2015 was the year that crowdfunding in real estate investment really took off. Instead of looking to REITs, investors have been increasing banding together in new ways to crack bigger deals and achieve their dreams.
Even though the notion of crowdfunding in real estate is a very new concept, it’s already raised hundreds of millions of dollars. In 2012, according to Sourceable, only about $2 million were involved in real estate crowdfunding. In 2015, it was well over $2 billion. It’s poised to change the industry as we know it.
But how? What has crowdfunding already done for real estate investment? Would does the future look like? What limitations are there?
First, let’s look at crowdfunding so far.
How Crowdfunding is Changing Real Estate Investment
First in the line of benefits is increasing market access. Not only can investors get their hands into crowdfunding investment opportunities across the country, but the barrier for entry is often a much smaller hurdle. Properties that you would typically demand an investment of hundreds of thousands of dollars are now available with a lower price of admission.
Some may argue that small-time investors who don’t have the capital for large investments or otherwise couldn’t absorb the costs should things go south shouldn’t get involved in these huge investments. But we have to remember: your net worth isn’t an indicator of how savvy you are.
There are plenty of sophisticated, intelligent investors who simply haven’t had the opportunity to test deeper waters.
Regardless, crowdfunding has certainly has increased access to big deals for a lot of people—permitting some investments for as little as $1000.
The crowdfunding model is highly based in transparency, in real estate and beyond it. Rather than relying on sketchy details and infrequent updates, successful crowdfunding campaigns emphasize providing detailed information and frequent updates. After all, these campaigns want to attract quality, dedicated funders. Gaining trust through transparency and communication is a big part of what makes a crowdfunding project work.
Instead of trusting an REIT to invest on their behalf, investors can truly get involved in high-dollar deals; knowing the ins-and-outs of every investment they make. That doesn't mean nor imply that a REIT would be any less transparent, yet emphasizes that crowdfunding has chosen the path of being ultra transparent to build its business model. There is no reliance on traditional, wall street type rules to grow this method of investing.
This is both true and false. For experienced investors, crowdfunding can be a way to get in on larger deals with other people, spreading out and reducing risk. On the other hand, the increased market accessibility means that novice investing who don’t know what they’re doing and don’t have a proper cushion are at an increased risk. If you’re needing to rely on smaller amounts to make the investment in the first place, you may not be able to afford to lose.
For investors who know what they’re doing, however, crowdfunding can be excellent for risk management in the same way that going into a deal with a partner is.
The Future of Crowdfunding in Real Estate
Though crowdfunding for real estate has had a largely positive impact on the industry, it’s not without its snags. While innovation is exciting, it also raises a lot of questions, complications, and risks that weren’t there before.
There are already more than 120 real estate crowdfunding platforms out there. It’s likely more will crop up as crowdfunding continues to grow in popularity—but many of these start-ups won’t last. Time will tell which platforms have a sustainable model. It’s important for any investor looking to crowdfunding to do their due diligence and examine the track records, transparency, and viability of each company before getting involved with their hard-earned money.
We probably won’t know who the real players are until there’s been more time to establish proven success. While many more will likely crop up, other may merge, rearrange, or disappear entirely.
Remember, the definition of real estate crowdfunding, right now, is very diverse. It can encompass everything from peer-to-peer lending opportunities, capital fundraisers for real estate portfolios, equity offers, direct-to-investor private placements, underwritten offerings, and more. Different platforms will cater to different kinds of crowdfunding that will appeal some investors and repel others.
As we’ve seen with new, innovative systems like Uber and AirBnB, the government can be a bit slow to enact regulations and oversight. As it is, real estate investment has been highly regulated. The crowdfunding model, however, pushes many of those boundaries and raises many questions that don’t quite have clear answers. Regulators are going to have to adapt, and adapt quickly if they don’t want to see crowdfunding for real estate turn into a new Wild West.
For real estate investors, the crowdfunding model certainly bears watching: but it also demands caution and due diligence, especially as this method remains in its infancy.
How do you feel about crowdfunding for real estate investments? Share your thoughts in the comments.