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Crowdfunding Real Estate: How to Raise Money through the Crowd

by Ankit Duggal on April 8, 2013 · 41 comments

  
Crowdfunding Real Estate

The Statute of Liberty was not funded by the US government! Shocking isn’t it?  The Statute of Liberty is the  beacon of crowdfunding success as the statute was erected through contributions from the citizens of France and the United States.

Crowd Funding is an old concept that dates backs to 3,000 B.C. The raising of capital from a crowd via an online  portal started a few years back with Kiva.com and a revolution of crowd funding started taking hold which is full swing within the startup world today. I started thinking of how this could apply to the hurdle of raising money from private capital investors that seems to hold back most investors from advanced strategies of commercial, multifamily and buy & hold investing.

What is Crowd Funding

Crowd funding is taking the power of the crowd to raise capital (debt and equity) in exchange for equity ownership.   Mohammed Yunis, the father of microfinance,  laid the foundation for crowdfunded investments. Microfinance focuses on small loans, typically in the $ 300 to $ 500 range, to entrepreneurs (mainly women) in the developing world. The core tenets of microfinance and crowdfund investing are similar: Both systems are about getting capital in the hands of people who have trouble raising it via traditional means, so those people can start and grow their businesses. Out of microfinance and Kiva sprouted donation- and perks-based crowdfunding websites.

How is this Legal

Title III of the JOBS Act, creates the opportunity for  crowdfund investing by using the term emerging growth companies (EGCs) to refer to entities that are most likely to utilize this form of financing. ECG helps  make crowd funding investing a real possibility. Prior to the passage of the JOBS Act, accredited investors (people with high net worths and/ or incomes greater than $250,000) often were the only ones who could invest in private debt or equity transactions. One of the biggest changes the JOBS Act created was lifting the restriction on soliciting unaccredited investors to purchase stock. This means that companies that use  crowdfund investing to raise capital are legally able to solicit people of all net worths and income levels to purchase their shares.

Who Are You Allowed to Solicit

The JOBS Act allows you the following maxims when it comes to soliciting for investments online:

  • The maximum dollars a business or entrepreneur can seek via crowdfund investing, which is $ 1 million per year
  • The maximum amount an individual can invest via crowd funded ventures in a year, which may be a flat $ 2,000, or 10 percent of the individual’s annual income or net worth.

The intent of JOBS Act is that if you want to raise money to start or grow a business, you can do so by soliciting funds from people who know you via an online portal. The act’s maxims are still being  codified into regulations by the SEC so be careful to not jump the gun in terms of approaching these investors as these maxims may change once the regulation comes into reality by SEC.

Real Estate Crowdfunding Portals

Crowdfunding portals have evolved for all business segments and purposes. The most popular online portals are Kickstarter.com, Indiego.com, and GoFundMe.com but online portals for real estate were slow to come out. Over the past 24 months, online portals for real estate funding have started to make it into the limelight. I have been researching on these portals and found two portals  that I believe are worth your consideration:

  • Realty Mogul: Realty Mogul is a marketplace for accredited investors to pool money online and buy shares of pre-vetted investment properties. Realty Mogul is crowdfunding for real estate. Realty Mogul vision is to make real estate investing simple. Forget the hassles of tenants, toilets and trash (Just a side note: they believe in my form of investing No Toilet, Tenant and Headaches“) and provide more investors with insider access to passive real estate investments they would historically not know about.  Learn about Realty Mogul 
  • Fundrise: Fundrise is the leading investment platform for commercial real estate. Operating in the top major metropolitan markets, Fundrise gives individuals the ability to invest directly in local properties without the unnecessary fees and middlemen of conventional real estate equity finance. With Fundrise, people now have the power to earn financial returns while building the city they want to live in. Learn more about Fundrise.

Crowdfunding portals can be a great way to raise capital for your deals  as real estate investors or if you are a capital investor you can find new investment deals to place your capital.

Happy Investing!

Photo: Phil Guest

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{ 41 comments… read them below or add one }

Nick April 8, 2013 at 2:48 pm

Hi Ankit,

Great article!

I have a question. In the case of both of these sites, since people are pooling their money together in a group, is that considered a syndication? Is that also the reason why people have to be accredited investors to invest money with them?

