Real Estate Crowdfunding on Track to More than Double in 2015
Three years after equity crowdfunding legislation was signed into law, crowdfunding is rapidly changing the world of real estate investing and capital raising.
Last year, real estate crowdfunding grew 156% to cross the $1 billion mark. This year, it is forecast to grow 2.5 times that to $2.57 billion, making it one of the fastest growing industry segments of crowd capitalism, according to industry research firm Massolution. In 2014, real estate campaigns ranged in size from less than $100,000 to over $25 million. North America ranked as the largest region by funding volume, grabbing a 56% market share.
Since the passage of the Jumpstart our Business Startups (JOBS) Act in 2012, a number of crowdfunding platforms have emerged that allow accredited investors to pool their resources to buy or finance commercial and residential real estate deals. Some platforms now also allow non-accredited investors, or the general public, to take part in deals that are under $5 million.
Last year, real estate crowdfunding grew 156% to cross the $1 billion mark. This year, it is forecast to grow 2.5 times that to $2.57 billion, making it one of the fastest growing industry segments of crowd capitalism
The JOBS Act has opened the doors to real estate deals that used to be marketed solely to ultra-high-net worth individuals or institutions, like endowments and pension funds. Rather than needing millions of dollars to invest upfront, crowdfunding platforms allow accredited investors to participate in deals where minimum required investments can hover around $5,000 or $10,000. This is giving investors expanded access to an asset class that has the potential to be used as an income generator, a hedge against inflation and a portfolio diversifier.
This increased access to real estate is a topic that many crowdfunding portals addressed in the 2015 PENSCO Crowdfunding Report. According to crowdfunding platform Silver Portal Capital, “equity crowdfunding will enable many more accredited investors to own real estate directly, including in their individual retirement accounts (IRAs), as well as diversify their overall holdings.”
By investing through crowdfunding, investors can go a step further when it comes to diversifying their real estate holdings. Lower minimum investment levels allow for investment across multiple property types or regions instead of having to commit to one project.
“On a basic level, creating a portfolio of different projects can spread risk,” according to real estate crowdfunding site LendZoan. “If one project fails, an investor may have several others in place that could succeed.”
Real estate crowdfunding also allows investor to locate viable deals with unprecedented speed and efficiency.
“Compared to traditional banks or lending houses, online marketplaces allow more people to participate in deals, which can shorten the time to reach funding goals,” explains LendZoan.
Currently, crowdfunding for commercial and industrial investments is outpacing demand for residential or multi-family real estate investments, according to Massolution. That could change over time if prospects use crowdfunding as an alternative financing method to get a mortgage to buy a single-family home or as a way to crowdfund a down payment.
“We are only in the first stage of the crowdfunding lifecycle.”
But before participating in real estate crowdfunding, investors must be sure to conduct careful due diligence. Silver Portal recommends considering the following due diligence questions:
- Do the sponsors have deep experience in real estate?
- Is the firm an experienced broker-dealer?
- What types of investments are being offered and do they fit you objectives?
- What is the sponsor’s overall investment philosophy and the breadth of investment opportunities being offered?
The key, according to Silver Portal, is to clearly outline your investment objectives and ensure the crowdfunding sponsor has the track record and demonstrated history to be successful on your behalf.
While real estate crowdfunding is relatively new, there is no doubt that it is gaining traction, and sponsors could quickly move to broaden their offerings from basic debt and equity deals to preferred or mezzanine capital. In the words of Silver Portal Capital: “We are only in the first stage of the crowdfunding lifecycle.”
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