Wednesday, July 25, 2018

Real Estate Crowdfunding

Real estate crowdfunding has been a hot topic for the past few years and continues to gain notoriety. Praised for its flexibility and low barrier to entry, crowdfunding enables investors to directly invest in real estate properties without having to amass the funds necessary for a mortgage down-payment. For an amount as low as $500, in some instances, investors can contribute to a pool of investor capital that will enable a real estate entity to acquire a property. Open to both accredited investors and the public at large, crowdfunding offers access to the risks and rewards of direct real estate ownership in a passive manner with relatively little out-of-pocket costs.

Why Didn’t This Happen Sooner?

Crowdfunding is not a new idea, real estate investors for decades have pooled money to purchase properties, in an attempt to share risk and/or acquisition costs. These attempts at crowdfunding typically took the form of private “offerings” of shares or interest in a real estate holding entity, such as a limited partnership, LLC or corporation. Such private offerings were frequently limited to the immediate network of the party organizing the offering for one primary reason—securities laws made offering such investment opportunities to the public onerous and costly.

The various federal and state securities laws that regulate investment opportunities in the United States all share one common motivation—to ensure that investors are given enough information to make a informed investment decisions during the offering of an investment opportunity. In an attempt to protect the public from overly complex investment opportunities that it may not fully understand, federal and most securities laws have classified certain classes of investments as too complex to be offered to the public. All other investments must undertake numerous steps to retain the transparency necessary for public investment, including distributing an investment prospectus, filing IRS form 10-K's annually and adhering to certain required accounting procedures, among other requirements. Complying with the various requirements of public offerings can be time consuming and costly, thus federal securities law offers certain exemptions from these requirements for certain non-public offerings. Most states offer similar exemptions in their investment laws, as well.

In the past, offerors of real estate investment opportunities were careful to ensure that their real estate offerings were structured in such a way that they qualified for the federal and state exemptions, as non-compliance with these laws could lead to stiff penalties and even criminal prosecution. In so doing, such offerings were limited to investor that fit the federal and state definition of “sophisticated.” This all changed, however, with the passing of the JOBS Act in 2012. This act expanded the exemptions offered under federal securities laws to include crowdfunding. Coupled with the 2015 SEC regulations on crowdfunding, the JOBS Act has served to facilitate the explosion of crowdfunding in general and real estate crowdfunding in particular.

Crowdfunding for All?

Real estate crowdfunding, with its open access to funding from the public at large, may seem the answer to all real estate funding needs. In fact, many crowdfunded projects are funded with equity or no-interest debt. This form of financing, however, is by no means a panacea for all real estate capital woes. First and foremost, all crowdfunding is limited by SEC regulations, which means that a crowdfunding offering cannot raise more than the current SEC limit of $1,070,000.00 within a 12-month period. Any additional funding needs will have to be obtained through other fundraising or financing efforts. Furthermore, crowdfunding offerors must also comply with various SEC and tax reporting requirements.

Types of Crowdfunding

There are many different types of crowdfunding offerings. In exchange for their investment, investors are able obtain equity in a real estate entity that acquires a property, provide loans or debt financing to an acquiring company or even become a limited partner in a small investment collaboration. Real estate companies have used crowdfunding in a myriad of ways from individual residential property acquisition to purchases of commercial property portfolios. Despite the various uses of the capital raised by crowdfunding, regulations on these offerings have led to similarities in the appearances and investor interfaces of most real estate crowdfunding portals. As such, most crowdfunding investors need only visit a crowdfunding portal to browse real estate investment opportunities available to fund. Companies such as Fundrise, Rich Uncle, RealtyMogul and Lending Home, among others, all offer access to real estate crowdfunding opportunities. The following articles provide more information on the most well-known real estate crowdfunding sites:



Not Crowdfunding, but…

In addition to crowdfunding, full-service real estate investor websites have also begun to gain popularity. These websites provide listings of properties available for real estate investment along with access to a myriad of support services to facilitate the purchase of the listed properties, such as financing, property management, etc. Companies like Roofstock, Own America and HomeUnion offer such investor listing services. Please feel free to check out the article below on real estate investor listing websites:


The key difference between investor listing websites and crowdfunding websites is that listing websites offer properties for purchase, whereas crowdfunding websites offer opportunities to invest in a real estate entity without directly owning a property.
At this point, it may be prudent to mention that passive investment in the real estate market is still possible through more traditional methods, such as real estate investment trusts (REIT’s), government sponsored entity debt (Ginnie, Fannie and Freddie debt) and mortgage-backed securities (MBS). Crowdfunding, however, is distinguished from these methods in its ability to provide direct exposure to real estate acquisitions and direct access to the acquiring entities.

Well, that is my take on real estate crowdfunding, please feel free to provide your prospective on the matter below.