Real Estate Crowdfunding Explained
What is Real Estate Crowdfunding? Crowdfunding, a new way to raise capital, has been gaining traction lately and it’s clear (at least to me) the result will be far-reaching. Traditionally, entrepreneurs or inventors would self-fund ideas or seek out banks and professional or institutional investors to secure the capital they needed to take their ideas to the next level. With crowdfunding, on the other hand, entrepreneurs can raise capital from a group of smaller investors in a secure and automated way online.
This is how crowdfunding differs from the traditional fundraising model:
Traditional Fundraising Model (Simplified)
Idea –> Pitch Banks or Investors –> Funding –> Execute Idea
Non-traditional Crowdfunding Model (Also Simplified)
Idea –> Set Up Crowdfunding Initiative –> Funding Goal Reached –> Funding –> Execute Idea
Crowdfunding’s “democratizing” of fundraising allows people outside the traditional investor groups and lenders to join in on the process. For investors, crowdfunding means less risky, smaller dollar investments in projects they care about. For entrepreneurs, crowdfunding is a better alternative to traditional investment capital that improves the likelihood of securing the capital required to stay in business.
Traditional Real Estate Investing
Real Estate is inherently fragmented and inefficient. Investors have a variety of options to choose from when investing in stocks and bonds, they have very few ways in which to access private real estate. Under the traditional “country-club” model of real estate investing, investors must solely rely on their own networks to access quality real estate investments. And to participate, you typically need to invest a minimum of at least $50,000-100,000. The problem is, most investors just don’t have that level of access or don’t want to put such a large sum of money into a single property. , which obviously hinders diversification.
Real Estate Investment Trust
A real estate investment trust (REIT) is a company that owns and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses. Some REITs engage in financing real estate. The law providing for REITS was enacted by the U.S. Congress in 1960. The law was intended to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks. REITs are strong income vehicles because, to avoid incurring liability for U.S. Federal income tax, REITs generally must pay out an amount equal to at least 90 percent of their taxable income in the form of dividends to shareholders. REIT’s are a possible alternative to the traditional model of real estate investing, but they reduce the control and transparency of the investment.
Crowdfunding a New Model for Real Estate Investing
Through an online investment platform, Real Estate crowdfunding provides accredited and non-accredited investors access to real estate investment opportunities that are nationwide. Investors can browse opportunities by asset type (i.e. single family home or apartment building) or geography and can pool their money with other investors to purchase shares in these opportunities for as little as $1,000. Investors also have access to an investor dashboard where they can monitor their investments, returns and tax documents. Thus, through crowdfunding, we’re making investing in real estate as easy as easy as investing in stocks in publicly traded companies.
The Benefits of the Real Estate Crowdfunding Model
Crowdfunding eliminates most of the barriers or difficulties involved with traditional real estate investing. Real estate is time consuming, expensive and requires skill and local knowledge. Real Estate Crowdfunding platforms not only provide a level of access and transparency that has never before been possible for real estate but also greatly reduces the time and capital requirements needed to invest. That is because each investment is passive and investors don’t have to worry about the usual headaches that come with property management and the investment minimums are much lower. This allows investors to invest more quickly and also to allocate the same $50-100K they may otherwise put into a single property across multiple properties in different geographies thereby achieving greater diversification.
Imagine sitting on your couch in Louisville and browsing apartment buildings or single-family home investments in Los Angeles or Seattle from your laptop or tablet. Crowdfunding is making that possible.