When you hear the word crowdfunding, you probably envision an online campaign with a polished promotional video urging you to “invest” in a product’s development. This is known as rewards-based crowdfunding, and it’s the most popular form, partly because anyone can participate and the barriers to entry are as low as $1.
With rewards-based crowdfunding, the best-case scenario is that an innovative product (such as an umbrella with a location tracker) hits production and you are one of the first people to have it. Like any investment, you still want to weigh the benefits and risks.
But perhaps you have more than a few dollars saved up and are looking to earn some money, rather than a wireless smart meat thermometer. Let’s enter the new and exciting world of investment crowdfunding.
This gives individuals the ability to pool their money together to support a business venture that provides a monetary return on investment (ROI).
The sector has taken off since President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act in 2012. The JOBS Act removed a prohibition that previously prevented sponsors – i.e., the individuals or companies utilizing the money raised from a campaign – from contacting a subset of investors known as accredited investors.
Investment crowdfunding can be broken down further into two types:
- Debt crowdfunding allows investors to pool together in order to lend money to an individual or company. The interest earned on loan payments provides investors with a return on their investment.
- Equity crowdfunding allows investors to pool together funds and invest in ownership of a company or business venture. Crowd investors earn money from profits generated by the company or venture.
Real Estate Crowdfunding
Real estate has grown to be the most popular form of investment crowdfunding, with more than $2.5 billion raised in 2015 – that’s two and a half times the volume raised in 2014. One factor behind the popularity is that there are plenty of opportunities to invest in either debt (a mortgage on an office tower) or equity (ownership shares in an apartment building).
Access, technology and transparency are three other major reasons that investment crowdfunding is developing into a significant source of capital in the real estate industry:
- Access: Prior to 2012’s JOBS Act, individuals or companies looking to raise money for real estate deals could not market publicly. Finding opportunities to invest was done on a “who you know” basis — and even if you knew a firm with an active offering, minimum investment amounts could easily approach the price of an attractive three-bedroom home in much of America. Minimum investment amounts have declined now that real estate companies can reach a greater portion of the population.
- Technology: Technology now provides for a streamlined investment process that can be completed entirely online. This means that several hundred investors can participate in a single deal without overburdening the company raising funds. Online crowdfunding portals are also extremely easy for investors to use, guiding them through a step-by-step process that can often take users from registration to wiring funds in less than 24 hours.
- Transparency: The unique investment product that real estate crowdfunding can deliver is also a major driver for its popularity. Let’s say you are interested in the historical stability and reliable returns income-producing commercial real estate offers. Unless your bank account rivals that of a small sovereign wealth fund, you could only access commercial real estate via a real estate investment trust or a private equity fund. Though both investment vehicles make sense for certain investors, they don’t allow you to select investments on a property level. Crowdfunding lets you pick which property deal makes the most sense for your financial goals – and you’re able to access and analyze the full business plan prior to investing.
Now that you have an idea of why someone would want to invest this way, let’s examine some tips for you as a burgeoning real estate investor.
Five Tips for Potential Investors
- Find the Right Sponsor – Not every sponsor is created equal. It’s important to look for tenured sponsorship with experience extending throughout multiple real estate cycles. Also look for firms that are invested in their own deals.
- Pick the Deal That’s Right for You – One of the key benefits is that you’re able to pick the actual property you’d like to invest in. While a development deal might offer large growth potential, a repositioning might deliver more stable returns over a specified period of time.
- Look for Transparency – The offering itself should be presented in a clear and accessible manner that doesn’t skim over the details. Look for sponsors and platforms that utilize multimedia tools to educate their investors. If you have any questions about the property or business plan, reach out and ask. Most sponsors will be happy to discuss.
- Learn the Market – Everyone knows the key to real estate is location, location, location. Look for opportunities in markets or submarkets with healthy population and job growth. If you live near the property, check it out for yourself.
- Understand Your Investment Goals – Whether you’re looking for income or long-term growth, understand what different assets can do for your investment portfolio, and understand how real estate can help you diversify.
Adam Kaufman is the managing director of business development at ArborCrowd, an online portal that provides investors with the technology, knowledge and opportunity to invest in commercial real estate alongside institutional investors.
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