The typical main street investor lacks more than just capital when it comes to finding lucrative investment opportunities. Institutional and accredited investors hold several advantages over the mainstream. First, accredited investors are legally allowed to receive investment pitches from entrepreneurs or representatives of entrepreneurs looking to sell equities. Second, institutional investors are typically better educated and better connected to find out about interesting investment opportunities, but that’s not always true. In fact, as current investment pitches rules stand, they’re structured to better assist the wealthy in taking advantage of deals and opportunities not readily available to most people. Certainly the barriers, both natural and regulated, exist as a consumer-protection mechanism. However, lack of at least some capital wouldn’t stop most ordinary people from investing in a few opportunities each year, if they were properly presented.
It all sounds fine, but there still exists a large swath of the U.S. population who remain ignorant to many business principles and–worse still–may not understand the intricate nuances of a complex business model with lots of moving cogs. Luckily other more simple forms of investment crowdfunding will–very soon–revolutionize the way main street investors are able to find and invest in meaningful opportunities. Real estate crowdfunding for the general investor is one such opportunity.
Differences in Crowdfunding Types
Before diving into a discussion about real estate crowdfunding, a brief outline of the differences between various Types of crowdfunding in the United States may be helpful.
- Type I: Rewards-based crowdfunding. This type of crowdfunding includes pre-sale sites similar to Kickstarter, Indiegogo or RocketHub. No equities, royalties or returns are promised in return for contributing to the campaign. This type of crowdfunding is used for everything from personal causes to charities and non-profits.
- Type II: Equity crowdfunding for accredited investors. This type of crowdfunding is currently legal and is practices on such sites as EquityNet and Crowdfunder. Title II crowdfunding is also available for real estate investors through sites like RealtyMogul and Fundrise.
- Type III: Equity crowdfunding for mainstream investors. While not yet available thanks to all the hand-wringing in Congress, equity crowdfunding for non-accredited investors will potentially present one of the greatest opportunities for investment returns. Title III crowdfunding has been bumped out indefinitely by the Legislature. The earliest legal access would occur, is sometime in 2015.
Business Equities vs. Real Estate
I like the oft-quoted saying from Steve Jobs: “Simplicity is the ultimate sophistication.” When it comes to individual investing, real estate represents a much simpler investment than most business securities and corporate equities. The nuances and complexities inherent in most business equities don’t translate for the typical main street investor. For most, mutual funds are the best way to ensure a good, safe return.
If a bit more risk is desired, real estate is typically the suggested vehicle, not private startup equities. Real estate, however, differs greatly from traditional business equity. First, it’s generally more easily understood by the layman. Cap rates and ROI are much easier to understand than payroll accruals and complex business models and investment pitches. Second, real estate is generally backed by a hard asset which provides at least some recoup in the event of widespread market drop-out. My personal opinion is that real estate is and will remain one of the better markets available to accredited (and eventually general) investors.
When crowdfunding does eventually expand to Title III (hopefully sooner rather than later), we may see some reported instances of fraud, but I would imagine that more good than ill will come of the law if it’s executed prudently. Creative ways for asset and equity divestment with crowdfunding–not just the startup crowdfunding–will emerge and help fill the financing gap for smaller companies in ways we never would have imagined.