Crowdfunding for real estate is akin to a hybrid between venture capitalism and social media. Interestingly, crowdfunding platforms for real estate are on pace to potentially surpass the latest annual venture capital firm numbers of $30 billion per year. Once investors and real estate agents learn how easy it is to invest digitally, then crowdfunding platforms may eventually surpass even the largest banks as the best funding sources for real estate deals. Keep reading to learn about crowdfunding, computerized digits and fundraising, the evolution of crowdfunding platforms for real estate, the JOBS Act, and more.
Crowdfunding is all about the digits, both literally and figuratively. At the true core, crowdfunding is a collaboration of shared capital or “digits” (slang for money), ideas, and investment opportunities accessible to both investors and business owners which originates in the virtual “digital world.” The origins of crowdfunding began with charitable fundraising, medical bill payment assistance, and start-up business ideas. It has especially been popular is India and other Asian regions, where it is also called “microfinance” or “micro-lending” for individuals and businesses with bank qualification challenges.
People with an interest in making investments in any type of a crowdfunding platform will typically first begin by visiting the crowdfunder’s virtual office or internet site. In today’s digital world, face-to-face meetings are being replaced with “face-to-screen” meetings on one’s computer or smart device screen. The crowdfunding platforms that can drive the most traffic to their websites by way of shareable blogs, videos, and positive word of mouth are the most likely to raise the highest amounts of capital.
Top crowdfunding platform sites by viewership traffic rank
- Go Fund Me
Source: Alexa & Compete and www.crowdfunding.com
Computerized digits and fundraising
An investor today is more likely to use their online search engine first when seeking investment opportunities or mortgage lending options rather than calling their stockbroker, real estate broker, or mortgage broker. Numerous studies in recent years from sources like National Association of REALTORS (NAR) report that a person is more likely to start searching for homes or mortgages online 90% to 95% of the time prior to speaking or meeting with a real estate or mortgage professional. Investors are also using search engines to find the best crowdfunding platforms for specific property types and locations which interest them such as a high-rise apartment building in Seattle, mini-storage facilities in Dallas, or office buildings in Miami.
Nowadays, crowdfunding platforms may know more about their prospects than the prospects know about the crowdfunding platforms by way of big data’s analytic and data aggregation systems. When people are interested in finding crowdfunding options, they will enter keywords in the search engines such as “crowdfunding real estate in Los Angeles,” which can then immediately generate numerous targeted digital ads from Los Angeles-based crowdfunding platforms. In some respects, crowdfunding platforms are real estate versions of digital search engines, as they digitally analyze their prospects and real estate properties.
Top online U.S.-based search engines
- Google (1.8 billion)
- Bing (500 million)
- Yahoo Search (490 million)
- Baidu (480 million)
- Ask (300 million)
- AOL Search (200 million)
- DuckDuckGo (150 million)
- WolframAlpha (35 million)
- Yandex (30 million)
- WebCrawler (25 million)
Source: eBizMBA Rank (September 2019 data)
The evolution of crowdfunding platforms for real estate
The real estate, mortgage lending, and construction and development industries have paid close attention to the literally trillions of dollars raised by crowdfunding platforms worldwide. Financial and investment entities are using both lending-based and equity-based capital sources for crowdfunding to provide purchase or refinance mortgage capital for owners of prime properties like 100-unit multi-family apartments, or to buy and hold the same buildings themselves while creating double-digit annual returns for their investors.
The success of crowdfunding platforms has also been due to the increased need for non-conventional types of funding for properties after most U.S. banks drastically tightened up their mortgage underwriting and loan approval requirements since as far back as 2007. In some cases, bank customers were more solvent and liquid than their own banks, sadly. Crowdfunding platforms essentially eliminate the “middleman” or banks, and go directly to the funders themselves and later sharing the profits with them as well.
How JOBS creates more jobs
The creation of the JOBS (Jumpstart Our Business Startups) Act in 2012 was the first true catalyst for the start of real estate funding opportunities on a large scale here in the USA by way of crowdfunding platforms. Crowdfunding for real estate is akin to a hybrid between venture capitalism and social media. Interestingly, crowdfunding platforms for real estate are on pace in 2015 to potentially surpass the latest annual venture capital (VC firms) numbers of $30 billion per year.
