Posted by Dennis Jao

Real Estate & Crowdfunding: A New Path For Investors

Real Estate & Crowdfunding: A New Path For Investors

Can two investment mindsets, an old school, and a new school, be understood without going crazy? This is the key question that crowdfunding poses in the real estate market and generally receives a positive answer. This strange crowdfunding and real estate partnership seems to combine well and offer investors a new way to mobilize investments in the global real estate market.


First and foremost for wealthier investors (for now)

The real estate crowdfunding site iFunding assesses the combined size of the market at over $11 trillion. At an industry conference, the conference moderator discussed new regulations related to the Jumpstart Our Business Startups Act (JOBS) of 2012. These rules mainly offer high net worth investors (with a net worth of $1 million or more) to directly access the real estate market through crowdfunding or peer-to-peer lending (among other investment markets).

As the U.S. Securities and Exchange Commission explores ways to enable investors of all income levels to access real estate online, the wealthiest investors are already investing in crowdfunding sites like iFunding, Realty Mogul, CrowdStreet, and Fundraise. If only a tiny percentage of them invest only a portion of their real estate assets, the market will be in the trillions of dollars.


Real estate crowdfunding

Crowdfunding uses social networks such as friends, family, and colleagues linked through social networking sites such as Facebook, Twitter, and LinkedIn to market a new business and attract a wide range of individual investors. Crowdfunding has the potential to significantly expand the pool of potential investors from whom it is possible to raise funds beyond the traditional circle of insiders, owners, family members, and venture capitalists. The recent amendments to the laws on who can invest in real estate and how have opened the door to more crowdfunding.

Real estate groups are already joining the crowdfunding movement, promoting relatively low-risk access to the U.S. real estate market. While each of these platforms has its niche and strategy, with varying minimum investment levels, they are all aimed at accredited investors who meet specific net worth and/or annual income requirements. On the contrary, crowdfunding will open the field to many small investors."

What are the advantages and disadvantages of crowdfunding for investors? In a nutshell, it all comes down to risk for both parties, particularly the amount of information online investors want to absorb. According to the report, real estate developers and investors can reap significant financial benefits from crowdfunding, and both can spread their risks.


Advantages and disadvantages of crowdfunding

Advantages 

  • Investors enter the real estate market with small amounts of money.

  • Work directly with developers and property management and have a say in the process.

  • You can choose which real estate developments you want to invest your money in.

  • Access to many projects, so the choice is not a problem.

  • Reduced investment size in a single project.

Disadvantages

  • Lack of liquidity, such as the absence of a secondary market, limits investors' easy access to sales opportunities.

  • The investment risks are basically the same as for any real estate investor. If the market goes down, the investor risks losing money.

  • The risk of non-payment of investments (by real estate developers) is higher for crowdfunding than for direct and peer-to-peer financing of real estate investments.

  • You must currently be an Accredited U.S. Investor.

Transparency is essential

It is recommended to look for crowdfunding platforms and sponsors who recognize risk by offering an educational approach to risk management. Today, most real estate crowdfunding platforms only allow accredited investors to invest, as defined by the SEC. Accredited investors are encouraged to invest in stocks with which they are comfortable, given their overall investment portfolio.

Another tip: only invest in offers from sponsors that you trust and are sure will have the best interest in good times and bad times.

Suppose an investor does not understand how his money is being used, the risk factors of the investment, and the factors that affect the return on investment. In that case, he should seek advice from his trusted investment advisor or transfer the investment. There will be several other investment opportunities to choose from, so don't rush into making an uninformed investment decision.

A professional real estate crowdfunding platform must offer investors many opportunities to communicate about the offer, including the direct presentation by the property sponsor.


A new regulatory environment

The instigator for launching crowdfunding for real estate investments and other business ventures was the passage of the JOBS law in 2012. Until recently, the ability to solicit and advertise to investors in real estate investments was limited. The JOBS Act (Title II) radically changed the way investment capital is raised by amending the existing rules of Regulation D, in particular the rules on how companies can offer and sell their securities without having to register them with the U.S Securities and Exchange Commission (SEC). 

In the past, Section 506 of Regulation D imposed restrictions on fundraising efforts, limiting fundraising to only pre-existing relationships and limiting a sponsor or other party from openly requesting or promoting such fundraising opportunities—fundraising. The new 506(c) Rule allows issuers, sponsors, syndicates, and others to raise capital from private investors to advertise these private investment opportunities to qualified investors under certain conditions. This rule entered into force on September 23, 2013. The new federal legislation represents a major change for patrons raising funds for the purchase or development of the real estate. In essence, Title II gives the green light to crowdfunding companies to trade directly with a large group of potential investors via social media and the internet. It also created a new vehicle that will make it easier for investors to access direct real estate investment opportunities.

For the first time, investors have direct access to a selection of private property offerings that they can explore, research, and make informed investment decisions online.


Bottom Line

Crowdfunding in the real estate market has proven to be a revolution. It's only getting off the ground, but it's already gaining impressive interest from serious investors. While real estate crowdfunding is risky, real estate investing can help you diversify your portfolio and earn competitive profits. Keep in mind that you still need to be an Accredited Investor in the United States for now. Still, as this market becomes more popular, we hope it becomes even more accessible to the average American.


Summary

  • A downside to crowdfunding investing is that you need to be a qualified investor for most of these projects.

  • New regulatory changes resulting from the JOBS Act of 2012 provide better access to real estate crowdfunding, allowing individuals better access to the growing U.S. real estate market.

  • One of the biggest advantages of crowdfunding real estate investments is that investors can commit much smaller amounts of capital to any property, sometimes up to $500 or $1,000.

  • Real estate crowdfunding enables developers to solicit a wide range of potential investors by capitalizing on these social networks on technological platforms.


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Dennis Jao
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