Real Estate CrowdFunding
December 21, 2016 |
Founder and CEO, RealtyShares
Since the passage of the 2012 JOBS Act, real estate crowdfunding has become one of the fastest-growing segments of the crowdfunding industry. According to research from the University of Cambridge Judge Business School, U.S. investors used crowdfunding platforms to invest $484 million into real estate deals in 2015 — more than triple what they invested the previous year. And this momentum has only accelerated in 2016.
From a wealth-building perspective, real estate crowdfunding offers some unique opportunities for both individual and institutional investors, as well as the real estate sponsors who are using these platforms to raise debt and equity capital for their investments. Real estate, although a very important asset for building wealth, has historically been inaccessible for many individual investors due to the high barriers to entry. Gaining access to private investments frequently was a matter of having the right connections and a substantial amount of capital readily available.
Sponsors faced their own set of obstacles when trying to secure funding. Traditional bank loans for investment properties have become more difficult for sponsors to come by as lending restrictions have tightened since the Great Recession. Hard money lending has long been an alternative, albeit a costly one, due to the higher interest rates these loans carry. Real estate crowdfunding has filled the gap left by banks and at a more attractive cost than hard money. Accordingly, real estate crowdfunding has allowed for the establishment of a symbiotic relationship between investors and sponsors that is beneficial for both. It offers better efficiency, accessibility and transparency than existing alternatives.
Consider residential real estate investments, for example. An individual investor may want to invest in an apartment building or single family rental property but they don’t have cash on hand to buy. Even if they do, they may not want to deal with the hassles that come with property ownership and management. Real estate crowdfunding solves their dilemma by allowing them to invest passively in residential properties with as little as $5,000 and from the convenience of their laptop or tablet. The investor reaps the financial benefits of owning a rental home without doing any of the legwork involved in managing the property.
The average rental property yielded a 9.4 percent return in the first quarter of 2016, according to RealtyTrac. The S&P 500, by comparison, offered a net gain of 1.12 percent over that same period, illustrating residential real estate’s value as a wealth-building tool.
Commercial real estate investments have also proven to be an important component of a wealth-centric portfolio. The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index reported an annual return of 12.7 percent in 2015, topping the performance of the S&P 500, the Dow 30 and the Russell 2000. Real estate crowdfunding has opened the door for investors hoping to see significant returns from investments in retail centers, office buildings, storage centers and warehouses.
For sponsors, real estate crowdfunding offers the advantage of speed and often times lower cost as compared to other options. In real estate, there’s no room for delays and being able to tap into capital quickly is vital. Crowdfunding enables sponsors to access the funds they need in less time, making missed opportunities a thing of the past. Oftentimes, a sponsor can raise capital in as little as seven to ten days. The incorporation of technology is the primary driver behind the faster funding times and it’s also responsible for creating a more streamlined process overall.
Also, real estate crowdfunding platforms can offer sponsors not only debt capital but also equity capital. This latter type of financing is something banks have never addressed. Accordingly, a sponsor can meet all of its financing needs through a single platform, something that has never been possible before. Working with a crowdfunding platform increases visibility so it becomes easier for sponsors to attract new investors and manage relationships with their existing investor base.
Some of the most successful institutional investors in the world allocate 20-25 percent of their portfolio to real estate and through real estate crowdfunding, individual investors have the means to create similar diversification within their portfolio. And in turn, these investors can use crowdfunding to build wealth through real estate.
Massolution estimated that real estate crowdfunding approached $3.5 billion in 2016. As new platforms enter the arena and existing platforms develop new products and services, I believe the horizon for opportunity will expand even further for both investors and sponsors alike in times ahead.