3 Things You Need To Know About Crowdfunding Real Estate Investments

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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.

Related: Crowdfunding Real Estate: How to Raise Money through the Crowd

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.

Fundrise

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

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.

RealtyMogul

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.

Related: Can You Use Crowfunding To Fund Your Real Estate Investing Business Under The JOBS Act?

Conclusion

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.

Thoughts?

About Author

Matt Faustman is the co-founder of UpCounsel. He frequently writes on the UpCounsel Blog about real estate deals, streamlining real estate businesses and legal issues facing the real estate industry.

21 Comments

  1. Matt, thanks for sharing this info on crowdfunding. It’s also worth mentioning the following:

    The crowdfunding exemption in the JOBS Act limits how much an investor may invest based on the investor’s annual income or net worth and includes for purposes of calculating the limit all crowdfunding exempt investments made in the 12-month period preceding the investment in question. The limits are as follows:

    * for investors with either an annual income or net worth less than $100,000, the amount invested may not exceed the greater of $2,000 or 5% of the investor’s annual income or net worth; and

    * for investors with either an annual income or net worth of at least $100,000, the amount invested may not exceed 10% of the investor’s annual income or net worth up to a $100,000 maximum aggregate amount

      • I’m not sure I would suggest lowering the threshold. True, $2k is nothing when investing in a real estate deal but the limits are in place to protect novice investors from getting in over their heads. The regulation limits savvy investors but will keep people on main street from swinging for the fences with their life savings.

  2. Charlie Williams on

    Thanks Matt for info. I just recently listened to a Podcast about this crowdfunding concept. Of the 3 companies you mentioned RealtyMogul sounds more up my alley. Do you know if I can use my self-directed IRA to invest in crowdfunding. Do you know of any other investors who have used RealtyMogul? Charlie-VA

  3. Marc Jolicoeur on

    I feel there could be additional benefits not mentioned in the article:

    – an investor with limited funds can participate in a cash flowing RE investment and make about the same return as if he invested locally.
    – an inexperienced investor can lean on a developer’s experience to find and manage a good deal
    – passive income. Does not require as much legal, management and administrative costs to get this income.
    – By investing in multiple projects, you diversify your portfolio across many types of investments and locations for real estate.

  4. Thanks for adding these Marc!

    Your point that “an inexperienced investor can lean on a developer’s experience to find and manage a good deal,” I think should be taken with a grain of salt if you don’t mind me saying. Even in crowdfunded real estate, you NEED to do your own diligence on not just the developer but also the project itself.

  5. The RealtyMogul faq says it is only for accredited investors.

    “Why is it only for accredited investors?

    Federal securities law requires that securities issued by private companies to their investors must be registered with the Securities and Exchange Commission (SEC) unless the offering qualifies for an exemption from registration.

    One exemption from registration is available if the company offers securities only to accredited investors in a private offering. Accredited Investors are defined by the SEC as having $200,000 of annual income per individual ($300,000 per couple) with the expectation of that continuing, or a net worth of more than $1 million, excluding the value of the primary residence.

    Realty Mogul is a private, password-protected network for accredited investors in order to meet these guidelines.”

  6. Hi All,

    I’m Jilliene Helman, the CEO of Realty Mogul.

    @Matt – Thanks for writing the article and including us, appreciate it. This is still a very young market so appreciate you educating more investors and stressing the importance of due diligence.

    @Charlie – We do allow investors to invest with self-directed IRA funds. We have worked with a number of the largest SDIRA companies to date.

    @Billy – You are spot on. Due to the regulatory requirements, we are limited to accredited investors.

  7. Welcome to the Blog Matt!

    Nice job on your first one. I guess I am a bit conflicted on this crowdfunding concept. I should say I can see the benefits to the borrower, but putting money into one of these means several things:
    1. I am presumed to not be educated enough to do deals on my own.
    2. I must rely on someone else to do the due diligence on my behalf.

    Frankly, both of the aforementioned are cardinal sins in the world of investing. Thus, would it be a better service than taking their money, to educate investors enough to do their own deals as principals or via PPMs, etc. Thoughts?

  8. @Ben, interesting perspective. We actually think about it quite differently at Realty Mogul. In regards to #1 – we want all of our investors to be educated about real estate and because we are limited to accredited investors, a good majority of our investors are savvy and sophisticated. They’ve told us that they use a service like ours because it saves them time and gives them access to deal flow they would not have had historically because they don’t spend concentrated time looking for private placements.

