Real Estate Crowdfunding: What Investors Should Know About the Growing Trend
There’s a word that’s been getting a lot of buzz lately. While you’re more likely to come across “Kickstarter” than the term that describes it, crowdfunding is a growing trend in just about every industry. Kickstarter, just one of many online crowdfunding platforms, is full of artists, developers, inventors and entrepreneurs rallying public support to fund their projects.
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Big things have been funded through Kickstarter, like the virtual-reality headset Oculus Rift, the reboot of Reading Rainbow, the Veronica Mars movie and countless video games and tech.
More and more platforms like these are emerging, including those for teachers to raise extra funds to pay for classroom supplies at DonorsChoose.org.
As the possibilities of crowdfunding grow, real estate investors are beginning to take note — and advantage. You can search the BiggerPockets blog articles and even the Forums and find dozens of articles beginning to introduce real estate investors to crowdfunding. This is certainly a hot new topic, and it is not going anywhere any time soon. It is important that investors get some knowledge about this opportunity and learn how it can help them as they move forward!
I thought there was no better place to learn than right here on BiggerPockets, so I decided to throw my $.02 in and add an additional resource article.
Why Join a Real Estate Crowdfunding Effort?
1. It Mitigates Risk
Sometimes things are just too expensive for investors to handle on their own. In Australian real estate, for example, homes lead as the third most expensive in the world, running a median price of over $780,000 USD. This has left many Australian investors in a pinch and unable to fully participate in the market. That price tag comes with a lot of risk. The Sydney-based platform BrickX, however, is trying to solve the problem — through crowdfunding. Investors purchase a “brick” or parcel of bricks, which is a share in the property. Each property has 10,000 bricks, and once all are purchased, they become liquidly tradable, with price determined by supply and demand.
As Forbes notes, “The beauty of the model is that investors can buy into an otherwise competitive and expensive property for several thousand dollars and exit the investment at any time, rather than waiting years. This gives the investor the flexibility to use the money for an emergency, holiday or even another investment.”
In the United States, most real estate investment crowdfunding platforms are exclusive to commercial real estate, but BrickX shows promising signs for more residential models.
2. It Allows You to Invest in Individual Properties
Why would a commercial real estate investor choose crowdfunding over simply buying a common share with a REIT? REITs don’t really allow for the satisfaction of investing in a single property, for one. Real estate has always been a tangible market. Developing an individual property can be high risk, but crowdfunding lets investors experience the thrill of getting invested in a single, potentially lucrative property without such enormous risk.
3. It Gives More Opportunities to Smaller Investors
Another advantage to crowdfunding is simply the market access it offers. In many cases, especially where commercial real estate is concerned, novice investors can get pushed out by huge investment demands and when brokers keep their best deal out of the market. Crowdfunding offers an alternative and lets more investors get their foot in the door.
Two Real Estate Investment Crowdfunding Platforms
RealCrowd is a dedicated online real estate investment site with a crowdfunding model. Through RealCrowd, two investment firms are raising the money needed to purchase and redevelop a 10,000-square foot commercial property in downtown Westport, Connecticut. The sponsor firms are ATCO and Forstone Capital, both equity investors. Crowdfunding has allowed them to reach other accredited investors who have been historically limited from participation in these private equity investments. With a minimum investment of $25,000 from individual real estate investors, this project has raised over $500,000 with only a few spots left.
Roman Rosario, co-founder of RealCrowd, notes that “making investment offerings from quality sponsors accessible to a wider audience literally allows more people to participate in excellent risk-adjusted returns through commercial real estate investing.”
Fundrise, another online commercial real estate investment crowdfunding platform based in Washington, is backed by some impressive sponsors, including Silverstein Properties, the developer of the new World Trade Center. Fundrise has been around since 2012 and in the works since 2010. As investors interest grows, big-name developers are joining the game. The big draw in Fundrise is that it’s accessible to virtually any investor — not just big players who can put millions towards a single investment.
Fundrise targets more than just accredited investors; it actively allows residents of the community to take part in commercial investments. The distance that most private equity investors experience from their investments can cause a disconnect from the needs of the community. Fundrise helps eliminate such a gap.
While crowdfunding for real estate is still a relatively new concept, its growth over the past few years has made it worth attention. There’s still risk, of course, but it just may offer a new, exciting avenue for investors to explore.
Can you see yourself joining a real estate investment through crowdfunding?
Let us know in the comments.