“Crowdfunding” for real estate is, at bottom, just another way of pooling money together from a group of investors in order to make an investment. The distinction now is that the ease of communications made possible by the internet has increased the potential reach of such pools so that they can extend out to investors across the country. It also allows for such investors to participate in larger commercial real estate projects – opportunities that were previously limited to financial institutions or a few very wealthy individuals – at lower minimum investment amounts than were ever before possible.
The Securities and Exchange Commission (SEC) still imposes some limitations on who can make these investments (unless an expensive registration statement is filed with that agency). Most commonly, this means that investors are limited to those who are “accredited,” meaning that they (generally) make over $200,000 in annual income, or have over $1 million in net worth (excluding their primary residence). This group, however, includes about 8 million Americans!
For such accredited investors, a single $100,000 investment into a large commercial real estate project (the minimum that is often otherwise required) might still be beyond their means; but a smaller investment of $10,000 may be quite workable. For these persons, crowdfunding has brought increased accessibility to real estate investment projects that can be reviewed at their convenience -- 24/7 -- from their laptop or tablet computer. It also gives them the ability to customize their real estate portfolios with interests in properties that they choose themselves (as opposed to investing in a “blind pool” portfolio) and to directly monitor those investments once made.
Crowdfunding companies like the one that I co-founded are themselves not generally “operators” of real estate projects, but rather aggregators of these smaller individual investments into a single larger sum that can be invested with companies that do manage the properties. The crowdfunding company also generally “curates” the many potential projects presented to it so that potential investors are shown only those opportunities that meet the company’s own criteria. This “vetting” process might include gaining some comfort level with the project’s sponsoring company, the assumptions it used in projecting the anticipated rates of return, and confirming comparable property valuations.
These real estate opportunities can be of two types:
- Equity investments (like owning shares of an apartment building) that allow investors to share in cash flow from rents and in the property’s appreciation upon its sale.
- Debt investments that relate to loans secured by real estate (similar to a bank making a loan), which produce monthly interest payments at a fixed rate.
Equity investments usually involve a longer investment “hold” period during which funds are tied up, but enable investors to share in the cash flow from rents on a quarterly basis and to share in the “upside” of the property – the amount by which such cash flow exceeds projections, and the amount by which the property’s value upon sale exceeds its purchase price. Debt investments, on the other hand, usually have shorter terms, and allow investors to receive consistent monthly income streams with less volatility & risk, but often offer a more modest rate of return.
The mechanics of making a crowdfunded investment are made quite simple by modern technology. Offering documents can be downloaded directly from the web site, and signatures can be handled electronically through one of several electronic signature services now available. Money transfers can be made directly from a bank account, and later distributions are deposited automatically into that same account.
Real estate crowdfunding sites not only make commercial real estate opportunities available to a much wider investor population -- they also allow for greatly increased investment transparency. They do this on three fundamental levels:
- Full transparency on individual investment opportunities
- Ability to build a customized portfolio of properties
- Ongoing, detailed monitoring of the property portfolio
Real estate crowdfunding sites generally provide access to private syndications of specified properties, and provide the detailed information necessary to make an informed decision about that particular property. This should include summaries of the property, the investment details, a discussion of the project’s sponsoring company, and detailed financial projections. Technology now also allows investors to participate in “webinars,” where they can hear the sponsoring companies present the opportunities directly and thus gain some level of comfort with that project manager.
Crowdfunding can allow investors to themselves diversify their portfolio in three major ways -- in multiple property types, across different geographical areas, and in both debt and equity investments. Investors are thus in a position to control their own portfolio diversification (as opposed to relying on a “blind pool” or a real estate investment trust (REIT)), in a way that permits them to be sure of each component’s fundamentals.
The better crowdfunding companies also allow investors to easily track the various properties in their portfolio. An investment “dashboard” should allow investors to stay abreast of their account value (divided between debt and equity investments), cumulative earnings, and cash and earnings activity. Individual property investments should also be trackable by start date, expected distribution date, and maturity date; earnings or interest payment histories should be broken down to show the date and amount of each such distribution.
The debut of real estate crowdfunding sites now allows accredited investors without pre-existing industry connections to participate in specific real estate projects, and with smaller individual investment amounts, than ever before.
Crowdfunding provides investors with increased power on three fronts – the ability to themselves thoroughly analyze individual investment opportunities, the capability to customize their own diversified portfolios, and a platform with which to monitor those investments on an ongoing basis -- all at the convenience of their laptop or tablet computer. It’s my opinion that the increased control and transparency that crowdfunding sites provide to investors should provide a solid foundation for the further growth of the real estate investment industry.