Real Estate Crowdfunding 101

Crowdfunding is another way to raise money for business ventures, pet projects, charitable causes and just about anything else. Opportunities are posted on crowdfunding websites which provides access to a much broader pool of potential investors than ever before. This method of raising capital is becoming a steadily increasing force in the real estate market as well.

The Basics

Real estate crowdfunding became more broadly available to investors in 2012. That year, the Jumpstart Our Business Startups Act (JOBS) was passed. It relaxed the eligibility requirements for individuals who want to invest in crowdfunding realty; a net worth of $1 million is one of the criteria. Conventional real estate investing often required a commitment of hundreds of thousands, if not millions of dollars. The average investment size for crowdfunding real estate projects is several thousand dollars.

Landlords and developers are also benefiting because it gives them another potential source of capital besides banks and more traditional financing options, which typically have more stringent requirements. According to a June 2014 Wall Street Journal article, a number of real estate crowdfunding websites had collectively raised $135 million in equity and debt for a wide variety of owners and developers.

Diversification

One of the big benefits of real estate crowd funding is the diversification it provides on many fronts.

• Geographic

 Some real estate markets are booming and others are depressed. Through crowdfunding, investors have no geographic limitations and can pick and choose the part of the country in which they want to invest.

•     Financial 

Are you interested in adding some financial diversification to your investment portfolio? While not without risk, participating in real estate crowdfunding may be an attractive option. The investment minimums for some opportunities are as low as $100. It is not uncommon for holding periods to range from 18 to 30 months, which means you hopefully get your money back and more after that timeframe. Many websites also post an IRR (projected annual compounded rate of return) for each project. This number is never guaranteed, but does provide a sense of what can be expected. Investing in a single real estate property can also be attractive to some people because it is a tangible investment they can actually see and touch, unlike many other opportunities.

•      Property Type

Real estate crowdfunding opportunities are available all types of properties including commercial, residential and retail. In July 2014, a 15 percent stake in the Hard Rock Hotel Palm Springs was sold to 85 investors on a crowdfunding website.

Crowdfunding real estate websites make investing in property more accessible and feasible than ever before. They increase the amount of potential opportunities for all parties involved in the transactions.