Is Real Estate Crowdfunding Right For You?



When Congress passed the Jumpstart Our Business Startups Act (JOBS Act) in 2012, the goal was to help small businesses find capital outside of traditional lending institutions to help them grow their businesses. 

It was not purposely designed to help launch crowdfunding for real estate investments.

But, the law of unintended consequences struck, and now the real estate crowdfunding industry is calculated to be at $11 trillion.

Until the passage of this law, the U.S. Securities and Exchange Commission (SEC) put tight regulations on how companies could advertise and solicit funds. Regulation D, Rule 506 required that fundraising could only be done among pre-existing relationships and it prevented sponsors or other parties from openly soliciting or advertising those private investment opportunities.

The JOBS Act (Title II) modified the Regulation D rules.

The Rule 506(b), which has always existed, requires potential investors to be vetted to determine their financial status before being able to even know what opportunities are available for them to invest in. 

The new Rule 506(c) allows for many parties (sponsors, syndicators, issuers, etc.) to advertise their private investment opportunities to any interested parties, with the caveat that the investor must provide proof that they’re accredited before they can invest with the crowdfunding entity.

This new rule has been a game changer for the real estate industry…sponsors and/or developers who are in need of funds for a real estate acquisition or development no longer have to depend on everyone they know to help finance a deal…they have an entire globe full of investors who can invest in their project.

Sponsors are using social media, online advertising, email marketing…everything any business uses to get the word out about their projects.

So what does this mean to the average person interested in real estate investing?

You have one more vehicle for investing in real estate to build out your investment portfolio…and for less than buying an investment property outright.

How it works

Crowdfunding real estate comes in two flavors:

  • Equity investments – similar to owning shares in an apartment building, when you invest in an equity investment you’re taking a share of the cash flow from rents and appreciation when the property sells.
  • Real property investments – non-bank loans that are secured by real estate and pay monthly interest

Equity investments obviously do well when property values are growing and vacancies are down and are typically paid out quarterly. Loans, however, provide a consistent monthly income with less volatility.

There are many crowdfunding websites out there with lots of great investment opportunities, but it’s important to understand what you’re investing in. One of the main documents you should receive is something called a PPM (Private Placement Memorandum).

While it has a lot of pages to it, it’s easiest to think of this document as a disclosure form. 

It should include the following information about the deal you’re thinking of investing in:

  • The risks you’re taking when investing in the deal
  • The tax implications of invest
  • Information about the project itself
  • Who is eligible to invest in the project

Investment Limits for Non-Accredited Investors

As of the time of this writing, the Title III regulations allow non-accredited investors to invest in crowdfunded investments, but the SEC has put restrictions on how much these investors can invest in a 12 month period.

The figure is based on each individual’s net worth and income.

  • $100,000 income/net worth = Either $2,000 or the lesser of 5% of your income/net worth
  • $100,000+ income/net worth = You can invest up to 10% of your income or net worth, whichever is less, up to a total limit of $100,000

These safeguards are put in place to reduce the risk to non-accredited investors who may not be as knowledgeable about either crowdfunding or investing in general.

Crowdfunding websites

Not every real estate crowdfunding website has opportunities for non-accredited investors, but with the explosive growth of the real estate crowdfunding industry chances are good you’ll find the right opportunities for your situation.

When choosing among the different crowdfunding websites, pay attention to the fees each platform charges as these costs will have an impact on the long-term returns you can expect.

Is Real Estate Crowdfunding Right For You?

Only you can judge whether or not real estate crowdfunding is right for you. Read through the following pros and cons to help you decide.

Pros:

  • It’s affordable – you can buy in for as little as $1,000, but more often it’s $5,000
  • It’s convenient – you can access deals online
  • Unlike a REIT, you have the choice of what deals to invest in
  • It helps you diversify your investments because you have many choices
  • You’re given access to lots of information about your assets, whenever you want it
  • It’s more predictable because crowdfunding properties aren’t publicly traded

Cons:

  • You’re not the owner…you simply own shares in the property
  • After you choose the platform and the property you invest in, you’re unable to make any decisions in how the deal is managed
  • If the project fails, you might end up losing your money
  • Often there can be hidden fees such as platform fees, construction fees, management fees, etc. that could undermine your returns

Finally, as with any investment, make sure you understand all of the details before diving in and that you find a reputable platform with a proven track record to avoid getting scammed.

 

Anita Cooper About Anita Cooper

Anita Cooper is the founder of Northwoods Writer, a marketing resource for real estate professionals.

Error-free, persuasive writing that meets or exceeds expectations is her obsession...that and coffee...black. She lives with her family in the beautiful Northwoods of Wisconsin when they’re not cruising the highways and byways on the lookout for something new and interesting or at least calm and relaxing.

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