4 Myths About Real Estate Crowdfunding

By , Founder & CEO at RealtyShares , CrowdFundBeat Sr. Guest Contributor.

With the passage of the JOBS Act in late 2012, crowdfunding has caught fire and is being used to raise money for everything from startups to small businesses. In fact, by the end of 2014, crowdfunding, which includes debt, equity, rewards and donation based crowdfunding has injected $65 billion into the global economy. And by the end of this year, some predict that crowdfunders will have injected $2.5 billion into real estate alone.

CircleUp and AngelList have made the crowdfunding value proposition possible for startups. The basic premise for real estate crowdfunding is very similar. An investor can access individual real estate properties through an online platform and pool money with other investors to invest as little as $1,000 into that specific property. Because of the complexity of real estate and because the industry is still very nascent, there are still misconceptions about the basic structure (both legal and otherwise) of a crowdfunded real estate investment. And as the Founder and CEO of real estate crowdfunding platform, RealtyShares, I’ve encountered these misconceptions firsthand.



The Investments Results are not Tied to the Success of the Platform Itself

Security is very important in any investing decision. Layer in the risk of making investments through a startup and one might think they’re playing with fire. However, most crowdfunding platforms take supreme precautions to make sure that investments are safely annexed from other entities and corporate considerations. For example, in order to make this possible, RealtyShares, Inc. provides the platform for listing investment opportunities–but a separate entity, RealtyShares Manager, LLC, acts as the manager of each deal. Each deal is also structured through a separate single purpose LLC so debts and obligations of the platform/startup do not effect the performance of the underlying real estate investment. So remember, you are investing in real estate not in the platform itself.

It’s not a REIT

Real estate investment trusts (REITs) are very popular instruments to get exposure to real estate. REITs are an important piece of a diversified portfolio, but they do not give the same flexibility and transparency as crowdfunded real estate investments. When you own a REIT, you are investing in a company that owns and operates many real estate investments. You do not choose the specific properties. Real estate crowdfunding offers an additional layer of transparency in that you can choose your specific properties and learn about the owner/borrower. They are also a nice hedge against the stock market, while REITs tend to have closer correlation with stocks. Of course, REITs offer instant liquidity whereas with crowdfunded real estate you’re locked in until an exit event such as loan maturity or the sale of the property (which can range from six months to ten years).

Debt v. Equity – They Aren’t the Same

Real estate crowdfunding has two primary subgroups – debt and equity. In the case of debt, the investor is entitled to monthly interest as well as a return of any unpaid principal at maturity but does not receive the benefit of property appreciation. The investment is also secured by the property and if the borrower fails to pay interest and principal when due, the investor has recourse and can recover his/her investment through a foreclosure. Equity investments allow the investor to “own” a piece of real estate. A savvy investor will invest in an equity deal with hopes of the property value appreciating. If/when the property appreciates in value and sells, the investor is entitled to an outsized return on their investment. Of course, there is always the chance the investment underperforms in which case the investor bears the risk of loss of their investment to a greater degree than if they were investing in a loan.

It’s Not Really Crowdfunding

Crowdfunding for real estate has been praised as a way to democratize the real estate investment market by giving mom and pop investors an opportunity to invest. Unlike Kickstarter or other donation and rewards based crowdfunding v, however, real estate crowdfunding has thus far largely been available only to Accredited Investors—generally, high net worth individuals. However ,that could change with the passage of the final rules for Title III of the JOBS Act which would allow platforms like RealtyShares to offer investments to all investors.

Investors are constantly looking for new ways to diversify. Investor confidence in real estate is back and crowdfunding has opened up new doors. Accordingly, it is now more important than ever for investors to understand exactly what they are purchasing when participating in a crowdfunded real estate investment.

Tags: , , , , , , ,


This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

Kirkland ReporterMillennial entrepreneurs gearing up to launch crowdfunding campaign for Ombraz SunglassesKirkland ReporterWhile the common mistake may seem fairly mundane to most, the broken hinges on Brehm's sunglasses — and how he would fix them — planted a seed for the Kirkla [...]

IGNHasbro Announces Toy Crowdfunding Platform With 4-Foot Jabba's Barge ModelIGNBy Shabana Arif Hasbro's HasLab crowdfunding platform is like Kickstarter for cool toys, and first up is Jabba's Sail Barge, weighing in at 14lbs. HasLab "hopes to bring dream products [...]

GizmodoHasbro Is Getting Into Crowdfunding With an Insane Star Wars ToyGizmodoToday, Hasbro unveiled Haslab, which promises to basically be the toymaker's answer to Kickstarter, for diehard fans of its toys. The new crowdsourcing program is kicking off with one hell of a project: [...]

Comics BeatCrowdfunding Watch: The Awesome Fantasy Adventure EditionComics BeatOn this particular President's Day I'd like nothing more than to step outside this current reality. Thankfully, fantasy adventure let's me do exactly that. I've located three fantasy com [...]

Cinema BlendHasbro Unveils Crowdfunding For Insane Star Wars ToysCinema BlendBeing one of the most powerful franchises ever created, Star Wars has provided fans with countless characters, worlds, and stories to fawn over across just about every conceivable medium, but any executive wi [...]

ESPN.co.ukBritish bobsleigh team hoping to repay faith of crowdfunding backersESPN.co.ukBritish bobsleigh team hoping to repay faith of crowdfunding backers. play. British bobsleigh team thankful for crowdfunding backers (3:03). ESPN's Tom Hamilton caught up with the GB women [...]

Prosecco producer launches crowdfunding campaign for Giacomo Casanova museumThe Drinks BusinessCasanova hopes that the museum will help to increase tourism to the region and lead to further job opportunities in the area. They are currently finalising the details of the project with as [...]

The IndependentFlorida shooting: Crowdfunding page set up for victims' families raises more than $750k in just one dayThe IndependentMourners stand during a candlelight vigil for the victims of Marjory Stoneman Douglas High School shooting in Parkland, Florida on 15 February 2018 [...]

Decentralized EnergyCrowdfunding appeal for Indian village cogenDecentralized EnergyA crowdfunding campaign is aiming to bring power to a remote Indian village through a containerized waste-to-energy solution. UK-based SEaB Energy's 'Flexibuster' cogeneration system (pi [...]

CFB Finance


  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |