Crowdfunding is turning the real estate investment sector on its head: It allows a group of investors to pool their money together to fund real estate transactions. On-line platforms connect individuals to commercial real estate investments across the United States, making it easier for them and real estate companies to raise capital as compared to traditional channels.
According to research published by the Cambridge Judge Business School, investors used U.S. real estate crowdfunding platforms to pour $484 million into real estate projects in 2015. This represents more than three times the amount in 2014. Meanwhile, the U.S. has more than 125 real estate crowdfunding sites, according to Jason Best, a partner at Crowdfund Capital Advisors, who helped conceive the framework for crowdfunding. The JOBS Act and the SEC’s Title III Ruling, which made it legal to solicit investments online, has enabled real estate crowdfunding sites to proliferate. (The JOBS Act allows “non-accredited” investors to back private companies. Before this, to invest in private companies, investors needed to be “accredited,” meaning they had to have at least a $1 million net worth or have earned at least $200,000 for at least two years.)
Investors can now pool their money together with others and finance an acquisition of a multi-million-dollar office building they wouldn’t have been able to do so on their own. They can then reap potential returns from the building’s cash flow or appreciation in its value. There are also platforms to pool money with others to invest in Real Estate Investment Trusts (REITs). For example, RealtyMogul.com’s Mogul REIT invests in a variety of commercial properties nationwide, including multifamily units, and pays its investors cash distributions along with providing them with the potential to participate in capital appreciation. Fundrise’s eREITs and Growth REIT as well as Heartland eREIT also include multifamily assets.
Who’s Joining the Crowd?
A recent real estate study shows that Chinese investors have poured $100 billion in the U.S. residential and commercial real estate market in the last five years, according to The Guardian. This investment in the next five years is set to double. Although no numbers are available, a portion of these dollars from foreign investors is thought to be going into alternative funding options such as real estate crowdfunding.
Millennials with money to invest are also getting in the act. Real estate crowdfunding provides them with an opportunity to help them share the wealth while staying true to their core values. Those saving for retirement are also considering crowdfunding platforms, providing them with an avenue to invest in real estate to gain passive income and tax benefits with just a few clicks on their phone or tablet.
When choosing whether to join the real estate crowdfunding trend, there are certain factors to consider, including choosing the platform carefully. Some may be a better fit than others so research the various platforms out there to identify strengths and weakness. Be sure to review the investments and talk over the details with a financial advisor to vet any potential issues. Also, keep a close eye on liquidity, as real estate has very different liquidity schedules along with unique return profiles for each individual investment. Of course, as with anything, weigh potential returns against the risks in each project.