Crowdfunding and Commercial Real Estate
Just a few years ago, aspiring video game companies, tech startups, and indie bands were using crowdfunding sites in the hope that they’d get just enough money to keep the lights on. In 2014, however, popular crowdfunding platforms like Kickstarter, Crowdfunder, and Indiegogo collectively raised more than $5 billion dollars. Now, crowdfunding has hit the real estate scene in a big, big way. Sites like Fundrise are proving their worth each day.
And while it could be argued that crowdfunding in the real estate sphere is unorthodox, expensive, and limited— JOBS Act passed in 2012 legalized equity crowdfunding only for accredited investors—with an annual growth rate of 74 percent, it seems only natural that it would start impacting the world of commercial real estate.
How Does it Start?
Though most crowdfunding revenue went to other ventures, crowdfunding for real estate platforms has been responsible for raising more than $100 million for real estate properties across the United States.
It may seem insignificant now, but more and more developers are turning to this type of community crowdfunding because banks or other traditional financial sources have failed to give them the support they need. Not only will you see more capital being created this way, this type of sourcing may urge novice investors and developers to get in on the action.
If you’ve ever tried to launch an investment opportunity you know that it can be a tough go if you don’t have seasoned investors to reel in the new person here or there. Not only that, but if a deal is too good, those same seasoned investors often block novice investors from participating at all.
By opening a crowdfunding as a public venture, more people will be inclined to back more properties—which also has shortcomings, but that’s for another article.
As new crowdfunding opportunities rise, so too does the technology to support them. Platforms such as Fundrise, Crowdstreet, and ProHatch, all offer investors a chance to build and diversify their portfolios.
ProHatch recently launched a very informative blog about real estate crowdfunding trends and topics. And, co-founders of Fundrise and brothers Ben and Dan Miller, blog about real estate crowdfunding here.
Utilizing new technologies, these real estate crowdfunding sources bring investors and real estate companies together, all within one, easy-to-use marketplace. By doing this, they help investors increase their returns, while real estate companies find more investors and thus more money.
This gives any accredited investors the opportunity to invest in professionally-managed real estate, which were previously limited to banking and other institutions.
Crowdfunding isn’t likely to replace large-scale funding that we’re used to, but it will definitely have its place in smaller projects for the time being. And it should be noted that just like a normal investment deal, many of these properties could carry significant debt, could default, or investments could fall through.
Still, if you’re an accredited investor looking to dip your toes into the commercial market, or are looking to diversify your investments, then you should check out some of the platforms above. It may not make you rich, but it will give you experience, allow you to invest in properties of your choosing, and who knows, maybe you’ll be one step ahead of the rest of us.