Something our legislators and other regulators are constantly trying to do is control the big players in real estate investing by passing new laws that change the rules. For instance, there is a waiting period for institutional buyers when government owned foreclosures come onto the market. The waiting period is intended to allow buyers that are planning to occupy the home the first chance to buy. Historically, the rule changes only mean it takes the big guys a few months to find ways to get around the new rules.
What's happening today is much bigger than a few rule changes. With crowd funding, the entire game is being changed. Crowd funding enables small investors to get in on deals with a small investment that were previously only available to big investors. For instance, if you want to get in on the big deals that hedge funds invest in, as an investor you're required to meet minimum capitalization levels, called accredited investors (have an income of $200,000 or a $1 million net worth). These regulations come from the SEC with some more ridged standards established at the state level. Additionally, the hedge funds have policies requiring a minimum $1 million investment that often goes as high as a $10 million to get into that game. Even then, the investor is at the mercy of the hedge fund manager deciding what to invest in. Clearly, all of these rules keep small investors on the sidelines when it comes to major real estate investments.
Crowd funding is about very focused investments. Instead of dropping $1 million into a general investment fund that spreads the money around, you invest maybe $5,000 into a specific and well-defined single project. Crowd funding opens up investment opportunities to small investors in expensive commercial properties such as shopping malls, mobile-home parks, and apartment buildings.
As a small investor, you can get in on the ground floor by working directly with a developer. When working with a developer to build new construction, you'll have to wait until the construction is complete and tenants are in place before you'll receive a return on your investment. You can also work with an experienced lead investor to buy into a property that is already providing income. In either case, crowd funding investors are entitled to a portion of the cash flow as well as the profit when the property is sold. There is no guarantee of earnings but early investors report that 6% to 8% is common and a few say they are earning upwards of 15%.
Not all crowd funding opportunities are open to small investors. Crowd funds requiring higher minimum investment amounts are still governed by the SEC accredited investor regulations. However, the SEC says it's working to remove these hurdles. Still, there are crowd funds out there accepting investments as low as $100 with the intent of enabling everyone to get into this new game.
Do your homework before investing in a crowd fund. This is a new game and the rules aren't set in stone yet. Before investing, be sure to read and understand all of the disclosures and look for opportunities with crowd funds that have demonstrated prior success.
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