July 31, 2015
With the passage of the JOBS Act in late 2012, crowdfunding has caught fire and is being used to raise money for everything from startups to small businesses. In fact, by the end of 2014, crowdfunding, which includes debt, equity, rewards, and donation -based crowdfunding has injected $65 billion into the global economy. By the end of this year, crowdfunders will have injected $2.5 billion into real estate alone.
The secret to its popularity in real estate lies in the fact that it opens the door to a much wider pool of investors. Real estate crowdfunding is an alternative path for those who want to get a toehold in the commercial or residential markets but lack the access or the capital to fund private investments. Crowdfunding also represents a less cumbersome investment option than a REIT, which only adds even more to its appeal. Crowdfunding real estate is a more transparent investment than a traditional REIT; it affords access to a single deal rather than a portfolio of deals and gives the investor supreme flexibility.
So how does it work?
Any time you take on an investment you’re assuming a certain amount of risk and real estate is no exception. That can be especially problematic for investors who are inexperienced in terms of how the market works. With crowdfunding, some of the guesswork is eliminated since all deals are always pre-vetted by the crowdfunding platform.
Each investment undergoes a thorough underwriting process which involves a review of the property itself and its location as well as background and criminal checks for the deal’s sponsors. That means you’re not having to waste time sifting through hundreds of real estate transactions to find out if a potential deal is legit.
In terms of diversification, crowdfunding real estate allows you to add holdings to your portfolio, which is an important part of any long-term investing strategy. If you’re heavily invested in a single security, such as stocks, adding in a real estate component makes it easier to balance out potential losses.
Crowdfunding also increases diversity by removing geographic barriers that might otherwise keep you out of certain real estate markets. Instead of being limited to investing in properties in your local area, you can cash in on upswings in cities across the country.
Why is it game-changing?
Some crowdfunding platforms allow you to get started with as little as $5,000. At others, the minimum jumps to $10,000 but that’s still a far cry from the $50,000 to $100,000 that’s typically required when you’re trying to get in on the ground floor of a private real estate investment. If you’re a newbie to real estate investing or you’re not comfortable locking all of your cash into a single asset, crowdfunding offers much more in terms of flexibility.
Another benefit of crowdfunding is increased transparency, which can be hard to come by when you’re funding traditional real estate ventures. If you’re investing in a REIT, for example, you may have a general idea of what type of assets are included but that’s it. Crowdfunding allows you to see specific details about the properties that are available so you can tailor your investment strategy to fit your comfort level. One of the things we find is that almost every investor on the RealtyShares platforms craves information about the borrowers. We offer as much as possible about their history of investments, investment theses, credit information and more.
They are also a nice hedge against the market, while REITs tend to move in lockstep with the stock market. Of course, REITs offer instant liquidity whereas with crowdfunded real estate you’re locked in until an exit event such as loan maturity or the sale of the property (which can range from six months to seven years).
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