Real estate ownership is one of the oldest — and most
inefficient — businesses. Real estate companies or “sponsors” looking to raise
equity for new development, project repositionings, or acquisitions still rely
heavily on old school methods such as their black book of investors and
handshake deals at the local country club.
Crowdfunding has the potential to change the financing
landscape for both investors and sponsors by bringing greater efficiencies to
the process. By using a technology platform that makes real estate deals more
transparent and easily accessible, crowdfunding allows investors to shop for
the latest real estate investment opportunities on their computers or mobile
That shift certainly streamlines the fundraising process for
project sponsors looking to fill equity or debt requirements. The question is
whether or not the real estate industry is ready to embrace that change.
A New Paradigm
The original premise behind crowdfunding was to use small
amounts of capital from a large number of individuals to finance new business
ventures. New startups relied on social media sites such as Facebook and
Twitter to reach out to friends, family, and colleagues to raise capital for
their dream businesses. It was grass roots and folksy — and it worked.
Entrepreneurs found success in funding new creative projects and small
businesses, ranging from indie films and art studios to restaurants and retail
That idea has morphed into an investment vehicle that has
piqued the interest of a growing pool of investors including venture
capitalists, angel investors, high-net-worth individuals, and family trusts.
The crowdfunding model is now emerging as a legitimate source of capital to finance
a variety of startups ranging from biotech to green energy.
It also has emerged as a viable source of real estate
funding. The catalyst that has made that shift possible is the Jumpstart Our
Business Startups, or Jobs Act. Essentially, the Jobs Act loosened some
restrictions related to who can invest in private offerings and how those
offerings could be advertised. The Jobs Act was signed into law in April 2012
by President Obama and advertising of certain private offerings is now
So what does crowdfunding mean for the future of real estate
investing? Think of the change that has occurred in the stock market in the
past 15 years. Technology has brought accessibility and transparency to that
sector. Investors no longer have to rely on stockbrokers to complete
transactions when they want to buy or sell securities. They can log on to their
own brokerage accounts to access a variety of investment tools from real-time
pricing to a detailed analysis of their portfolios.
That same level of direct access to information and
transparency is starting to occur in the real estate market, and crowdfunding
has the potential to be a key driver behind that change. Fortunately, for those
CCIMs that accept this change, the technology will lead to a more capital-efficient
marketplace that will increase deal flow. Furthermore, real estate is, after
all, a people business, so innovative CCIMs will always have an important seat
at the table.
Crowdfunding is creating a marketplace where investors sit
down at their computers, access current offerings, and quickly filter through
multiple deals to find the right fit. Investors will have the tools and
resources to build a portfolio that meets their specific needs. For example, an
investor can opt to have a percentage of their real estate dollars allocated to
growth opportunities for a child’s college savings plan or income-producing
property for retirement savings.
Traditionally, investors who wanted to participate in direct
real estate investments had to participate in entities such as a limited
liability partnership where the minimum buy-in was sizable — often upward of
$250,000. Crowdfunding deals can be accessible for as little as a few thousand
dollars. That lower dollar amount allows investors to split up that investment
into smaller allocations to create more portfolio diversification and minimize
risks. Instead of investing $100,000 into one deal, they can spread that out
into five, 10, or even 20 different investments across different property types
and different geographic markets.
On the equity side, crowdfunding allows sponsors to
outsource their capital-raising efforts and the management of those investor
relationships over time. There are fees associated with crowdfunding, and
different crowdfunding firms operate with different fee models. Sponsors must
scrutinize those models carefully to make sure the investor’s return on
investment is not devoured by fees and charges. But the efficiency that
crowdfunding brings to the process in terms of reaching investors, delivering
information, responding to questions, and meeting reporting requirements
replaces the time and money that sponsors were already spending on those
Ultimately, crowdfunding allows sponsors to tap into a large
pool of middle-market investors who have a desire to put capital into real
estate. One of the crucial steps for this emerging niche to evolve is for
crowdfunding firms to prove that they can not only reach that pool of
high-net-worth investors, but also bring them to the table for sponsors. If
crowdfunding can deliver on that promise, then this is a sector that will
continue to carve out a bigger place for itself in the real estate arena.
Darren Powderly, CCIM, is co-founder of CrowdStreet and a
principal with Compass Commercial Real Estate Services in Portland, Ore.
Contact him at Darren@crowdstreet.com.
Currently, crowdfunding real estate opportunities are only
available to accredited investors while the Securities and Exchange Commission
determines final rules for governing crowdfunding activities. For more
information, contact www.sec.gov.