Since 2012, the equity fundraising numbers have compounded and snowballed each subsequent year. In 2012, the amount raised for real estate through crowdfunding platforms was $2.7 billion. By 2013, the numbers grew to $6.1 billion; 2014’s numbers reached almost $16.2 billion. 2015 is on pace to potentially exceed $34.4 billion (all numbers provided by Massolution, a crowd-powered business site).
Title II, Title III, and Title IV (A+) of the JOBS Act
Title II (Regulation D), or an updated amendment, of the JOBS Act guidelines were enacted back in September 2013. One of the main purposes of Title II was to better define an “accredited” investor for crowdfunding platforms. An “accredited” investor was defined as a person who has an annual income of $200,000 per year within the previous two years, or a net worth greater than $1 million dollars, excluding their primary residence. Some of the most well-known national crowdfunding platforms have worked exclusively with creditworthy and financially worthy “accredited” investors since 2013’s Title II passage to acquire packages of single-family homes, multi-family apartments, and Class A office buildings.
Title III (federal securities’ crowdfunding component of the 2012 JOBS Act for both accredited and non-accredited investors) has still not formally been approved by the SEC (Securities and Exchange Commission) as of yet. A hearing was planned for October 2015, but it may be pushed into 2016 for this Title III section which could open up investment opportunities to people currently designated as “non-accredited.” Various state securities offices have been so frustrated by how slow that federal agencies have moved to expand the allowable number of qualified investors that some states have passed their own more flexible intrastate crowdfunding guidelines partly to boost their economies.
Title IV (Regulation A+): This is the 2015 amendment which may open up the “floodgates” to access to much larger investor pools. Title IV allows the possibility of non-accredited investors to purchase startup securities in crowdfunding platforms while sharing in the profits. While the details continue to be ironed out, the early definitions of Title IV allows crowdfunding platforms to use a combination of both accredited and non-accredited investors in funding amounts up to $20 million or $50 million dollars per year in the form of Tier 1 (simpler state-based securities filings) or Tier 2 (more federal-based securities filings) funding options, respectively.
At present, less than 1% of the U.S. population qualifies as a financially “accredited” investor. With Title IV or Regulation A+, the other 99% of the U.S. population base may be available as potential investors. Title IV’s non-accredited investors for Tier II may be limited to invest up to no more than the greater of 10% of their net annual income or net worth. With both Tier I and Tier II, accredited investors now may have no capped investment limits. Some investors and crowdfunding platforms, in turn, are giving Title IV (Regulation A +) the equivalent as a grade of “A+” for more flexible investment options.
Digital research, funding, and profit opportunities
Crowdfunding platform investors can research the subject property online for one or more specific investment options, research income and expense histories, interior and exterior photos, sales comps, invest with digital funds in some cases such as Bitcoin or other crypto-currencies or digital payments such as Apple Pay or Google Wallet, get pre-approved as “creditworthy” if applying to be an “accredited” investor (e.g., Accredify and Crowdcheck), and place the funds in the equivalent of an online title and escrow account with companies such as FundAmerica all within the comforts of their home. Once investors and real estate agents learn how easy it is to invest digitally, then crowdfunding platforms may eventually surpass even the largest banks as the best funding sources for real estate deals.
The World Bank has projected that equity crowdfunding for real estate may exceed $90 billion by 2020. If 2015’s projected numbers of $34 billion+ hold up, then $90 billion may be reached much sooner than those 2020 estimates. In 20/20 hindsight, a person may one day wonder why banks couldn’t offer the same types of profit-sharing crowdfunding platform options instead of keeping the bulk of the profits themselves while offering their bank customers zero to negative rates of return.
Crowdfunding investors can pool and leverage their funds in just minutes, hours, days, or weeks, and create significant monthly returns and future compounded growth opportunities with prime real estate properties almost anywhere across America. The sky is the limit for crowdfunding opportunities for real estate investors, business owners, developers, and real estate agents to create more financial digits off of computerized digits by way of the seemingly infinite internet!
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