he says. “Accredited investors should invest in amounts that they feel comfortable with considering their overall portfolio of investments.”

Another suggestion: Only make purchases from companies whom you trust and you believe will be looking at your interests during bad and good times.

“If the investor doesn’t comprehend how their money being spent as well as the risk-reward factors of the investment, or what elements affect their investment return then they should seek out the guidance of a trusted adviser to their investment or rethink an investment” says Powderly. “There are many other investment options to consider and you shouldn’t be pressured into making an investment decision that isn’t well-informed.”

A reputable Real estate crowdfunding site must give investors plenty of opportunities to share information about the crowdfunding platform and even make introductions directly to the person who sponsors the property listed.

The New Regulatory Environment

The reason for the launch of crowd-funding for real estate investment and other types of business ventures was the passing of the JOBS Act in 2012. Up until recently, the capability to solicit and advertise investors to invest in real estate was restricted. It was until the JOBS Act (Title II) drastically changed the manner in which the capital for investment can be raised by altering the existing Regulation D rules, specifically the rules that govern the manner in which companies can offer the sale of their shares without needing to register their securities in the U.S. Securities and Exchange Commission (SEC).

In the past regulations D, Rule 506 placed limitations on fundraising activities which specifically limited the amount of fundraising to existing relationships, as well as preventing sponsors or another party from soliciting or promoting these investments that are private. The new Regulation 506(c) permits issuers, syndicators, sponsors, and other entities that are seeking funds through private investment to promote these private-investment options to investors who are accredited subject to certain conditions. This rule was in effect from September. 23rd, 2013. The new law is significant changes for companies seeking to raise funds for a real property development or acquisition. It basically, Title II gives crowdfunding firms the right to market directly to a huge number of potential investors through social media as well as the Internet. The legislation also provides an opportunity for investors to be able to gain access to direct investment opportunities.

As Powderly says it is the first time in history investors will have access to a variety of real estate investments that are private which they can look through as well as research, making informed investment decisions online.

The Bottom Line

A crowdfunding model in the residential real estate sector promises to be a revolutionary change. It’s only just taking off, but is already attracting huge amounts of attention by serious investors. Although real estate crowdfunding is risky however, it can be a great way to diversify your portfolio as well as provide high returns. Be aware that at present, you’ll need to be a registered investors to invest in real estate U.S., but as the market becomes more well-known there is a chance that it will also become more accessible to the average Americans.