The Low Down on Real Estate Investment Crowdfunding

Crowdfunding—where savvy would-be inventors, artists, directors, and entrepreneurs turn to the internet to source capital from “regular” folks—has become a legitimate way to raise money. Funded projects range from the outrageous (like potato salad) to the outrageously backed and anticipated (see Pebble Time), and make it possible to find and attract investors. But crowdfunding isn’t limited to people with big ideas for the latest gadget or movie idea. The real estate industry is tapping the power of the crowd, too. Real estate investment crowdfunding, often called peer-to-peer (P2P) lending or equity crowdfunding, is starting to take off—and with good reason. It’s a great option for borrowers, who gain quick access to a wide range of investors through an easy online platform—bypassing the bank altogether. Investors, on the other hand, can make smaller investments with lower risk—but big upside if the property ends up making money.

So far, less than one percent of the country’s estimated 50,000 real estate companies have generated capital through real estate investment crowdfunding, but it could very well be the way of the future. Here’s what you need to know to stay on top of this growing trend.

Make way for the little guy or gal

Expensive fees can eat up too much of the profit and scare investors, even big players, away. However, many of today’s online P2P lending sites offer investors direct access to investments for nominal fees. That coupled with low minimum requirements—with the typical minimum being $5000, but some sites dropping it to $100—allows first-time or small real estate investors to join the game.

Clients must do their homework

People looking to invest through crowdfunding must understand the risk involved when investing in any property. That’s why in-depth evaluation and a thorough underwriting process are absolutely critical. Even if the risk is lower through crowdfunding than more traditional means, real estate investors should review the facts and data—including location and occupancy information, the experience and reputation of the developer, the condition of the property, and more—to reduce their risk. That’s where, as an agent, you can play a key role in offering potential investors expert guidance on a property.

Laws and regulations for real estate investment crowdfunding vary

As with most endeavors, real estate investment crowdfunding is held in check by legislation and laws that vary from state to state. One biggie: Investments are often reserved for accredited investors, meaning those individuals with a net worth or joint net worth that exceeds $1 million, or individuals with an annual income that exceeds $200,000 in the past two years or a joint annual income exceeding $300,000 for those years—and is expecting the same income level in the current year.

Still, while accredited investors tend to have more opportunities, unaccredited investors do have options. But they must be reviewed by the U.S. Securities and Exchange Commission (SEC). And there are even exceptions to that rule, especially with the boom in real estate crowdfunding sites.

The JOBS Act of 2012 has definitely relaxed the requirements, but many guidelines exist about how much money can be invested, along with varying steps in the filing process. Make sure you fully understand the laws that apply to your locality, so that you can advise your clients.

Real estate investment crowdfunding can definitely offer the clients and companies you work with the money they need to purchase more real estate—and it might even be an option for you if you are looking to expand your own business.

For an in-depth overview—and to ensure that you understand the ins and outs of it all—register for McKissock’s Crowdfunding in Real Estate course.

 

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