Please correct me if I’m wrong but if I bring on say one investor into a project, that person doesn’t necessarily have to be accredited do they? For example if I buy a multifamily property and fund the down payment using a private investor’s money in the form of either an equity or debt partnership, that investor does not have to be accredited right?

I’m a little confused on the SEC rules aspect of all of this.

Thanks so much!

Reply

Ankit Duggal April 9, 2013 at 6:50 am

Pooling the money is considered a syndication that is correct. The reason people need to be accredited is that SEC blue sky law via Reg 506D is requires that investments be only sold to accredited investor in order to not register them as securities with the SEC. There is a 35 person limitation exception to unaccredited investors that rule 506D does permit. I am not a lawyer so check with your securities attorney to make sure that is allowable in your state.

If you bring one investor into a project as a capital investor then that person will still need to be defined as accredited or unaccredited so make sure they sign an accreditation statement. From my understanding the person does not need to be accredited if they own the asset with you as joint deed holder with their personal or corporate name on the deed.

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William April 8, 2013 at 3:51 pm

Are there any other websites that would allow an individual to start pooling money from real estate investors?

Thanks for this great article!

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Danuel Brown April 8, 2013 at 4:03 pm

Great Article Ankit. This article was perfect timing for me since I spent the last two days research the value of crowdfunding in real estate investing. This can be a very powerful real estate investment niche once finalized by the SEC.

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Ankit Duggal April 9, 2013 at 6:54 am

Danuel

In your research did you find anything else that you want to add on to this article in case I missed something.

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Jenkins, R April 8, 2013 at 5:32 pm

I enjoyed the detailed article

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Ankit Duggal April 9, 2013 at 7:00 am

Glad you found the information useful. Please share BiggerPockets blog on your social network so that other potential readers can find this site and access its great tools and resources.

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Philip Wade April 8, 2013 at 11:04 pm

I am just amazed with the fact discussed in the article. I am in complete agreement with the views and details presented in the blog. I really love reading blog.

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Ankit Duggal April 9, 2013 at 6:58 am

Philip

Glad you found the information useful as that I know all the blog post contributors spend a lot of their time putting together information that you hope readers find relevant and useful. So thank you for sharing the kind words. In terms of your comment associated with reading the blog, you should really be thanking @Joshua Dorkin and @Brandon Turner as they have put together and grew this site into a great resource for novice and experienced investors alike.

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Jilliene Helman April 8, 2013 at 11:11 pm

Ankit, thank you for the coverage. I am the founder of Realty Mogul and we are incredibly excited to be live at http://www.realtymogul.com. Although we are limited to accredited investors today, we hope to open to a wider audience of investors when the JOBS act is finalized.

Happy to answer any questions on Realty Mogul here or at [email protected].

@Nick – I am not an attorney, but it is my understanding that investor would need to be accredited. You do not have to be accredited to buy the entire property, but to buy a piece of the property, you do! Very strange, I know.

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Ankit Duggal April 9, 2013 at 6:38 am

Thank you for putting together Realty Mogul as that is a great innovation to the real estate fundraising space. I love innovative people such as yourself who are changing the landscape of real estate.

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Al Williamson April 9, 2013 at 12:01 am

Hey Ankit , I’m flipping out. Thank you so much for giving me a head start on thinking about crowd funding options. I’m planning to give it a go.

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Ankit Duggal April 9, 2013 at 6:53 am

Keep flipping out Al as this is an exciting time in the innovation space of fundraising for real estate deals. Sites like Realty Mogul and Fundrise are changing the dynamic of the landscape and I cannot wait to see what happens once the JOBS Act regulations are in place.

I would love to hear about your crowd funding journey so keep me updated via email or a call.

Reply

RealtyAdda April 9, 2013 at 12:38 am

Hi Ankit
Thanks so much!! to Provide this detailed Information through this blog…

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Ankit Duggal April 9, 2013 at 7:01 am

You very welcome. Feel free to share the BiggerPockets blog so that other potential readers can find the writing of other blog contributors.

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Tevis Verrett April 9, 2013 at 3:49 am

@Ankit,

Great article sir, and you have elucidated the grand power of the internet. I have been watching this subject with keen interest. For our BP peeps, I have found a companion site: http://www.collaperty.com that is in the same genre.

