You’ve probably heard of crowdfunding. It’s the latest buzzword in the world of business finance and investing. Crowdfunding — financing a venture with small amounts of money from many people — has been used to back everything from apps to movies.
And now it’s becoming an increasingly popular way to finance real estate investments. Crowdfunding real estate developments and investment is big business, and it’s catching on.
In theory, the practice is fairly straightforward. A group of people (the “crowd”) pool their resources to fund a real estate purchase or development. They then share the returns generated by said project.
A New Twist on an Old Investing Strategy
In a sense, crowdfunding for real estate investments is nothing new. Investors have been pooling their resources together to finance projects beyond their individual investment capacity for decades — long before the word “crowdfunding” even existed.
However, as a recent Reuters story pointed out, real estate crowdfunding is maturing. This is partly due to the development of new web-based technologies, apps, and websites; and partly due to a stronger housing market that is once more attractive to investors. Put the two together, and you have a real estate crowdfunding boom just waiting to happen.
Regulatory Easing a Boon for Real Estate Crowdfunding
Industry experts claim that crowdfunding could be a win-win for the economy, boosting real estate-related capital while giving investors a solid return on their investment. But there are obstacles. In some cases, regulatory restrictions prevent traditional investors from participating in crowdfunding projects.
While crowdfunding for real estate has grown in popularity, it is still just a small slice of the broader investing community, said Nav Athwal, founder and chief executive of San Francisco-based RealtyShares.
RealtyShares wants to streamline and simplify the process to foster the industry’s growth. One of the company’s biggest challenges, at present, is that only accredited investors are allowed to invest in the online marketplaces that serve as virtual middlemen between borrowers and investors.
“We are very eager to one day be able to open our platform to anybody that wants to put $1,000 or a couple hundred bucks into real estate,” Athwal said, “because let’s face it, real estate is one of the best ways to build wealth.”
Athwal could soon get his wish. A posting on the U.S. Office of Information and Regulatory Affairs website said that implementation of Title III of the Jumpstart Our Business Startups (JOBS) Act was expected sometime within the month. Among other things, Title III would ease current regulations so that smaller investors could participate in real estate crowdfunding investment deals.
Growing by Leaps and Bounds
If regulations are eased, real estate crowdfunding activity could grow by leaps and bounds, according to industry watchers. Luan Cox, president and CEO of Crowdnetic (a technology provider for the “alternative finance” industry) said the industry could experience annual growth of 25% or more.
Awareness is another obstacle for real estate crowdfunding. While the term itself is familiar to most investors, many of them don’t fully understand how it works, or how to invest through such a platform. If regulations are eased to allow smaller investors into the game — thereby “democratizing” real estate crowdfunding — there will be a need for more education, training and outreach. But such learning curves are common with new technologies and investment strategies.