What is Real Estate Crowdfunding?
Equity crowdfunding or crowd investing are new terms and concepts that allows small businesses and startups to sell equity in their companies to investors for equity stakes or ownership in the company. Most people are familiar with rewards or donations based sites like Kickstarter and Indiegogo where people donate funds or trade donations for low-cost rewards that are not equal to the amount of funds donated.
Real estate crowdfunding is an extension of the equity crowdfunding model where a portal creates an online marketplace that brings together commercial real estate owners and developers with prospective equity investors and lenders with capital. Investors may include private investors, real estate oriented funds and institutions. Lenders will include banks, insurance companies and other institutional sources of debt capital for commercial real estate transactions.
Real estate crowdfunding, allows investors can pool money together and buy shares of real property like apartment buildings, office buildings and retail centers. Rather than buying the entire property and dealing with the hassles property management.
Most often, you will own shares in a Limited Liability Company (LLC). It’s typical for individual properties to be held in sole and separate LLCs and most crowdfunding companies are taking this same approach. Investor monies are pooled into a single purpose LLC and that LLC invests into the property. This provides protections for investors, including a limit of liability, and streamlines the reporting and distribution processes.
The great benefit of crowdfunding for real estate is added diversification and insider access to private transactions that were historically limited to the extent of one’s personal network. With the advent of social media and the internet, investors will now have the ability to easily invest across geographies, across property types and across operating partners. While crowdfunding may not be easily applied to every industry, real estate seems to be one industry where it is poised to grow rapidly.
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