Mortgages & Creative Financing

What Exactly Real Estate Crowdfunding Is — And Why You Should Care

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
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crowdfunding

Real estate investing is a tool that allows people to build wealth. Because of this, industry leaders want to catapult the reputation of the sector into the 21st century. One way to do this is through real estate crowdfunding. Due to recently passed laws, investors now have access to more deal flow.

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Crowdfunding Sites

According to Wikipedia, crowdfunding is “pooling smaller amounts of capital from a large number of individuals to fund a business, venture or investment.” Everything imaginable has been funded on crowdfunding sites like Kickstarter and Indiegogo  — from rock albums to comic books to trips abroad.

Real estate has not traditionally been associated with crowdfunding. But with the new laws, it now lends itself to crowdfunding very well. In fact, there are entire websites devoted to real estate crowdfunding.

crowdfunding

How Crowdfunding Applies to Real Estate

At its core, real estate crowdfunding has been around for centuries. Relatives put money together to buy property. Even large investment companies pooled their funds together to purchase properties. But the primary difference between the collective investing of the past and the crowdfunding of today is the ability to facilitate the process online. Because of the internet, we now have access to this distribution platform.

Related: #AskBP 017: Real Estate Crowdfunding: Should I Invest?

Overcoming the Uncertainty Factor

A factor that may prevent investors of all ages from participating in crowdfunding is uncertainty in this industry. But this concern doesn’t mean that you should stay away from crowdfunding altogether. It just means that you should make sure you do additional research. You not only need to research the property you’re thinking about investing in, you also need to research the operators and market.

The most important thing to maintain while investing in this new sector is due diligence. Don't allow the lightning-fast speed of internet deals cause you to prematurely rush into a bad investment. You need to go through the same research process with crowdfunding that you would pursue with regular investing.

Use Crowdfunding to Finance Your Commercial Real Estate

The SEC

As far as investing, the SEC is on it. As of 2013, the commission is only allowing accredited investors to participate in publicly advertised offerings. So before you participate in any kind of online investment, make sure that you meet certain requirements. And whatever your role in investing, it’s important to keep in mind that new doors could be opened for the non-accredited with the recent passing of Regulation A+ for publicized offerings. 

Crowdfunding for real estate investing is essentially rooted in the JOBS act of 2012. Prior to that, there were far more regulations regarding fundraising. But in an effort to heal the nation's economy since the recession, the government has revamped their entire stance about this approach to investing.

The Commercial Real Estate Development Association recently released a statement to clarify new developments: "Crowdfunding for real estate is not an entirely new phenomenon. Numerous players have entered the field. Although each of these platforms has its own niche and strategy, with different levels of minimum investment, all are geared toward accredited investors who meet specific requirements for net worth and/or annual income. By contrast, crowdfunding under the JOBS Act will open the field to many more, smaller investors."

Related: How to Use Crowdfunding to Finance Your Commercial Real Estate

Conclusion

Whether it’s online or in person, it’s important to do research before moving forward with any investment. But taking the necessary precautions shouldn’t prevent you from proceeding with crowdfunding. There are more government regulations about online investing than ever.

Just because it’s a newer concept doesn’t mean you should rule crowdfunding out as a possible way to facilitate your progress as an investor. Many reputations have been built online, and there are now plenty of ways to pursue safe crowdfunding.

Have you considered crowdfunding as a way to invest? Any questions?

Leave your comments below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
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    Nathan Richmond Rental Property Investor from Visalia, CA
    Replied over 4 years ago
    Has anyone here done this with much success? Which sites are reputable?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 4 years ago
    Nathan great questions. There are several threads on this platform on that very topic. Here is one: https://www.biggerpockets.com/forums/520/topics/258773-share-your-crowdfunding-investment-results—the-good-and-the-bad
    Nick E. Investor from Brooklyn, New York
    Replied over 4 years ago
    I’ve had good experiences with RealtyShares, RealtyMogul and Patch of Land so far. PM me for a referral code if you’re interested.
    Dirk Watters
    Replied over 4 years ago
    Thanks for the recommendations Nick. I’d be interested in a referral code to those sites.
    Segun O. Investor from Houston, Texas
    Replied over 4 years ago
    Thanks for sharing Nick. Could you please send me the referral codes to those sites?
    Yun Chu Investor from Orange, California
    Replied over 4 years ago
    Could you refer me to Patch of Land?
    Kevin Izquierdo from Hillside, New Jersey
    Replied over 4 years ago
    Great article! I actually never considered crowdfunding to be a source of creative finance. Thanks for writing 🙂