Real Estate Crowdfunding – In Plain English…
Crowdfunding is not a new concept. Cooperatives and communities have used crowdfunding even in the era preceding the internet.
The virtual world has definitely helped crowdfunding and the advent of social media has simplified it further.
More important than anything else is the fact that crowdfunding is now an effective way to raise money.
The concept can be actually explored by almost anyone with a worthwhile idea to raise funds and finance the execution of the plan.
There are some restrictions to how much you can raise in which country and for what purpose.
You would need to check out the specific laws pertaining to your industry in your country and state.
Real estate crowdfunding is now legal in many countries.
All developed nations allow real estate crowdfunding and there are dedicated sites where you can pitch your project.
Crowdfunding is not limited to the major social networks or popular social media sites.
There are specializes websites, much like the payment gateways or apps that focus solely on facilitating monetary transactions.
Crowdfunding vs. Real Estate Crowdfunding
While the basic concept and premise remain the same, there are some subtle and a few consequential differences between crowdfunding in general and real estate crowdfunding.
General crowdfunding may be for a company, perhaps a startup, or a business that is trying to develop a new product.
This is an ongoing quest and the company can offer some stakes to those who contribute.
In case of products, the company or the entrepreneur may offer one or more of the manufactured items to those who contribute on the basis of the amount they fund. Real estate crowdfunding does not and cannot work in such a manner.
Crowdfunding enables you to raise funds by harnessing the power of the masses.
You are not looking at a million dollars from one person or a few investors.
You are trying to raise a few dollars from many and possibly a few hundred dollars from some.
You will have people who would be willing to fund thousands of dollars if they are enthused over your project and want to be generous.
Yet, crowdfunding is about harnessing the power of more people and raising smaller amounts from them instead of trying to have one investor take up the whole chunk and also reserve the entire pie of returns.
Real estate is a finite project.
Developers cannot really offer part ownership of the residences, office spaces or stores.
The crowd funding the project is also not going to be interested in owning a space somewhere far away where they have no investments or any venture really.
The financial return is the most and the only driving force in case of real estate crowdfunding.
Even if a developer is also a property management company and intends to churn out a recurring profit, the investors may not want to be a part of something that can get complicated.
Long term returns may be minuscule compared to onetime gains and more people would get excited only when they see a substantial return on their initial investment.
The scenario is quite different when you are crowdfunding a tech project or developing a cutting edge tool, product or program.
In case of real estate projects where there is no outright sale of the properties being developed and there would be ongoing rental income or some other utilities then the investors would look for shareholding or they would want to earn a share of the profits.
Some investors may be looking for a share of the revenue depending on what the initial pitch is and how the whole crowdfunding process is carried out.
Projects that do not have outright sales are not finite and hence onetime returns may not be as lucrative for investors.
One must study the scope of possibilities and get familiar with the trends vis-à-vis the type of project. How much funds one must raise and the types of investors needed will determine the returns.
Sites for Real Estate Crowdfunding
All investors who partake in real estate crowdfunding can be classified into two types: accredited and non accredited.
Accredited investors are those who have earned more than two hundred thousand dollars in the last two years or have a joint income with a partner of more than three hundred thousand dollars in the same period of time.
Anyone with a net worth of over a million dollars excluding the value of the house they reside in is an accredited investor.
Directors, executive officers and general partners of issuers of non regulated securities are also accredited investors.
You can expect accredited investors to offer more money but they are more often than not demanding too.
There are many sites for real estate crowdfunding. Some have more accredited investors than others.
Their popularity varies of course and so does the amount of money you can raise.
The most useful sites right now are:
- Rich Uncles,
- American Homeowner Preservation,
- Small Change,
- Patch of Land, RealtyShares,
- Prodigy Network,
- 1031 Crowdfunding,
Some of these may be ideal for you and some may be unsuitable.
Compare the propositions, understand their strengths and weaknesses, try to prioritize the site that is trending or hot right now as you are more likely to get access to a larger number of investors and that will make the whole process of raising funds much simpler as well as surefire.