July 27, 2020, 5:22 pm
Crowdfunded Real EstateNow, more than ever, it’s important to be familiar with the ins and outs of real estate crowdfunding. This strategy of raising million-dollar stakes in thousand-dollar contributions can be risky for both the investor and property manager, but the payoff may be too big to ignore.
Many people have seen the applications of crowdfunding in some capacity, as people take to social media to fund things like medical bills or purchases for the less fortunate. It was only a matter of time before its applications in real estate were realized.
In general, there is a high barrier of entry to real estate investment. Traditionally, most projects seeking investors required million dollar commitments in order to buy a stake in the projects. Smaller projects like home flipping did not have the opportunity to raise funds from investors, and investors only willing to commit thousands of dollars did not have the opportunity to choose their own projects.
US News States, that previous to the creation of crowdfunding platforms, Real Estate Investment Trusts (REITS) provided some outlet to small investors. However, managers treat them more like mutual funds. Investors cannot choose their own projects. In real estate, one of the main draws of investment is the tangible effects that their money can have.
Enter crowdfunding. Up until 2012, the definition of accredited investors was too rigorous for crowdfunding to work. In 2015, the JOBS act was modified so that anyone can invest in crowdfunded real estate, according to Forbes. Now, investors can both choose their project and hedge their bets with smaller investments.
Progress in Crowdfunding Real EstateIronically, although crowdfunding gives exclusive access to smaller projects, more and more large-scale real estate deals are crowdfunding. In Portland, Oregon, the Fair-Haired Dumbbell development was funded in part by crowdsourcing, according to the New York Times. It is consists of two towers which have skybridges between them, is 60,000 square feet, and has a funky exterior design.
The project raised just over US $1 million on the CrowdStreet platform. Investors were expecting 8 percent annual return for the first five years and additional interest following that. And although this might be the most visible (and visually striking) success of the platform’s funding power, it is by no means the only success.
CrowdStreet reported this year that it has 99,000 investors on its platform, according to Crowdfund Insider. This number is up 135% from March 31st, 2017. There are also more than 195 sponsors on the platform, a figure that increased 96% in the last twelve months. In other words, although the platform has been around for a while, it has experienced explosive growth only recently.
What Does the Future Hold for Crowdfunding?Given the amount of growth seen over the last year, the future seems bright for real estate crowdfunding platforms. Although CrowdStreet focuses on commercial real estate, there are platforms for virtually every niche.
Furthermore, the global market is expanding as a whole. Real estate crowdfunding is taking off in Germany. People are now more likely to use crowdfunding as they have seen evidence of its success. Colombian investor Rodrigo Nino built a skyscraper with a similar platform. As a whole, the market has gone from a US $8.80 million to a US $35 billion dollar industry. By 2025, estimates predict the market to be worth more than $300 billion.
Even more, new technologies have the potential to increase the practicality and widespread use of crowdfunding in real estate. The combination of cryptocurrency coin offerings and this type of funding is referred to as tokenization. Tokenization is in its early stages, but it’s worth keeping an eye on in the future. If the rapid growth of real estate crowdfunding is any indication, tokenized real estate could be seeing explosive growth soon.
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