Real estate crowdfunding has been a hot topic for the past few years and continues to gain notoriety. Praised for its flexibility and low barrier to entry, crowdfunding enables investors to directly invest in real estate properties
without having to amass the funds necessary for a mortgage down-payment. For
an amount as low as $500, in some instances, investors can contribute to a pool of investor capital that will enable a real estate entity to acquire a
property. Open to both accredited investors and the public at large, crowdfunding
offers access to the risks and rewards of direct real estate ownership in a
passive manner with relatively little out-of-pocket costs.
Crowdfunding is not a new idea,
real estate investors for decades have pooled money to purchase properties, in
an attempt to share risk and/or acquisition costs. These attempts at
crowdfunding typically took the form of private “offerings” of shares or interest in a real estate holding entity, such as a limited partnership, LLC or corporation.
Such private offerings were frequently limited to the immediate network of the
party organizing the offering for one
primary reason—securities laws made offering such investment opportunities to
the public onerous and costly.
The various federal and state
securities laws that regulate investment opportunities in the United States all
share one common motivation—to ensure that investors are given enough
information to make a informed investment decisions during the offering of an investment opportunity. In an attempt
to protect the public from overly complex investment opportunities that it may
not fully understand, federal and most securities laws have classified certain classes of
investments as too complex to be offered to the public. All other investments
must undertake numerous steps to retain the transparency necessary for public
investment, including distributing an investment prospectus, filing IRS form 10-K's annually and adhering to certain required accounting procedures, among other
requirements. Complying with the various requirements of public offerings can
be time consuming and costly, thus federal securities law offers certain exemptions from these
requirements for certain non-public offerings. Most states offer similar
exemptions in their investment laws, as well.
In the past, offerors of real
estate investment opportunities were careful to ensure that their real estate
offerings were structured in such a way that they qualified for the federal and
state exemptions, as non-compliance with these laws could lead to stiff penalties and even criminal prosecution. In so
doing, such offerings were limited to investor that fit the federal and state
definition of “sophisticated.” This all changed, however, with the passing of
the JOBS Act in 2012. This act expanded the exemptions offered under federal
securities laws to include crowdfunding. Coupled with the 2015 SEC
regulations on crowdfunding, the JOBS Act has served to facilitate the
explosion of crowdfunding in general and real estate crowdfunding in
particular.
Crowdfunding for All?
Real estate crowdfunding, with its open access to funding from the public at large, may seem the answer to all
real estate funding needs. In fact, many crowdfunded projects are funded with equity or
no-interest debt. This form of financing, however, is by no means a panacea for
all real estate capital woes. First and foremost, all crowdfunding is limited by
SEC regulations, which means that a crowdfunding offering cannot raise more
than the current SEC limit of $1,070,000.00 within a 12-month period. Any
additional funding needs will have to be obtained through other fundraising or
financing efforts. Furthermore, crowdfunding offerors must also comply with various SEC and tax reporting requirements.
Types of Crowdfunding
There are many different types of
crowdfunding offerings. In exchange for their investment, investors are able
obtain equity in a real estate entity that acquires a property, provide loans
or debt financing to an acquiring company or even become a limited partner in
a small investment collaboration. Real estate companies have used crowdfunding in
a myriad of ways from individual residential property acquisition to
purchases of commercial property portfolios. Despite the various uses of the
capital raised by crowdfunding, regulations on these offerings have led to
similarities in the appearances and investor interfaces of most real estate
crowdfunding portals. As such, most crowdfunding investors need only visit a crowdfunding
portal to browse real estate investment opportunities available to fund. Companies such as Fundrise, Rich Uncle, RealtyMogul and Lending Home, among others, all
offer access to real estate crowdfunding opportunities. The following articles provide more
information on the most well-known real estate crowdfunding sites:
Not Crowdfunding, but…
In addition to crowdfunding, full-service
real estate investor websites have also begun to gain popularity. These
websites provide listings of properties available for real estate investment
along with access to a myriad of support services to facilitate the purchase
of the listed properties, such as financing, property management, etc. Companies
like Roofstock, Own America and HomeUnion offer such investor listing services. Please
feel free to check out the article below on real estate investor listing
websites:
The key difference between investor
listing websites and crowdfunding websites is that listing websites offer
properties for purchase, whereas crowdfunding websites offer opportunities to
invest in a real estate entity without directly owning a property.
Well, that is my take on real
estate crowdfunding, please feel free to provide your prospective on the matter
below.
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