Good Investing all,

Tevis

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Ankit Duggal April 10, 2013 at 8:14 am

Thanks to share. If anybody else have other sites please feel free to comment and share them here.

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Shaun April 16, 2013 at 8:22 am

Tevis,

This is funny to me because they are a corporate sponser of my local REIA in Boston and I didn’t really know what they did. :)

Guess I should probably check them out first since I can actually talk with someone face to face pretty easy if I have the level of interest.

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Karen Margrave April 9, 2013 at 11:48 pm

@Ankit Duggal, great blog! I posted on the forums with questions regarding Accredited Investors, Regulation D, etc. trying to get some answers for others that have posted recently. This article will go a long way towards removing some of the confusion for everyone. Thanks!

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Ankit Duggal April 10, 2013 at 8:16 am

Thanks Karen. I hope the other members find the article useful and thank you for the efforts on placing it within the appropriate forums.

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Brandon Jenkins April 11, 2013 at 9:15 am

Ankit,

Thanks for including Fundrise in your discussion on crowdfunding real estate. We are very excited to see so much interest around the idea and believe that it will open up new investment opportunities previously not available to the average investor.

Fundrise actually offers investment opportunities today to both “Accredited” and “Non-accredited” investors through Regulation D and Regulation A.

For anyone interested in learning more, we would encourage them to visit http://www.fundrise.com and feel free to email us [email protected]

Best,

Brandon

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Asia Jones April 11, 2013 at 9:34 am

This was an great post, I’m in the process of raising money to purchase my first multifamily home and was wondering if this was an option I could do raise money. Thanks!!!

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Kyle Zaylor April 12, 2013 at 3:46 pm

Great piece, Ankit! Realty Mogul and Funrise are definitely starting to turn heads in the development world. It’ll be exciting to see how this new investing platform evolves.

Reply

Ankit Duggal April 14, 2013 at 12:48 pm

Kyle

I am glad that you found the post useful. The sites are definitely starting to turn heads. I am very glad to see this evolution.

Reply

DWAYNE April 13, 2013 at 10:18 am

THIS WAS A FANTASTIC POST.

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Nav Athwal April 13, 2013 at 10:08 pm

Ankit,

Great post. In addition to being a real estate and securities attorney and real estate broker, I’m a Founder of RealtyShares (www.realtyshares.com), a Real Estate Crowdfunding Portal that is gearing up to offer great real estate opportunities to our investor community. We have had over a 1,000 accredited and nonaccredited investors sign up with us since we went private beta in early December 2012.

Although currently we are focusing on Regulation D offerings and are thus only open to Accredited investors, we eagerly await the SEC’s promulgation of the crowdfund act regulations so we can open up our platform to all investors.

I’ll give you an update as soon as we go live in the next few weeks.

Nav

Reply

Ankit Duggal April 14, 2013 at 12:50 pm

Nav,

Great. Thank you for sharing your website information as well. Loving all the disruptive members who are starting and launching crowd funding portals. I look forward to chatting with you about it in greater detail

Ankit

Reply

Nav Athwal April 14, 2013 at 6:14 pm
Ankit Duggal April 14, 2013 at 12:45 pm

Thanks Dawyne. I am glad that appreciated the post.

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Elizabeth Sky April 15, 2013 at 12:49 pm

Hey there! what is meant by accredited and nonaccredited investors? Thanks.

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Jilliene Helman April 15, 2013 at 1:45 pm

@ Elizabeth – the definitions are set by the Securities and Exchange Commission, but an accredited investors has an income greater than $200,000 per year (if they are single) or greater than $300,000 per year (if they are married) or has a net worth greater than $1 million (excluding the value of your primary home).

A non-accredited investors does not meet the income or net worth requirements as above.

At https://www.realtymogul.com/, we are focused on accredited investors today due to the regulations, but we’re looking forward to the final rules from the JOBS act to do business with all types of investors.

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Ankit Duggal April 15, 2013 at 2:03 pm

Thanks Jilliene. I appreciate you responding back to Elizabeth question.

Ankit

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Elizabeth Sky April 15, 2013 at 3:12 pm

thank you so much for your explanation, Jilliene, much obliged!

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Shaun April 16, 2013 at 8:19 am

Great article Ankit!

