Is Crowdfunding Taking Over the Real Estate Market?
Has real estate investing become a collaborative effort? In a word – yes; crowdfunding is the new "boom" in the real estate market, but what is it? The concept is not that difficult to grasp. One person has an idea, in this case a property to buy, but not enough money to leverage it. He takes that idea and flashes it around to people who do have cash to spend and are looking for investment opportunities. With several investors in his pocket, he now has the capital to turn that bright idea into something tangible.
In the world of real estate investing, crowdfunding is the newest trend, especially for commercial property investments where big money comes into play. It is an alternative investment plan that keeps you out of the stock market and, potentially, flush with passive income.
Crowdfunding in Action
Real estate crowdfunding is a tried and true method of raising capital. The Hard Rock Hotel Palm Springs recently sold off a small chunk of equity to 85 individual investors. This crowdfunding campaign sold 15 percent of the 163-room themed hotel to a diverse group of small investors found online. The principle company, Kittridge Hotels & Resorts LLC, retains the remaining 85 percent.
The goal was to raise funds to pay for upgrades to the property and to bring in better entertainment. The majority of the money will go to adding a nightclub to the resort, according to Kittridge owner Andy Carpiac. Each investor bought into the resort with at least a 10,000 dollars payout.
In return, the they will receive passive income from the hotel – paid quarterly as rent. The investments will also appreciate, creating another pay off should Kittridge sell the property. That is no small door prize. Oculus VR raised crowdfunding capital through Kickstarter. When Facebook bought them out, the appreciation paid a 145-fold return – that's 145 dollars for every 1 dollar invested.
Is Real Estate Crowdfunding Legal?
If it sounds too good to be true, there must be a catch, right? In 2013, the U.S. Securities and Exchange Commission approved the non-accredited crowdfunding component (Title III) for the Jumpstart Our Business Startups, or JOBS, Act.
In a nutshell, Title III opens the door for businesses, usually emerging growth companies, to solicit people of all income levels to invest. Prior to the passage of Title III, they could only solicit what the SEC calls accredited investors – people with net incomes over 250,000 dollars.
Title III does come with a catch. There is a cap on how much capital a company can seek via crowdfunding each year. Individuals can also only invest 2,000 dollars a year or 10 percent of their annual income.
Crowdfunding versus Peer-to-Peer Lending
Crowdfunding is not technically peer-to-peer lending, but it is close. When it comes to real estate, P2P lending is like taking out a mortgage except the lender is other people. Crowdfunding is a collaborative real estate investment. You have investment partners instead of lenders.
Who are the Key Players?
Both crowdfunding and peer-to-peer real estate investing have marketplaces active on the Internet. As with all things investment, read the small print before signing on the dotted line.
- Realty Mogul – Even if you are not looking to invest, this site is a good resource if you are interested learning more about crowdfunding and passive income. Founded in 2013, Realty Mogul serves as the middle man for those who have money to invest and those looking to buy property or sell equity.
- Fundrise – Fundrise focuses on commercial real estate in major metropolitan markets. The site boasts an average return of 12 to 14 percent.
- The Lending Club – The Lending Club is a more generalized P2P site, but you could see some real estate opportunities there, as well as small business lending.
- Money360 – Money360 is strictly P2P real estate and deals only with accredited investors.
So, who benefits from real estate crowdfunding? If you believe the hype, everyone does. As an investor, you get to put your money towards less risky ventures then the stock market. As a real estate entrepreneur looking to drum up capital, you have access to a wider audience of potential investors – win win.