The number of real estate crowdfunding platforms have spiked over the last few years. The National Association of Realtors (NAR), expects that growth to continue. It’s easy to see why.
For realtors, real estate crowdfunding offers a new source of capital for commercial real estate projects that does not depend on banks. The NAR says this is especially valuable for smaller projects that may be tough to finance through regional lending institutions.
Wider access to investing in commercial real estate
Real estate crowdfunding also allows individuals to invest with a relatively small amount of capital. Valley commercial real estate agent, Kurt Nishimura says crowdfunding, until fairly recently, is what used to happen only in exclusive circles; on golf courses or at dinner parties. Someone with an investment opportunity and in need of capital, would talk to his or her wealthy golf buddies at the country club about a great deal. By the 18th hole, several investors were lined up and ready write a check. These opportunities, for the most part, were reserved for the wealthy and well-connected.
Crowdfunding platforms allow investors to pool their capital, making investing in commercial real estate accessible to just about anyone with money to invest, regardless of whether or not they belong to an exclusive country club. Developers can reach a much wider group of potential investors, even those who want to commit as a little as $1,000.
SEC regulations govern crowdfunding platforms. Realtors cannot host a platform for their clients unless they are registered with the SEC as a licensed broker-dealer. Most real estate crowdfunding platforms only allow accredited investors.
Most crowdfunding platforms only allow accredited investors
The SEC defines accredited investors as someone who has an individual net worth or joint net worth with his or her spouse in excess of $1 million at the time of the purchase. That figure does not include the value of the investor’s home. Investors can also be considered accredited if they show an annual income of more than $200,000 for the last two years and can prove that income will likely continue. The SEC allows these investors can invest up to ten percent of their annual income or net worth.
To allow unaccredited investors requires crowdfunding platforms to jump through endless regulatory hoops. The SEC treats real estate crowdfunding aimed at raising more than $100,000, the same as a public offering. As such, it requires full, registered offering-style disclosure.
Smaller projects avoid SEC disclosure regulations
Smaller projects, looking to raise less than $100,000 can raise capital from unaccredited investors and duck that SEC requirement. The rub is that you would still have to comply with the state regulations – called “blue-sky” laws- and those change from state to state; sometimes year to year.
Pros of crowdfunding
Proponents of real estate crowdfunding say it gives investors access to the real estate market, with relatively small amounts of money. It also gives them choices. Investors can choose the projects in which they want to invest and work directly with real estate developers. Crowdfunding also opens up access to a wide variety of commercial real estate projects, allowing investors to find the right project for their investment needs.
One of the drawbacks to real estate crowdfunding is the risk. The likelihood real estate developers will default is higher for crowdfunding than with other types of funding. Nishimura says developers would often be better served getting a small business loan. They can borrow more money and are securing funds from an institution guaranteed by the government. Another drawback to crowdfunding is the lack of liquidity. Investors cannot sell their investment in a secondary market, if the need for cash arises.
Maximize the benefits, minimize the risk
To maximize the benefits and minimize the risk, work with a crowdfunding company that is well-capitalized and clearly has longevity. This requires potential investors to do their homework. Not all real estate crowdfunding platforms are created equal. Turning your money over to a platform headed by inexperienced people without their own capital could reap swift financial loss.
At Landmark Title A+, we work with residential realtors and their clients providing escrow and title services. If you have questions or need assistance, please contact our office at (602)768-2800 or visit our website.