You have quickly become one of my favorite authors hear on BiggerPockets, and that is saying something given how many great contributors are here!
You might not be as flashy as others but you do a great job explaining very complicated subjects into very understandable posts.

Awesome job breaking things down and giving the facts about what we know and what we don’t know pending SEC clarification. This is a must read for any real estate investor interested in this form of funding.

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Ankit Duggal April 16, 2013 at 3:07 pm

Thanks Shaun. That is an amazing compliment. That is true I am not very flashy. I try to distill information in a manner that’s understandable to me. thank you for continuing to read my blogs and big and being part of Biggerpocket community.

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Doug Perry April 16, 2013 at 2:47 pm

Anyone utilizing crowd funding for real estate in Chicago? If so, let me know about your experience.

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william April 25, 2013 at 1:26 pm
Brian J. Curley May 16, 2013 at 2:19 pm

Hey guys. I’m an emerging real estate developer in the NYC area. I’ve been exploring the pathways of raising capital for new projects, which led me to crowdfunding. My background is in investment banking and with that in mind, I knew with all this hype there was a hook here.

These two websites describe the process and costs more accurately. Said simply, the transaction costs as a percentage of the amount raised (up to 20% on $1 million) is simply too high compared with other options available.

http://www.forbes.com/sites/deborahljacobs/2013/04/17/the-trouble-with-crowdfunding/
http://thehill.com/blogs/congress-blog/economy-a-budget/299341-is-crowdfunding-to-be-crowdless

I believe the JOBS act better qualifies to startups due to (a) startups dont require that much capital at first; and (b) aside from angel investors, its the only option they have given their risk profile. Real estate is a fixed asset (as opposed to working capital for startups) and $1 million doesn’t really get you far. Furthermore, with a better risk profile, the high transaction costs and compliance aren’t warranted. That said, crowdfunding may be a good way to raise sponsor capital, or the amount of equity outside investors require you to have in the deal to have “skin in the game”.

In summary, I believe crowdsourcing is a game changer that will enable thousands of entrepreneurs to seed their ideas. However, the people getting rich of this scheme are the platforms (or broker-dealers) and the service firms (lawyers, accountants, etc.)

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Darren June 17, 2013 at 9:14 am

Hi Ankit and All,

Thanks for covering the crowdfund real estate industry. Although in it’s infancy, there’s a confirmed demand for this type of equity/debt crowdfunding. My partners and I have been researching crowdfunding real estate for the past 14 months (April 2012) when the JOBS Act was signed. We’ve interviewed thousands of individual investors and real estate professionals and we concluded that there’s a large market demand for alternative capital formation via crowdfunding. Individual investors and property owners alike will recognize huge benefits from high performance real estate crowdfunding portals.

As a 10 year veteran of the investment real estate industry and a CCIM, I am aware of the key issues impacting property owners and investors. My team and I created http://www.crowdstreet.com to help level the playing field for property owners and their banks and empower individual investors via direct access to investment real estate. We also believe in the exciting community improvement possibilities that crowdfunding real estate provides. Invest in what you know, invest in your neighborhood.

Please join the movement at wwww.crowdstreet.com.

Kind regards,

Darren J. Powderly, CCIM
Founder, CEO
CrowdStreet, Inc.
[email protected]

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Harold August 28, 2013 at 5:11 am

Very informative article. This is a must read for all who are exploring opportunities in Crowdfunding and Real estate.

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Robert Yarrington November 5, 2013 at 10:09 pm

Hello Ankit

Been hearing alot about crowd funding lately. I’m currently looking into it as a means to purchase my late fathers estate, which sits on a private lake, with own beach access to call your own, only a stones throw away, has perfect beach. Been accessed at $235,000.00.
Anyways, I wish to rent/lease it out to create funds to pay for it, but due to my being a self-employed startup business, can’t get funding using other methods, in part due to an high LTV% of 89, if, I’m able to contribute $25,000.00 of my share. Being 1 of 5 siblings, I do have 1/5th share of profits in event of sale or a discount per sake. We’re talking about $31,000.00
Anyways- Wondering if you know of anyways I could get crowd funding for this and perhaps offer people either a timeshare type deal as compensation, or another type of repayment.
On my last days before I have to inform sister to go ahead and sell to interested parties, so would be grateful for a response ASAP-thank you!

Reply

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