The US commercial real estate market is an $11 trillion dollar. There is no surprise it attracts thousands of investors, but historically, financial barriers to entree have been very high, making it impossible for an average Joe to enjoy the rates of return available for hedge funds and wealthy families. Recent changes in securities laws have changed the situation.
The JOBS Act signed by the President Obama in April, 2012 has freed entrepreneurs, including real estate developers, from certain restrictions allowing them to solicit and raise capital in small amounts from a broad number of individuals. The SEC is still working on finalizing the new rules of the game. This fall we saw two major legal developments: in September, an 80 year-long ban on general solicitation was removed, allowing entrepreneurs openly promote their fundraising efforts. Then in October the SEC voted on the rules for crowdfunding to allow non-accredited investors to participate.
All of this has stimulated the emergence of real estate crowdfunding portals. In 2013 we have witnessed the creation of more than ten websites devoted to promotion of the new vehicle which offers portfolio diversification and access to commercial real estate deals for individual investors as well as project financing for real estate developers.
Main advantages of real estate crowdfunding for investors:
- Minimum investment $1,000 -$10,000
- Individual Investors employ an expertise of a portal’s executive team to vet lucrative investments and to project future returns
- The portals offer new level of transparency and real time information about the properties
- Unlike in REITs, an investor can choose specific properties s/he wants to participate in funding of
- An investor can choose between debt and equity deals
- A passive investment (no hassle of property management)
- An investor is not limited in geography or an asset class for the investments
- An individual mitigates risks by co-investing alongside hundreds of other stakeholders, sometimes including large investment funds
Main advantages of real estate crowdfunding for developers:
- Access to funds from a large pool of geographically diverse investors
- Access to marketing and legal expertise provided by a crowdfunding platform
- Big potential for community oriented projects
While new real estate crowdfunding portals emerge every month, there are many skeptics and opponents of the idea in general.
Here is a list of the most common concerns being spread in media and on real estate forums:
- A portal investors do not have voting rights and will not be able to influence decisions of a property management
- If crowdfunding is the last resort for the project, maybe it’s not a sound investment
- The risk of dilution for a project investors if future capital is needed is too high leaving the initial investors unprotected
- If invested in equity, an individual would have to hold the shares for indefinite period of time because there is no secondary market for this type of securities
- For a developer it would be very time consuming to deal with hundreds of inexperienced shareholders as well as risky in terms of potential lawsuits
For those who are weighting on all pros and cons before getting involved, there is a unique opportunity to get their concerns addressed and questions answered by the founders of six real estate crowdfunding companies who are gathering at Aspen Investment Forum on January 6th-7th, 2014 at the legendary Jerome Hotel in Aspen, CO.
- Realty Mogul is a marketplace for accredited investors to pool money online and purchase shares of pre-vetted investment properties. The minimum investment is $5,000. They have surpassed $8 million in equity and loan transaction during 2013 alone, with real estate holdings including retail, residential, multifamily, mobile homes and hotels all across the nation.
- American Homeowner Preservation generates high-yield distressed mortgage investment opportunities which positively impact families and communities. By purchasing pools of distressed mortgages from banks at substantial discounts, AHP can offer viable solutions for families to stay in their homes. AHP began in 2008 as a 501(c)3 nonprofit and has evolved into a for-profit socially-responsible hedge fund, and has recently added crowdfunding. The minimum investment in AHPs hedge fund was $250,000, and now it is $10,000. The investors can earn 9% for one year investments, 10.2% for two years and 12% for five years.
- GroundBreaker is a white-label crowdfunding solution available to real estate entrepreneurs. The company graduated from Cornell University’s accelerator program and closed eight projects during its beta period. Currently it has offices in San Francisco and New York City. Groundbreaker’s platform automates fundraising administrative tasks. While the projects have specific requirements, they are not curated. Anyone can use the technology if they pass initial barriers. The company’s focus is on the green technologies and engineering innovation. The minimum investment is $1,000.
- iFunding focuses on commercial retail investments that offer stable cash-flow generating opportunities with a single credit tenant. Their goal is to allow investors access to prime real estate investments in an easier, more efficient and transparent manner through the use of superior technology. Investment capital raised through the iFunding is managed through an escrow service provider, allowing investors control their own investment accounts. The minimum investment is $1,000.
- CrowdStreet features both equity and debt investment opportunities, including multifamily, retail, office, industrial and land opportunities. In addition to traditional direct investments, CrowdStreet will feature other structured investment vehicles offered by professional real estate companies, which could include a “basket” of targeted real estate assets. The minimum investment is $5,000.
- ForeFund is a newcomer on crowdfunding market. The portal currently features pre-screened deals in four states and real market data to help make sound real-estate investments.
Other speakers at the Aspen Investing Forum include leaders of the largest online community of business angels Angel List, the second largest peer-to-peer lending marketplace Prosper, the most successful American equity crowdfunding platform CircleUp, and founders of investment/crowdfunding communities from UK, France, Israel, Netherlands and Australia.
Investors interested in attending the forum can take advantage of special early bird pricing through December 6th. In addition, attendees are being offered discounted hotel rooms at up to a 50% discount. To register for the forum, or to learn more about it, visit their website www.AspenInvestmentForum.com.