Investment Analysis

Crowdfunding Capital

Crowdfunding Offers Opportunities for CRE Owners and Investors

While real estate is one of the most traditional and palpable forms of investing, new digital platforms are transforming how some owners and investors are sourcing capital for their assets and funds.

Despite many still viewing crowdfunding in real estate as the newest fad, a report from the Cambridge Centre of Alternative Finance shows that real estate crowdfunding across the Americas grew by 250 percent in 2015 to a volume of $483.77 million -- up from $138.15 million the previous year -- with similar yearly rates of growth over a three-year period. 

Title III of the Jumpstart Our Business Startups Act, or JOBS Act, passed in 2015, opened up crowdfunding to an even wider range of investors. In the time since, increasing numbers of owners and investment firms have begun to view and utilize this as a valid -- and deeply valuable -- means of sourcing capital.

Capitalizing on Crowdfunding

Below are the top three ways that real estate owners and investors can take advantage of crowdfunding and current trends in the sector.

1. Target investors across a wider range. Crowdfunding in commercial real estate has opened up a market that traditionally has had high barriers of entry to a wider constituency with regard to minimum investment required, geography, and accreditation status. 

Rather than requiring minimum equity commitments upward of six figures, investors can buy in with as little as $1,000 in some cases.

Some platforms provide the opportunity for unaccredited investors to build and diversify their portfolios, or create a streamlined process for foreign investors to have a stake in U.S. real estate with fewer hoops to jump through.

Further, as millennials and potential investors of all ages move toward taking advantage of a more mobile, instant, and on-demand lifestyle, online crowdfunding is a way to cast a wider net and attract those who might not have the time or diligence for traditional real estate investing. 

2. Utilize access to multiple platforms. Several investment models are available across dozens of platforms within the commercial real estate crowdfunding space.

When considering online crowdfunding to supplement equity or even establish an electronic real estate investment trust or fund, it is important to understand that not all of these platforms are created equal; in fact, due to their differences, they can be leveraged alongside each other.

For example, Trion Properties of Los Angeles has used both RealCrowd and CrowdStreet to source equity and investors for its first fund. While investors can participate in more than one platform, this allowed Trion Properties to reach those who are experienced and comfortable with each respective website.  

Additionally, while the two platforms have similarities since they were both chosen carefully to fit the company's needs, differences between them include minimum investment and investment terms.

A wide range of options is available, depending on what platform is used, often specializing in certain types of investment. Some of the available options include direct investment in equity, debt investments, eREITS, and funds.

3. Leverage upfront savings for potential investors. While it is far too early to determine to what degree these digital investment platforms will cut out the traditional middleman, in many cases online crowdfunding creates a more direct method of real estate investment and can lead to immediate savings in upfront fees for investors.

In turn, this means that commercial real estate owners, developers, and investment firms can utilize this absence of fees as an incentive for their potential investors, and might ultimately see them investing more than they would have otherwise.

One example is an eREIT -- the online, crowdfunded version of a REIT -- which on many platforms is available to invest in with no fees or a low single-digit percentage. On the other hand, traditional, non-traded public REITs require that investors pay fees of up to 15 percent.

Crowdfunding the Future 

Commercial real estate crowdfunding is an exciting prospect, as it brings more potential investors to the playing field and mitigates risk. That said, it is still a relatively new, and in many ways fragmented, sector that can be intimidating to navigate.

The benefits of crowdfunding can far outweigh any risk or discomfort due to the unfamiliarity or relative newness of the process. When considering or approaching crowdfunding for the first time, it is critical that owners, developers, and investment firms perform extensive research into the platforms available to ensure that they will reach the right potential investors for their needs.

Max Sharkansky

Max Sharkansky is managing partner at Trion Properties in Los Angeles, a private equity investment firm that primarily acquires value-add real estate properties with an emphasis on multifamily. Contact him at max@trion-properties.com.

CIRE September/October 2018

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