Regardless of whether you’re a traditional REIT, an investor or a property management company, you’ve heard of them. They claim they’ll “change real estate investing forever.” They even claim you’re afraid of them, depending on who you are in the real estate industry.
They’re crowdfunding real estate investment companies, and they’re definitely making a splash in the industry. According to a statistic quoted by Forbes, the entire crowdfunding industry is projected to grow to over $300 billion by 2025. That kind of money gets everyone’s attention.
Just in case you haven’t had the time to really dig in and research crowdfunding, here’s a quick primer. In short, crowdfunding is a way for people to pool their money and invest it in a project, cause or asset. Think Kickstarter or GoFundMe. In the case of real estate, there are several big crowdfunding players, including RealtyShares, FundRise and Prodigy Network. Crowdfunding for real estate allows investors large and small to pool resources to buy, invest or support real estate projects from single-family to high-rise office buildings. Usually, the amount runs from $5,000 and up. Prodigy Network, which is focused on institutional assets has, a $50,000 minimum.
Before we leave the neighborhood, let’s keep the focus on Single Family for the moment.
Depending on the platform you use, crowdfunding companies claim they can they can help you find, buy, invest in and sell real estate assets. And they can. Many connect house flippers with investors who are willing to fund the flip in return for a piece of the profit. It’s as risky as flipping a house yourself, except you are relying on the experience of someone else to pick the right asset, improve it and sell it. Sounds familiar, right? In truth, it’s not much different for an investor than investing in a REIT, except for a few key items.
Crowdfunding real estate has given smaller investors more access to markets that were formerly restricted to institutional investors. Much of the barrier has been previously based on the amount required to invest. If you’re looking to build a high rise, it hasn’t made sense to go to small investors and ask for money. Crowdfunding offers something akin to volume buying, where several small investors can reach critical mass in the eyes of the developer. Another area of restriction comes with ownership. Private owners hold their investments more closely and some only want to deal with investors on very specific terms. Crowdfunding allows for a variety of options and agreements.
From an investor’s standpoint, even for larger investors, real estate crowdfunding does offer some favorable benefits. While the barrier to entry for normal investing might be $50,000 just for a single property, crowdfunding allows for diversification across multiple properties at that amount, decreasing risk. Finally, there’s visibility and transparency at the crowdfunding level. Crowdfunding sites generally have a vetting process that helps protect investors, as well as their own reputations.
While they may move the needle in some way, real estate crowdfunding platforms are unlikely to replace Real Estate Investment Trusts (REITs). These organizations offer strength, tradition, consistency (and in some cases, a well thought out, diversified portfolio) that can only be offered by an experienced professional. If knowledge is power, then an experienced REIT should inspire confidence and offset some of the risk that occurs with a less-diversified portfolio.
Are REITs still king? That is yet to be determined. Regardless of the source, no investment is a sure thing, no matter how ingenious the business model might be. Do your own research when dealing with any company or property, rather than jumping on the next big thing or assuming a company knows what it’s doing.
If you’re an owner or developer, crowdfunding might offer a possible cash flow. If you’re an investor, it can offer another possible alternative. If you’re a REIT, crowdfunding’s innovative approach may offer your own organization some fresh ideas for growth of your own business.
Note: This article is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should get independent financial advice from a professional and should research and verify, on our own, any information that you see here, whether for the purpose of making an investment decision or otherwise.
With 25+ years of marketing communications experience and 20 years of digital, Brett Moneta is a consultant, strategist, and writer with a web, video, social media (and even print) background. Growing up with a family-owned swimming pool construction business, he learned the ins and outs of construction and real estate well. Brett has built content strategy for Fortune 50 companies and has been a national blogger for Talent Zoo’s Digital Pivot magazine. Presently, he works in Marketing at RealPage, Inc., a leading global provider of software data analytics to the real estate industry, where he’s been since 2015. Brett holds two bachelor’s degrees from the University of Texas at Austin: BS in Radio/Television/Film and a BA in English.