Since the Jumpstart Our Business Startups Act, or JOBS Act, was created in 2012, crowdfunding has been picking up steam. But what exactly is crowdfunding?
By definition, it is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.
Most successful projects receive about 25 to 40% of their revenue from their first, second, and third degree connections. These are friends, family members, work acquaintances, or anyone related to the owner of the business.
But because anyone can contribute any amount of money to a project or venture through crowdfunding, a compelling message must be created so as to draw a large audience.
Now, there is a misconception that crowdfunding is just useful for small businesses and start-ups. After all, it’s extremely popular where smaller investments are required.
However, crowdfunding is also booming in the real estate industry.
Benefits of Real Estate Crowdfunding
Before crowdfunding came along, traditional real estate investing was reserved primarily for high net-worth individuals and private equity.
But today, there are a number of crowdfunding platforms for real estate that have raised more than $100 million for individual properties all over the United States. Similar models are now also being used in China, Japan, Australia, Canada, and France.
Crowdfunding on these real estate platforms allows investors to participate in individual deals involving the financing of apartments, hotels, office buildings, and other commercial real estate. They get to work directly with real estate developers and have a voice in the process.
Investors can also choose the projects in which they want to invest their money, purchase a percentage of the project, and, in return, share in a portion of the operating profits associated with those real estate projects.
Sounds easy, right? Technically it is.
However, you want to be careful about which crowdfunding platform you choose.
5 Real Estate Crowdfunders to Know
Typically, you want to look for a platform that is well capitalized — meaning you want to watch out for platforms created by a couple of students who just graduated from college and don’t have more than two pennies to rub together.
According to crowdfunding expert Zack Miller, the top five crowdfunding platforms for investing in real estate are:
- Realty Mogul
- Fundrise
- Groundbreaker
- CrowdStreet
- GroundFloor
Realty Mogul has completed 58 deals in 14 states, totaling over $14 million as of the end of March 2014.
Fundrise has a $100 minimum and has invested in over $10 million in real estate investments since the start of 2014.
Groundbreaker works closely with real estate companies, so real estate firms interested in crowdfunding can work with Groundbreaker’s technology to grow their investor base.
CrowdStreet was founded by CEO Tore Steen and VP of Business Development Darren Powderly. Both have negotiated over $200 million in commercial real estate transactions since 2003.
And GroundFloor uses state crowdfunding rules, meaning those living in the states where GroundFloor does business don’t need to be accredited investors to participate in the deals. Investors can contribute as little as $100 per project.
Of course, while crowdfunding is quickly becoming a popular choice for real estate investors, there’s still nothing better than having a qualified broker in your corner — someone who can help you negotiate the best deals and seek out the most lucrative real estate opportunities in the market.
Next month, I’ll elaborate on this further.
Until then,
Paul Benson
