When investors think of purchasing real estate to diversify their portfolio, the overwhelming process often initially outweighs the benefits. The same is true for real estate developers when it comes to securing funds for their projects. The process of locking in capital appears to be not only lengthy, but costly. But what if there was an easy win-win situation for these investors to work seamlessly with these borrowers? Great news for everybody: there is a way.
Real estate crowdfunding is one of the simplest ways for an investor to add real estate to their portfolio and for borrowers to quickly, and securely, raise funds for projects. Investors need as little as $5,000 to get started and can access a vetted database of real estate developments looking for capital to complete projects. Real estate crowdfunding platforms work with both investors and borrowers, making sure that each investment is the best fit for both parties.
Crowdfunding real estate first began to soar in popularity when President Barack Obama signed off on the Jumpstart Our Business Startups Act in 2012 allowing startups to raise up to $1 million in capital without having to register securities with the Securities and Exchange Commission (SEC). Following in 2013, the SEC further opened the door for crowdfunding by allowing more direct marketing and solicitation of accredited investors, removing restrictions on the solicitation of funds online.
Real estate crowdfunding today is in a unique position to connect borrowers to capital from accredited investors, potentially minimizing the previous barriers to secured funds for real estate development projects. The real estate crowdfunding platforms used to streamline this process are potentially the gateway to funding projects, both residential and commercial, big and small.
1. Speed and ease of borrowing: Rather than potentially waiting months for a loan to be approved through a bank, crowdfunding has the ability to secure funding within a matter of weeks. This process, when compared to the leaps and bounds required to obtain a bank loan or bridge loan, is becoming the go-to source for capital among some real estate developers.
2. Competitive costs vs banks: Cost is potentially one of the most rewarding benefits of utilizing crowdfunding vs bank lending. Online platforms have lower overhead compared to banks, which can translate to fewer fees and lower interest rates for borrowers.
3. Flexible financing options: Since real estate crowdfunding platforms have the ability to be flexible with the types of properties they’re able to list to investors, they can also offer flexible financing options to the borrower. Financing options from these platforms include secured real estate loans, equity financing and preferred equity and are potentially more flexible on loan terms and underwriting requirements.
Just as investors weigh the pros and cons of investing in real estate via crowdfunding, REITs or direct ownership, borrowers also must compare the benefits and disadvantages of using crowdfunding vs direct lending. Similar to the benefits of directly investing in real estate, borrowers may be better matched up to direct lending if they are interested in creating a closer relationship with their lender who can help them make daily decisions along the way during development. On the other hand, a developer may be more comfortable with investors that can provide quick and dependable capital for them to complete a project as they see fit utilizing their own team of professionals.
If crowdfunding is determined to be the right fit for funding, borrowers must then answer a few questions to best match them up with the platform that suites their needs.
1: Does the platform have the options necessary for the investment?
In other words, research to see if they offer debt, equity or both.
2: Is the platform focused on the type of project being developed?
Making sure that the platform is set up to leverage the type of project such as residential developments, commercial or mixed-use.
3: What is the process and what are the fees?
A borrower needs to perform their own due diligence on finding the right platform. This includes having all of the information prepared that the platform needs to secure the opportunity for their investors and reviewing the fees required to list on their platform.
If crowdfunding is a good fit for a borrower, it is a quick process to begin, and funding can be available in as little as a few weeks once the project is listed on a credible, and accountable, crowdfunding platform such a RealtyShares, one of the first and one of the most reliable online platforms for real estate crowdfunding.
Borrowers can begin to leverage their opportunities to accredited investors starting with these steps:
1. Submit an online application providing all of the necessary information about the real estate opportunity so that the platform can begin its analysis of the development and approve it for listing.
2. Once approved, more detailed information is requested and a background and credit check are performed. In other words, the opportunity is vetted in preparation to present to accredited investors.
3. The opportunity is listed on the platform’s site and immediately begins attracting attention from investors ready with capital for the project.
4. Capital can begin to come in from multiple investors and depending on the details of the debt investment or equity investment, many opportunities are fully funded within a few weeks.
5. Approval to move forward is granted once all commitments have been received, a process that can take only a few days.
Although Real Estate Crowdfunding may not be the best choice for all borrowers, it does have some favorable attributes in comparison to traditional lending sources.
About the Author: Nav Athwal is the Founder and CEO of RealtyShares, an accredited investor crowdfunding for real estate platform. Before starting RealtyShares, he was a Real Estate & Land Use Attorney at San Francisco based law firm Farella Braun & Martel, LLP. As a Real Estate Attorney, he represented National and International Clients including public REIT’s, real estate developers, property owners, investors, non-profit housing providers and governmental agencies.
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