Crowdfunding is one of the new buzz words to hit the financial services industry and it is now being applied to real estate. Through crowdfunding, investors can pool money together and buy shares of real property like apartment buildings, office buildings and retail centers. Rather than buying the entire property and dealing with the hassles of tenants, toilets and trash, individuals investing through crowdfunding do not deal with any of the day-to-day management of the property.
How is it different than a Real Estate Investment Trust (REIT)?
When investing in a REIT, most investors have little to no information regarding actual properties the REIT invests in and cannot invest in their own backyard. Through crowdfunding, investors can invest in individual properties, allowing for added transparency and control over investment selection and location.
In addition, REITs are such large entities that they can rarely participate in many of the smaller investments crowdfunding opportunities will offer, such as niche retail centers or multi-family buildings with 10, 20 or 40 units.
When you invest in real estate through crowdfunding what do you actually own?
Most often, you will own shares in a Limited Liability Company (LLC). It’s typical for individual properties to be held in sole and separate LLCs and most crowdfunding companies are taking this same approach. Investor monies are pooled into a single purpose LLC and that LLC invests into the property. This provides protections for investors, including a limit of liability, and streamlines the reporting and distribution processes.
When can investors expect distributions?
Timing for distributions will depend entirely on what type of property is being invested in. Some crowdfunding websites are focused on ground up development where distributions should not be expected for 18-24+ months. Other real estate crowdfunding companies, are more forced on cash flow and anticipate providing distributions as early as monthly on some transactions.
One of the great benefits of crowdfunding for real estate is added diversification and insider access to private transactions that were historically limited to the extent of one’s personal network. With the advent of the internet, investors will now have the ability to easily invest across geographies, across property types and across operating partners. While crowdfunding may not be easily applied to every industry, real estate seems to be one industry where it is poised to grow rapidly.