In recent years, crowdfunding has become a popular way for businesses to raise money, from charities to tech startups. After the passage of the JOBS Act in 2012, companies have been able to market formerly private investments to individuals, allowing for the growth of crowdfunding as a way for startups and other small businesses to raise funds for operational costs. This legislation has also shaken up the real estate market by making it easier for non-institutional investors to stake their claim in residential and commercial projects.
Traditionally, buying and selling property has been a tedious and somewhat expensive process full of intermediates and middlemen, all of whom demand their cut. This has made it difficult for small-scale investors to get their foot in the door when it comes to real estate. In the wake of the 2012 JOBS Act, however, the real estate market has seen a boom in individual investors that buy into projects through crowdfunding. In 2016, crowdfunded real estate reached an estimated value of over $3.5 billion, and the market is expected to continue to grow in the coming years.
With crowdfunding leveling the playing field, participation in large residential and commercial real estate projects is becoming increasingly available to individuals who are looking for a small-scale investment with low risk and decent gains. If you’re thinking about buying into a crowdfunded project, there are several business models that individual investors can follow.
Through crowdfunding, people use equity to invest in real estate, and in return, they receive partial ownership of a property. Investors work alongside established real estate companies, who take care of legal matters, maintenance issues, and more. Equity crowdfunding offers a passive form of income, entitling investors to a fixed share of profits without the stress of dealing with property management. Fees usually range between 0.5% and 3% annually, though some platforms may charge higher rates.
Syndicated Debt Crowdfunding
While equity crowdfunding allows individuals to invest in upcoming or in-progress projects, syndicated debt crowdfunding gives people the opportunity to buy into an existing real estate loan that often belongs to a private, non-bank lender. The loan is divvied up between individual investors at a fixed rate of return, often between 8% and 12%, and is often issued over shorter terms than other investment models. Platforms often charge a low annual fee for syndicated debt crowdfunding as well, with rates typically ranging between 0.5% and 1.5% annually. This model may pose a lower risk for investors than equity crowdfunding, but remember that it also promises smaller overall returns.
Platform-Issued Debt Crowdfunding
Like with syndicated debt crowdfunding, platform-issued debt crowdfunding is based on a real estate backed loan. In this model, however, the crowdfunding platform acts as the lender, removing any middlemen from the equation to streamline the investment process. Many times, these real estate loans involve smaller properties such as single-family homes that a borrower is planning to flip and sell for a profit. Platform-issued debt crowdfunding is relatively low risk, and platforms usually charge investors a minimal annual fee.