Investing in real estate has usually been the bastion of the extremely wealthy. After all, it takes a lot of capital to build a skyscraper. But the explosion of crowdfunding’s popularity along with the lifting of restrictions on real estate development marketing is now giving a much wider pool of investors the chance to diversify.
Until 2013, SEC regulations kept real estate developed from marketing their investment opportunities using “general solicitation” or advertising. The implementation of the JOBS Act has lifted those restrictions and opened the door for crowdfunded real estate development, meaning a much broader pool of investors now have the opportunity to get into the real estate game.
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1.) How Do They Work?
Crowdfunding, generally speaking, is a way of spreading the risk – and the rewards – of an investment over a larger pool of people. For a creative project, 5000 people might contribute $10 to have their favorite musician record a new album. In return for providing some of the initial funds, they would get a copy of that album.
However, when it comes to crowdfunded real estate investment, it is a little different. Real estate investors are looking for a return on their investment, not just an mp3. Crowdfunding real estate sites sell investments in small chunks, which are much more accessible to an average investor than an entire building or development would be. An investor may contribute $5000, for example, to purchase an empty building. The funds then go into renovating and leasing out the building, at which time the investor will receive an agreed upon percentage of rents and revenue.
2.) Are They a Good Investment?
It is impossible to answer definitively whether or not any type of investment, including crowdsourced real estate investment, is a good investment. There are no guarantees and no sure things. There are, however, a number of things for potential investors to consider in a crowdsourcing real estate scenario.
As with any investment strategy, it is essential that investors do their homework before investing their hard earned cash. This means looking into the experience and track record of the real estate developers that are soliciting crowdfunded money. Good developers, who have a proven track record of earning substantial returns for their investors would likely not have a difficult time securing funding from a more traditional source, like a bank or a seasoned investment firm. It is worth considering why a developer is going the crowdfunded route. Have they had trouble securing funding because of unsuccessful past projects? If so, what evidence is there that things will be different this time? Investors should seek to obtain as much information about a developer’s history, including past projects, specific details of the proposed development, and even tax returns, in order to make an informed decision about the investment.
Overall, many financial experts are skeptical about the idea of crowdfunded real estate, with both consumer and investor advocates speaking out against the JOBS act. While a crowdfunded real estate investment could provide a tidy return, it is important for investors to carefully consider the risks and temper expectations. An investor could have his money tied up in this kind of development deal for months or even years and there is always the possibility of losing the investment altogether.
3.) How Do I Get Started?
If you have decided that you want to try your hand at crowdsourced real estate investment, there are a few sites currently offering opportunities.
One of the originators of crowdfunded real estate investment and a champion of the JOBS Act was Fundrise. This site launched even before the JOBS Act passed, using a loophole known as Regulation A, which allowed local investors to contribute to real estate developments that they were likely to patronize. Fundrise creates a company that purchases and develops the real estate using crowdsourced funds. Fundrise investors can either invest directly in a local project or join a local investor network. Some projects will post “Test the Waters” campaigns in order to gauge the Fundrise community’s interest in their project. With enough interest, they may proceed to set up a project through Fundrise. The site also features different private offerings for accredited investors, meaning those worth at least $1 million, or those who earn $200,000 per year. The minimum Fundrise investment is $100.
Prodigy Network was another early entry on the crowdfunding scene. The company, founded by Columbian real estate agent Rodrigo Niño, works much differently than Fundrise. Rather than invest in local communities, international investors as well as accredited U.S. investors are able to purchase shares of a Real Estate Participation, or REP. The investor’s investment in a specific project is put into escrow until the entire project is funded, at which point the funds are released and development begins. The goal is that the investor will eventually see returns in the form of rent or hotel fees, depending on the type of development. If the project fails to raise necessary funding, the investor’s initial contribution is returned. Prodigy Network has used this process to fund many international projects, including a 66-story skyscraper in Bogotá, Columbia and is currently raising funds for a project in Manhattan. The minimum investment for a Prodigy Network project is much higher, generally $100,000 or more per project.
The crowdfunding real estate site RealtyMogul sits somewhere between Fundrise and Prodigy Network on the spectrum of accessibility. RealtyMogul requires a minimum $5000 investment and allows investors to choose from a list of pre-vetted opportunities. These developments must meet RealtyMogul’s viability standards. Every listing includes the duration of the investment, estimated annual return, property and location information, and detailed background information about the company or individuals involved. Furthermore, each investment is linked to a company that covers the management of the property. Many opportunities on RealtyMogul are “flipping” investments that allow small time investors to participate in purchasing and renovating a building without needing the actual construction and renovation experience.
Ultimately, the decision to make any type of investment is up to the investor. While crowdfunded real estate can be a tempting opportunity to diversify your portfolio and be a part of big projects that would otherwise be out of your reach, it is always important to consider all angles before making a big investment.