    In regards to #2 – every investor must do their own due diligence. It’s the #1 rule of investing so totally agree with you there, you absolutely cannot rely on others to do it. We try and provide as many facts as possible presented in a streamlined, consistent fashion across each investment so that due diligence can be done faster, but no investor should rely on a platform to do their diligence for them. While we are a curated platform, so we have guidelines and standards for the real estate companies we work with, one of the great benefits of crowdfunding is that you have more investors doing due diligence on the same assets.

  9. What are the barriers to an established real estate development/investment company building their own portal? Why wouldn’t someone with deal flow build their own portal and solicit/advertise to their existing investors while also taking advantage of the solicitation to find some new ones? How difficult is it to build a portal and will the savvy real estate development and investment firms do this themselves? After all, they already have most of the pieces of the equation.

  10. Can anyone help shed some light on a few questions (if this thread is still alive)?

    1. In general, does the typical investor realize their return of investment through: A) – Yearly cash flow that the property produces (assuming there is cash flow), B) – a possible sale of the property at the back-end, or C) – Both?

    2. Most real estate acquisitions and rehabs are funded with both equity (20% for example) and debt in the form of a mortgage through a bank. Is the typical crowdfunding real estate investor helping to fund the 20% equity requirement? Or are they funding the entire project (eliminating the need for bank debt)?

    3. How does voting work in a crowdfunded deal? Do the individual investors have any voting rights as to when the property is sold and for how much? I’m assuming there is some sort of agreement that spells out the minimum hold period and restricts the developer from selling to a related party?

    • Kay Nealis

      Hi Anthony,
      I have invested in several projects via crowd funding. I have 4 investments that are similar to hard money loans for flippers. 3 are interest only paid monthly and do not share in equity upon sale (12-13%) and one that pays 11% interest monthly and another 8% upon sale. The other is an equity deal invested in a mobile home park LLC. This will have cash flow after 9 months, and then share in equity upon sale (approx. 5 years). These are all new investments so I can’t speak about returns yet, but would be happy to follow up next month after our first monthly checks arrive. I have chosen this method of investing in hard money notes as a way to spread risk without being in a hard money pool. I have invested with Realty Mogul, Realty Shares and Patch of Land.

      Kay

      • Hi Kay,

        Just wondering about your progress. I believe you were going to post an update about your first months checks ? 🙂

        I’m not an accredited investor yet but I’m wondering if it’s worth aspiring to join something like Realtymogul once I reach that point.

        Cheers,
        D

    • Gary,

      Funds are collected by the RECF portals. Part of their business is to raise the funding, and they do this in various ways but quite basically they are building lists of investors. The sponsor or borrower doesn’t have to worry about raising financing, they have to present a viable project for funding, which is approved by the portal. This is why you may also hear them referred to as a ‘marketplace’ because they must both collect funds from investors and offer viable real estate projects from developers/sponsors.

      I believe your question about crowdfunding vs joint venture is a complex, legal question. Both joint venture and crowdfunding are generic terms that can be interpreted in different ways. However, for the sake of this thread and post, crowdfunding in its most basic form is the pooling of money from unrelated individuals, to collectively fund a project – and it is done online. You invest, you get updates, you get a return. A JV tends to be more intimate relationship between the parties involved, and perhaps more active, whereas the ‘crowdfunding’ we are referring to here is less personal and more hands-off. You might say that crowdfunding with these portals is more like investing in a security. **this is by no means legal advice.

      Fun Fact: The term CROWDFUND came to be from the initiative of the government and the JOBS Act. It is actually an acronym set out by congress! CROWDFUND: “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure”

  11. In the real world, $5000 will not getting you to do any business start up. Crowdfunding or whatever businesses out there are not different. Their hidden administrative fees and commissions will eat up all your profit if they make any or they may just disappear from the face of the earth with your cash and live a lavish life in the Bahamas Islands. Remember your hard earned cash giving to them has no witness, no legal documents approved by lawyers or court and manage by a guy in the basement desk and his laptop.

    If you have more than $5000, you can just buy a small home with no cash down payment, fix it up, rent it or resale it for a small profit. If you keep it too long, you may gain a lot more or loose a lot more. It’s 50/50 chance.

    It’s very easy to copy and paste photos from real estate Website into their own made up home buying Websites, sometimes they are just glossy pictures and nothing else behind. IMHO, you don’t lend money to a guy that you don’t know who he is.

    I remember China Forest Co. was a huge trading company on stock exchange, many people were buying theirs shares. It turned out it was a Website with glossy pictures of trees in the park.

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