Maybe you have heard the term and wandered “what is crowdfunding?” Just like any business transaction, there is more than one side of crowdfunding. Crowdfunding in real estate includes the investment side and the borrower side. This post covers the investment side.
The great part of our free market system, is that people may recognize issues and create alternatives. The new world of financing residential and commercial real estate investment is pushing the traditional sources of funds aside. The new option is private financing through technologies available for bringing together a large number of people for a specific cause. The umbrella name for this peer-to-peer financing is “crowdfunding”.
What Is Crowdfunding?
Crowdfunding in real estate is a way for a group of investors to join together and create a pool of funds (think Kickstarter and Prosper ) . These funds then allow each participant to make an investment that they are unable, or unwilling, to make on their own. Crowdfunding allows investors to participate in much larger projects, with a smaller investment, than traditional funding vehicles ever permitted.
Crowdfunding investments, under current government, rules are still largely limited to accredited investors. An accredited investor is a person with a net worth exceeding $1 million (excluding the value of their primary residence) and/or an annual income exceeding $200,000 annually (or $300,000, jointly with a spouse). Under a federal law passed in 2013, regulations were loosened for the use of crowdfunding concepts for business. There is also expectation that the rules for participation may soon also allow non-accredited investors to participate. The rules for how this can specifically work have been slow in coming from the Securities and Exchange Commission due to concerns that small and inexperienced investors could be taken advantage of if allowed to participate in crowdfunding methods.
On-line real estate lenders are crowdfunded by investors who want real estate related investments without the real estate related work. These investors can actually place as little as $1000 into a real estate investment using the lender’s platform. By using technology, the on-line lender is able to make investments such as buy-fix-sell loans simply and fast. The basis of the decision to loan into a project is strongly weighted toward the asset and the returns expected on the project. Most loans are financed singularly by project. Equity investments are also available.