An Inside Look at the Real Estate Crowdfunding Land Rush
Crowdfunding is a concept you have probably heard of and are pretty familiar with. It is a term associated with sites like Kickstarter and Gofundme. Usually, someone needs to get an expensive medical procedure and cannot afford it, or an artist is looking for funding whether it be for a tour or recording session or something else. However, did you know that real-estate crowdfunding is gaining some serious momentum? This offers some serious opportunities for anyone interested in real-estate, but it is important to understand exactly what you’re getting into and what you can expect out of a transaction of this nature. Let’s explore real estate crowdfunding and take a look at some things you should keep in mind if you are going to put your money into it.
In 2015, Americans used various crowdfunding platforms to invest a total of 484 million dollars into real-estate projects, which according to the Cambridge Judge Business School is more than three times the total of 2014. There is no doubt that this type of investing is becoming increasingly popular. But why?
Just under three years ago the JOBS Act was passed. This law made it legal to solicit investments online, which was previously illegal. Since then, the number of crowdfunding real-estate investment sites has exploded exponentially. While this creates a lot of opportunity, there are also a lot more chances to err. There are hundreds of real-estate crowdfunding websites currently. Not all of these sites are going to be quality places. Right now there is a gold rush so to speak. A lot of sites are popping up hoping to attract business and investments, but they have very little to offer the user.
Some things that you should be keen on looking for when exploring a real estate crowdfunding site are:
–Transparency: You should know exactly what the terms of the site are. Where your money goes, and how much of a percentage on the deals the site takes for use etc. There are a number of things that should raise red flags for you. The first one should be the ease of acquiring information. You should not have to struggle to get basic information.
–Fees: Find out how much a crowdfunding site is charging and compare those fees to other websites on the internet. When it comes to reputable online real-estate investment there is probably a pretty standard fee charged. Rates that are extremely low or are too high should raise red flags for you.
–Investment opportunities: Are there any quality investment opportunities offered? Look and see what kind of projects are looking for investment on a crowdfunding site. What is the point of joining a website if there are not any quality investment opportunities.
–Venture capital backing: Are other people, especially venture capital investments, backing projects on the crowdfunding platform you’re looking at? As we’ve previously discussed, 484 million dollars were invested last year on crowdfunding sites. There is venture capital backing out there. If the platform you’re looking at has no venture capital backing, look elsewhere.
On May 16th, new SEC regulations went into effect concerning online investment. Non-accredited individuals can only invest a limited amount of money into projects, and projects are not allowed to raise more than 1 million dollars from non-accredited investors. However, there has already been a new bill introduced in Congress to raise both of those limits.
Like any business, there are going to be a number of solid platforms ranging in size. Size is not necessarily going to be indicative of quality, but investors should really take an in-depth look at any platform before choosing to invest on it. There are going to be more and more real-estate crowdfunding sites popping up while the trend is still hot, so it is more important than ever to be careful.
Contact us to learn more about real estate crowdfunding!