Real Estate Crowdfunding – How It Works


Do you have many ideas which you want to accomplish? Do you wish to see your start-up succeeding?

Maybe you want to invest in property or something else. But you don’t have money. Or you have but you would like to contribute to someone else’s ideas?

What can you do? Here comes crowdfunding.

This is a way to finance your projects or ideas by convincing other people to donate money. Or vice versa – you can become an investor or a member of someone else’s business.

Sounds good?

Real Estate Crowdfunding Evolution

In the US, the real estate market is the biggest sector of the economy, and it shows no signs of slowing down.

Why?

Investing in property is one of the safest options and it offers investors a long-term capital appreciation. The stable housing market in recent years has attracted people’s attention to real estate crowdfunding.

Fact:

Raising money for a property has existed for a long time.

Until 2012, however, it used to be quite restricted and unregulated, which repelled many investors. On April 5, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law. This legislation significantly changed the way people can raise money for a real estate asset. These changes eased securities regulations, in particular for small companies. Title II and Title III part of the Act also legitimized equity crowdfunding.

This is crazy:

Talking about a growing sector, here you can see some interesting statistics showing the development of the crowdfunding industry. In 2015, the total amount of money raised reached $34.5billion compared to $2.7billion back in 2012. In 2015, real estate crowdfunding reached $3.5 billion. Experts predict that the whole crowdfunding sector will have expanded to $300 billion by 2025.

Real Estate Crowdfunding - How It Works

How To Invest In Real Estate Crowdfunding

First of all, to participate in such project, you need to use one of the platforms which deal with crowdfunding.

Do you want to check some of them

Here are the most popular ones – Kickstarter, Crowdfunder, Rockethub and much more. You cannot raise money or become a sponsor on skype or facebook. Approved by the SEC in October 2015, Title III of the JOBS Act went into effect in May 2016.

This means that online platforms should “open” their doors to non-accredited investors. After all, that was the main purpose of this legislation – be accessible and affordable.

But beware:

Despite that, almost all platforms, which you can join are still designed only for accredited investors. These are people who have at least  $1 million in assets or have made more than $200,000in the last three years. The changes in the JOBS Act aimed at making this option more affordable to the masses, but everything needs time.

You Can Start With $1000

If you manage to qualify and can participate, then it gets easier.

Look:

Due to the high number of people, the price of entry is relatively low. Sometimes properties cost hundreds of thousands or even millions of dollars, but crowdfunding gives you the chance to own a piece of this estate for just $1000.

It sounds simple. And it is.

Keep in mind:

Just because you participate in a crowdfunded project, it does not mean you are an owner of this property. It makes you an investor who has shares of a company.

Investing in real estate crowdfunding is not like investing in real estate investment trusts.

What’s the difference?

Investing in REITs means investing in a company managing income-producing real estate. So, you trust a professional manager to invest in whatever they choose, you do not pick up the properties yourself. When joining a project via crowdfunding, you as an investor have the chance to choose which one.

This freedom, however, is not free of risk (Later I will be talking about the risks associated with this investment).  Whereas REITs give you the chance to sell your stocks, a crowdfunded property does not give you this flexibility. You have a “lock in” period and you cannot sell anything.

Types of Real Estate Crowdfunding

Debt Crowdfunding (also known as crowd lending)

This one is really gaining popularity. Let me explain:

Instead of owning the property, the people who like to invest in a project would eventually receive an interest and dividends. Each investor receives shares of the future company, and should the business grow, investors might sell their shares at a higher price.

It’s good to mention that this investment is secured by the property itself. Investors here cannot expect property appreciation because they do not own it, which is a drawback. Also, any change in the interest rate affects on your investment.

Equity Crowdfunding

In this one, the potential investors become owners of the property.

Because of that, they are not secured by the property in case something happens to the company raising money. However, investors can make use of property appreciation, which is a great advantage  (See crowdfunding pros and cons).

Risks Associated with Crowdfunding

Nothing in this world is risk-free, let alone when we talk about investments.

Uncertainty and low liquidity

It’s never certain whether the project will be successfully executed or not.

The period of it might also be a problem. If it’s too long, think twice before putting your money and expecting to make a profit. Keep in mind that many of these investments have problems with liquidity.

Unsecured investment

In addition, the majority of investments in real estate crowdfunding are not secured. That’s why debt-based crowdfunding is the safer option.

Lack of expertise

This is one of the strongest arguments against investing in real estate at all.

If you are not well-acquainted with the sector, how can you decide whether to become an investor in a crowdfunding project? How will you know if this is an attractive offer or not?

Frauds

Since it’s still relatively unregulated area, there are plenty of scammers whose purpose is to trick people into investing in something that is not real.

Rememeber: if you don’t have knowledge in the field, it’s likely your venture will end up quickly and bitterly.

Best Real Estate Crowdfunding Sites

Realty Shares offers investors to join as little as $5000 and boasts diversification, transparency and monthly or quarterly cash flow.

Fundrise requires just $1000 minimum investment and offers short-term investment opportunities.  Bear in mind that only US resident can participate.

Realty Mogul offers potential investors a wide range of commercial real estate. In addition, according to their website, they have a 200-year history and never offer high-risk investments.

Summary

Crowdfunding, notably real estate crowdfunding, is a relatively new area of investing.

For sure, this field has been rapidly developing following all the latest achievements of the so-called Information Age. With all the latest statistics regarding the US real estate market, things look as bright as a July morning.

The economy is performing well and the unemployment rate is a record low. These indicators always promise robust housing market. Perhaps, now it’s the right time to invest in property using crowdfunding.

Play