Crowdfunding, where a project or venture is financed from a large number of modest individual donations, was once used mostly to help artists, designers, musicians and inventors make their dreams a reality.
However, in recent years it has become something of a buzzword in the real estate sector too, bringing a revolutionary new funding source to the commercial property landscape.
In the aftermath of the 2007-2009 financial crisis the public’s perception of traditional institutions dive-bombed. The scarcity of conventional credit inspired budget business models like pop-up stores and innovative new funding sources like crowdfunding.
Since their launch back in 2009 the world’s most popular crowdfunding site, Kickstarter, has had 10 million people back a project, amassed $2.2bn in pledges and brought 1,000,142 projects to fruition.
And what was once used to support video games, comics and gadgets has come a long way since.
The JOBS Act and equity crowdfunding
In 1933 the U.S. government passed the Securities Act, which banned general solicitation – the advertising of investment opportunities in private companies to the general public.
The aim of this act was to help reduce fraud, but it proved harmful to entrepreneurs, restricting them from accessing potential investors during the worst recession of the 20th century.
This all changed on April 4, 2012 when President Obama passed the JOBS Act, which included two sections relating to crowdfunding, Title II and Title III, to eliminate the restrictions on general solicitation.
After Mary Jo White was sworn in as Chairwoman of the Securities and Exchange Commission she pushed the regulations for Title II through, legalizing equity crowdfunding for accredited investors –and for the first time in more than 80 years start-ups and small businesses were able to raise capital direct from the general public.
However, this was still a difficult process for small businesses as the new regulations required accredited investors to have a net worth – excluding the value of their home – of at least $1 million, and an income of at least $200,000 for the past two years.
After three and half years the Securities and Exchange Commission (SEC) approved Title III in 2015, finalizing the proposed rules and allowing equity crowdfunding for non-accredited investors – in other words allowing everyday citizens the opportunity to invest.
Fresh capital flooded in and crowdfunding for real estate took off in a big way, with hundreds of millions of dollars raised in 2015 alone.
Dan Miller, co-founder and president of real-estate crowdfunding platform Fundrise, says: “The whole industry is changing by allowing non-accredited investors to participate for as little as $100. The excitement for us is giving everyone access to investing in commercial real estate.”
And that brings us to where we are today, where small businesses and real-estate developers can leverage the internet to reach millions of potential investors.
A turn to real estate
Since the early 1990s real estate has proven to be a lucrative investment option, with growth in private equity investment in excess of $100 billion.
And while tech start-ups and community projects are still at the heart of crowdfunding, it’s starting to encompass more traditional, hard-headed investments like real estate.
However, the idea of crowdfunding for property isn’t a completely new concept. Real Estate Investment Trusts (REITs) have long allowed investors to combine their resources to gain access to a larger portfolio of properties.
But the rise of sophisticated online platforms has fast-tracked the process and enabled investors to better evaluate which offer has the best terms and incentives.
According to a study from Massolution, crowdfunding investors were responsible for injecting $1 billion into the U.S. real estate market in 2014.
Richard Swart, Massolution’s research adviser, says the market is “growing beyond expectations. When the JOBS Act passed we didn’t think real estate would be a part of it, but it turns out to be a more efficient way for investors to find good deals across the spectrum.”
Jilliene Helman, founder and CEO at RealtyMogul.com, told CNBC: "I always wanted to provide access to more investors and crowdfunding is a perfect way to do that. You can give access to tens of thousands of investors online."
Transparency and accessibility
Crowdfunding has changed the real estate investment landscape dramatically and the effects have largely been positive.
Previously, it wasn’t unusual for investors to get involved in a deal they knew little about and hope for the best.
However, crowdfunding offers investors detailed information about an investment opportunity, which is often vetted beforehand, and investors can keep track of their holdings online.
It also brought a new level of accessibility to what was once a very closed market, opening up a new asset class to a larger pool of investors and eliminating the premium price tag associated with ‘minimum’ investment.
In 2016, the crowdfunding industry is set to reach the $3.5 billion mark. So long as the economic climate remains benign, it seems that crowdfunding for real estate will only continue to grow, becoming more competitive and fuelling demand as non-accredited investors flood the market.