One of the strengths of the internet is its ability to enable anyone to reach out and connect with others with similar interests. If there’s a niche that you’re passionate about, you’ll be able to find a like-minded community somewhere on the web. Many have taken advantage of this trend and translated it into capital production. Crowdfunding sites such as Kickstarter and Patreon cater to inventors, entrepreneurs, and artists looking to find support for their niche project. However, what started as a way for startups to gain exposure has been picked up by the commercial development sector.
Federal regulations hamper the abilities of real estate developers to receive capital from financial companies. There is, however, still a high demand for commercial development projects, which has caused many firms to consider crowdfunding an alternative method to acquire the necessary funding. Peer-to-peer real estate funding was made possible with the Jumpstart Our Business Startups (JOBS) Act in 2012, which required the SEC to write rules regarding crowdfunding and other capital formation for startups, among other things. After its passage, an amendment to the act opened up crowdfunding for anyone over the age of 17, provided that they comply with investment limits. In this way, non-SEC accredited investors can make their mark on real estate.
Part of the peer-to-peer funding is the use of an intermediary to handle transactions. This is a requirement of the JOBS Act, and sets a limit of $1 million per year for what companies can raise from non-accredited investors. This is a point of contention for many real estate firms, who will often require more capital, particularly for larger and more noteworthy projects. At the moment, they mostly provide supplementary capital for developers, but if intermediary crowdfunding portals are successful in the near future, it could mean a large scale alternative to traditional funding. For now, appeals to raise the limit have been rejected by Congress.
Still, investors have taken notice of the power of crowdfunding. Not only does it allow for anybody to become an investor, but it ignores several hurdles that have faced investors for years. Crowdfunding portals allow for investors to manage their investments much more easily, and transactions can occur in a matter of hours instead of days or weeks. Portals also ensure that fundraising efforts are SEC-compliant. All manner of real estate projects, ranging in price from the thousands to the multimillions, have been impacted by crowdfunding. In fact, in 2015 alone, peer-to-peer investment went up by 300%, with $468 million invested in the market. This is still a very small portion of the market, but the growth attests to the interest that crowdfunding has generated in recent years.
Additionally, the often low investments common in crowdfunding ease some of the burden on investors, allowing those with somewhat limited funds to still contribute. Generally, the two options for anybody looking to invest in development through crowdfunding are debt, which is paid later with interest, and equity, in which an investor receives shares of rental income. The former is more predictable and reliable, but returns are limited by the interest rate. The latter has no cap on returns, and confers investors with tax benefits, but is riskier if the project has a poor ROI.
In any case, many developers are praising crowdfunding for circumventing the regulations that limit banks lending. It’s certainly more agile than private equity, as peer-to-peer fundraising lacks the central infrastructure of a bank that requires overhead. FundRise, RealtyMogul, and RealtyShares have all emerged as strong contenders in the race to innovate in real estate crowdfunding. In the future, we’ll likely see crowdfunding provide further opportunities for both smaller real estate companies and smaller investors. It may even eventually become competitive with larger financial institutions.
The commercial development industry has taken its first steps into the world of crowdfunding, making it less costly to adhere to compliance laws and easier to invest. The digital age has allowed it to carve its own niche in the industry, one that can leverage a vast pool of investors that have previously been unable to stake claims of their own.