Brian O’Connell | Investopedia | July 25, 2014 – Can two disparate investment markets – one old and one new – get along without driving each other crazy?
That’s the key question for crowdfunding and the real estate market. It’s a question being answered in positive ways in 2014, as the two “odd couples” appear to be pairing up quite nicely and giving investors a new way to leverage profits from the burgeoning U.S. real estate market.
The real estate crowdfunding site iFunding estimates the size of the combined market at $11 trillion.
At the “Innovations in Real Estate: Crowdfund Investing” conference in April 2014 in New York City, Markley Roderick, a lawyer with Flaster/Greenberg PC and the conference moderator, pointed out that new regulations are linked to the Jumpstart Our Business Startups (JOBS) Act of 2012. The new rules allow mostly affluent investors (with a net worth of $1 million or more) to gain direct access to the real estate market through crowdfunding, or peer-to-peer lending (among other investment markets).
While the U.S. Securities and Exchange Commission explores ways to allow investors of all income levels to access the real estate market online, Roderick says that wealthier investors are already investing on crowdfunding sites like iFunding, Realty Mogul, CrowdStreet and Fundrise.
“If only a small percentage of them invest only a small amount of their assets in real estate, the market will be trillions of dollars,” explains Roderick.
By definition, crowdfunding should be a natural for the real estate market. In a word, crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.
Real estate industry groups are already climbing aboard the crowdfunding bandwagon and are touting the relatively low-risk access to the U.S. real estate market to, for now, wealthier Americans.
“Crowdfunding for real estate is not an entirely new phenomenon,” said the Commercial Real Estate Development Association in a recent statement. “Numerous players have entered the field. Although each of these platforms has its own niche and strategy, with different levels of minimum investment, all are geared toward accredited investors who meet specific requirements for net worth and/or annual income. By contrast, crowdfunding under the JOBS Act will open the field to many more smaller investors.”
What are the pros and cons of crowdfunding for investors? In a word, both sides come down to risk; specifically, how much investors want to absorb online.
According to the report, both real estate developers and investors can reap significant financial returns through crowdfunding, and both are able to spread their risks.
Pros . . .
Investors get access to the real estate market with small amounts of money.
Investors get to work directly with real estate developers and have a voice in the process.
Investors can choose which real estate projects in which they want to invest their money.
Investors have access to myriad projects, so choice and options aren’t a problem.
Cons . . .
Investors have the same issues as every real estate investor. If the market goes south, they will likely lose money.
The risk of investment default (from real estate developers) is higher for crowdfunding compared to peer-to-peer and direct real estate investment funding.
A lack of liquidity, as the absence of a secondary market restricts easy selling access for investors.