by David Drake
Investors have always regarded real estate as a safe and less volatile investment than other forms of investment such as equities, and since 2013, the rapid rise of the crowdfunding industry is changing the rules of the game. Investors are now beginning to see real estate crowdfunding as an excellent tool to stabilize and diversify their investment portfolios. Moreover, many investors interested in real estate investment had to previously invest in real estate companies and their entire range of activities whether these activities were acceptable or not. Now, crowdfunding allows them to invest directly in specific properties or projects and achieve diversification and manage risk by spreading their investment over several projects.
Who Can Invest and How Much?
As of now, participation is restricted to accredited investors (defined as investors with an annual income in excess of $200,000 or a net worth of $1 million excluding a primary residence). However, the SEC is working on regulations to expand crowdfunding to non-accredited investors as well, and these are expected to be in place by the end of 2014 or early 2015. The deals available vary according to the platform: Fundrise LLC accepts amounts as low as $100 with the average investment being under $10,000. On the other hand, the minimum investment at Realty Mogul is $5000 and the average is $60,000. At the high end, Prodigy Network based in New York has raised more than $200 million from 4200 investors in Colombia to construct the tallest building in that country and $30 million for a luxury extended stay residence in Manhattan. It is now looking to raise $55 million for a luxury hotel project in New York. Prodigy has a minimum investment threshold of $50,000.
Crowdfunding and the Real Estate Industry
Crowdfunding has come at an opportune time for the real estate industry as banks and institutional investors had started pulling back from real estate financing in the aftermath of the sub-prime mortgage crisis. However, real estate is such a traditional and conservative industry that real estate developers have not fully accepted crowdfunding as a legitimate and credible alternative source of finance. However, real estate is arguably the industry to have benefited most from the explosive growth in crowdfunding. Crowdnetic has reported that real estate accounted for investments of more than $17 million in April 2014 followed by consumer products with $6.5 million. Crowdfunding platform Realty Mogul alone has raised over $26 million from investors since its inception. It is possible to explain the success of real estate by the fact that real estate investment is familiar to many investors but the entry barriers have been the requirement for large amounts of investment capital and access to the appropriate investment opportunities. However, real estate crowdfunding platforms allow investors to invest smaller sums of capital and offer access to a wide range of investment opportunities both in the United States and throughout the world. While investors wait for the benefits of capital appreciation over time, rental income produces steady cash flows in the short run.
Real Estate Crowdfunding Platforms
Currently, there are a handful of crowdfunding platforms but the number is expected to grow significantly by the end of 2014. Each platform has its own distinctive mix of investments ranging from equity through limited liability SPVs to senior secured debt to unsecured mezzanine debt as well as its own fee structure. For instance, Fundrise allows investors to invest anything between $100 and $1 million and a property developer looking for funding would make a proposal and the platform would carry out the necessary due diligence to determine that the proposal is investment worthy and then help to structure the deal and draw the necessary documentation.
A testament to the growth of the industry are the big institutional players which are joining the real estate crowdfunding arena. An example of such is Mainstreet Property Group which has raised about $1.8 million from “accredited investors” through its partnership with CrowdStreet, a real estate crowdfunding platform. In a pioneering move, the Carlton Group, a global real estate investment banking firm, has launched its accredited investors’ equity crowdfunding platform in April this year which represents the first of its kind by an institutional investor.
GroundBreaker, another leading platform in the real estate crowdfunding industry, is capitalizing on this trend as it transitioned to a full SaaS (Software as a Service) platform. This positions the firm as a turnkey solution not only for startups but also for the big institutional players who have long been in the real estate industry but don’t know how to leverage technology or internet marketing. GroundBreaker provides the technology in order to help entrepreneurs build their own real estate crowdfunding sites and have their own investor base.
How Big Can It Get?
Millions of dollars are flowing into real estate crowdfunding investments, and it is only the beginning. The value of the real estate market in the US is estimated at $11 trillion, and $400 billion worth of deals are estimated to be transacted every year. Even a tiny slice of this pie could be worth billions of dollars. The biggest challenge for crowdfunding platforms is to establish their credibility with investors and many of them are either becoming registered broker/dealers or affiliating with them. It looks as if the sky is the limit and the picture of real estate investment could change drastically in the short term.
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City-based family office, and The Soho Loft Media Group - The Voice of Capital Formation – a global financial media company with three divisions: Victoria Global Corporate Communications, Times Impact Publications, and The Soho Loft Conferences. You can reach him directly at David@LDJCapital.com.
This article originally appeared on the August Issue of Rule506Investor: http://www.rule506investor.com/issue1/html5/
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