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.
Crowdfunding real estate comes in two flavors:
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:
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.
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.
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.
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.
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.
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