You may have heard of a new financial concept called real estate crowdfunding and wondered what it’s all about. You probably assume that it’s similar to websites like Kickstarter or Indiegogo that allow individuals to contribute to startup companies and receive t-shirts or other token rewards in return.
Real estate crowdfunding actually has very little to do with charitable or rewards crowdfunding; it’s a way for real estate entrepreneurs, known as “sponsors”, to raise funding for their projects and for investors to access the real estate market and diversify their portfolios away from stocks, bonds, and other low-yield investments.
Real estate crowdfunding is essentially real estate private placement offerings conducted online. The websites that host real estate crowdfunding investments are typically known as platforms, although some people prefer to call them portals. Sponsors that post properties on crowdfunding platforms can raise equity or borrow money directly from the platforms, or from investors they connect with through the platforms. Some platforms only offer equity deals, some only offer debt deals, and some offer both. Investors are able to sign subscription agreements and other documents online, and can often pay sponsors online as well. Some platforms even allow investors to track the performance of their investments using special dashboard applications.
There are currently around 150 real estate crowdfunding platforms worldwide, and there is a great deal of diversity and specialization among these companies. For example, RealCrowd and CrowdStreet specialize in pure commercial real estate equity, Patch of Land and PeerStreet only offer single family residential fix-and-flip debt deals, and Fundrise features a new type of REIT product. There are platforms that specialize in different geographic regions, and even a platform that offers nothing by hospitality industry investments.
Real estate crowdfunding has caught on in a big way, and is growing at an incredible rate. According to crowdfunding data provider Massolution, $1 billion was raised using real estate crowdfunding in 2014; that amount increased to $2.5 billion in 2015 and $3.5 billion in 2016. These amounts may sound enormous, but they represent less than one percent of the total real estate capital market; real estate crowdfunding has plenty of room for growth!
Next up I’ll talk about the legislation that enabled the real estate crowdfunding revolution.