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The Benefits of Real Estate Crowd Funding

By Scott GelberPublished November 3, 2013

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Crowfunding is a popular way for people to raise money for businesses, campaigns, and other ventures. The SEC recently has allowed crowdfunding to be used to fund real estate projects. In this article, the benefits and risks of the type of fundraising will be analyzed.
By Scott Gelber

What if I was to tell you that you have the opportunity to invest in physical assets, make sufficient returns, and even help your community out?  This dream is possible now that crowd funding investing is allowed for real estate.  I highly recommend both investors and developers to get involved.  In this blog post I will discuss the background, strengths, and risks of crowd funding investing for real estate.

Background

In April, 2012 the Jumpstart Our Business Startups (JOBS) Act was signed into law that made the funding of small businesses easier by easing various securities regulations.  Through this act, the concept of crowd funding, the collective effort of pooling money to support efforts of other organizations, has become used widely to help fund start-up businesses, political campaigns, and virtually anything that involves raising money.

Recently, SEC has allowed for crowd funding to be applied to real estate.  In the past, real estate investing was limited to high net worth investors and private equity firms.  The minimum investment for a real estate project can range from millions to tens of millions.  As of now, the minimum investment can be $1000 per share.  These investors, in return, gain stake in buildings and a percentage of the income from rent and appreciation.

Benefits

The following attributes of the new legislation will benefit both the investors and the real estate development companies:

·       Investors have the chance to invest in real estate:  Before this act came into place in order to invest in real estate, investors had an extremely high buy-in.  Now almost anyone can invest in a real estate development project.  According to Daniel Miller who is the co-founder of Fundrise, a real estate development company based out of D.C. that facilitates crowd funding, their projects on average gain returns between 8%-12%.

·       Developers will have easier ways to fund projects:  Developers can now advertise and market their projects to the public.  Since crowd funding is mostly done on the internet, owning a part of a building can be a click away.  For example, Realty Mogul, a marketplace for accredited investors to pool money online and buy shares of pre-vetted investment properties, has generated $4 million in real estate crowd funding transactions to invest in 20 properties that have been funded in full or in part.

·       Investors have social power:  Crowd funding gives the socially conscious a way to support their local communities.  This was not possible for the average member of a community when only accredited investors could invest in real estate.  Many projects will spring up now that will benefit the community.  For example in Philadelphia, an online campaign has started to help fund a project that will provide space for local artists, small businesses, and start-ups.  This project is being developed by Fundrise.  According to Ben Miller, the CEO of Fundrise, real estate investments have now been "democratized."

Risks

Although crowd funding has a lot of benefits for all parties, investors should be careful of certain risks with the crowd funding:

·       Scams:  Investors should be worried about not seeing their money back.  According to Peter Chinloy, a professor of real estate and finance at American University's Kogod School of Business, investors run the risk of the investing in a project that never happens or that someone can't raise the money and never see construction take place.

·       Lack of knowledge:  Most people do not have the knowledge of a professional real estate investor and know exactly what a good investment is and what is not.  The fact that anyone can invest in these properties means people can be making bad choices and lose money from these investments.

Investor should be aware of these risks; however, if they are investing with credible developers, such as Fundrise or Realty Mogul, these risks should not be a problem.  These reputable companies are also trying to make a sufficient return and have done the analysis to see if they are strong investments.  I advise investors to analyze projects, but they should trust the expertise of these companies.