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Crowdfunding Innovations in Real Estate Investment

Is it possible for the Crowdfunding and Real Estate investment markets, widely different and in differing time-space zones, to work together for mutual benefits? This odd March-December couple seems to be pairing well to enable investors to leverage profits in the booming American real estate market. iFunding estimates the combined market size at around $11 trillion.

A Booming Real Estate Market?

At a recently held conference on Innovations in Real Estate and Crowdfund Investing in NYC, Markley Roderick, the Conference moderator, targeted regulations for the Jumpstart Our Business Startups (JOBS) Act of 2012 to allow affluent investors (net worth > $1 million) to directly access the property market through crowdfunding, or even peer-to-peer investment market lending.

With the U.S. Securities and Exchange Commission examining how to enable investors with varying income levels to deal online in the realty market, richer investors have started investing through crowdfunding sites Realty Mogul, iFunding, Fundrise and CrowdSteet. Even if a tiny fraction of investors invests a miniscule portion of their wealth in real estate, it would generate trillions of dollars.

Crowdfunding in Real Estate

Real estate markets and crowdfunding work well together as easy access to vast social media platforms like LinkedIn, Facebook and Twitter with huge networks of friends, family, and colleagues, to secure new business and attract investors. Crowdfunding enhances entrepreneurship by enlarging the investor pool to raise funds beyond the traditional groups of relatives, owners and venture capitalists. Realty industry groups are active on the crowdfunding platform, touting a low-risk approach to the real estate market for wealthier American buyers.

Purchasing real estate through crowdfunding is not an entirely new phenomenon. Many players have entered with their own strategy platforms, with varying minimum investments, all geared towards accredited investors meeting certain requirements for annual income and/or net worth. But crowdfunding under JOBS Act opens investments to many smaller investors.

Crowdfunding Pros and Cons

Assessment of risks for both sides is critical, especially how much risk investors can absorb online. Both investors and real estate developers can gain significant financial returns through crowdfunding, as both could share the risks.

The Pros

  • Investors access the property market with lesser capital.
  • Investors deal directly with developers, with a say in the process and working.
  • Investors choose the real estate projects in which to invest funds.
  • Investors can access myriad projects, as choice is not a problem.

The Cons

  • Investment risks are pretty much the same for real estate investors. If the market tanks, investors could lose money.
  • Investment defaults risk is higher when crowdfunding as compared to peer-to-peer or direct realty investment funding.
  • Liquidity is low as  the lack of a secondary market confines vending opportunities for investors.

Getting Started

To start with real estate crowdfunding, select a well-capitalized firm that has been around for some time and which will survive the odds. Exercising due diligence is essential for real estate, more so than any other investment in crowdfunding.

An investor must research all platforms where they seek investment opportunities, as all are not created equal with multiple business plans being tested to capitalize on market opportunities. Founders /senior management of crowdfunding firms must have a genuine reputation with sound business experience in finance, IT and real estate and excellent customer experience during fund-raising and after closure.

Transparency Remains Critical

Crowdfunding platforms and sponsors which acknowledge risks and provide education-based method to risk management, must be preferred. Most of the realty crowdfunding platforms allow accredited investors, as demarcated by the SEC, to participate. Investors who are accredited are advised to spend their funds as they deem fit, as per their investment portfolio. Only finance offerings from sponsors who you can trust, and are confident of protecting your best interests at all times.

A new investor should consult a trusted investment consultant, or wait for investment opportunities rather than making an uninformed investment decision. A good crowdfunding platform provides investors with opportunities to communicate directly with sponsors of specific property listings.

How Is This Feasible?

The catalyst was the passage of the JOBS Act in 2012 for crowdfunding in real estate ventures, along with other business ventures, as the ability to promote and solicit investors for land and realty investments was earlier controlled. The JOBS Act radically changed how investment capital was raised by modifying the Regulation D rules for registering sales with the U.S. Securities and Exchange Commission (SEC).

Amended Rule 506(c) lets sponsors, syndicators, issuers and others raising capital from private/individual investors to advertise opportunities to recognized investors with certain conditions, with effect from 23rd September 2013. The new central legislation encourages sponsors to raise funds for real estate purchase or development. Investors can analyze, research, and then make informed decisions about online investments.

Crowdfunding in the property market will be a revolution which may just have taken off, but attracts serious interest from serial investors.

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