In this episode of The Commercial Real Estate Show, Michael Bull interviews co-founder and managing director at ArborCrowd, Adam Kaufman. Now if you’re new to crowdfunding in commercial real estate this video with Adam Kaufman will help you grasp a better understanding of how sourcing funds for your CRE project works.
In Wednesday’s commercial real estate news – we’ll give you a look at the Airbnb of commercial real estate, which office REITs stand to gain the most from Amazon’s HQ2 choice, the future of crowdfunding in CRE, and so much more. Read More
The playing field is becoming more level for small investors thanks to a slew of real estate crowdfunding websites sprouting up across the web.
The crowd-sourced investment websites have become an expansive trend in the industry. In the last year, an estimated half a billion dollars pooled into sites like realtyshares.com, realtymogul.com and realcrowd.com.
To keep it sweet, it’s the trend that’s here to stay for commercial real estate. And for the next week, MyNOI will be covering the details you need to know when getting involved.
Just over a year ago the U.S. Securities and Exchange Commission (SEC) opened doors to permit the use of the popular investment platform in an effort to help small investors acquire capital and additional protections under the law.
Regulators adopted A+ Offerings, which in turn expanded asset classes to two tiers, ranked between $20 million to $49.9 million and $50 million and above.
In a statement released near the time of the adoption of the final rules, SEC Chair Mary Jo White stated he following: “There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need.”
And investors are noticing. For the first time, accredited investors — or, someone who’s valued at $1 million and makes equal to or more than $250,000 per year — aren’t the only ones who can have a stake in crowd-sourced campaigns.
The regulations have gone a long way. Based on my experience owning my own share in one of these sites, they’re growing in popularity because they’re reaping returns. By next year, I expect the number of dollars invested in these sites to double.
Now, I’ve already identified the top brass in the real estate crowdfunding sites today, but I’ll also recommend a valuable place to search for reviews and rankings as well as stats on fees or other features on the hundreds of crowdfunding options available.
It’s called realestatecrowdfundingreview.com and it offers readers the top 100 real estate crowdfunding sites on the web today. So if you’re looking for facts and figures, check it out.
You’ll find that many these sites have similar components. Often, you’re presented with several properties detailing the project, the developer or investment group as well as their investment and project history and return.
By law, parties leading the crowdfunding effort will need to disclose the amount of money they’ve put in as well as their intent for the property.
As an investor, it’s your choice to drop a dollar in several properties or just one.
So take a careful look at your options and consider giving real estate crowdfunding a shot — I predict it’s here to stay.
An enduring trend, real estate crowdfunding is credited with generating more than $1 billion worth of investment in recent years. With dozens of platforms cropping up across the web, experts anticipate a two-fold investment increase within the next year.
Thanks to the U.S. Securities and Exchange Commission (SEC), popular investment pools like realtyshares.com, realtymogul.com and realcrowd.com are now available to investors of all capacities — in years prior, only accredited investors valued at $1 million with a salary of at least $250,000 per year had the chance to join in.
However, despite the size of your wallet, it’s important to note that an estimated half of all real estate campaigns fail to meet their funding goal. To avoid that outcome, we encourage you to sift through our list of simple steps for success before leaping into a campaign of your own.
Right off the bat, understand that as a project sponsor, you’re responsible for eliciting interest from prospective buyers. You’ll need to establish a clear plan, purpose and objective.
Ask yourself the following questions:
Once you’ve answered those questions, you can begin to form a solid plan for the project and establish your funding goal. This is crucial because many platforms on the market today don’t allow for the project sponsor to change the goal amount once it begins.
Be strategic when it comes to identifying your goal and remember, you’re trying to appeal to a large base of investors who may or may not have a lot of money to spend. Begin with a low amount and consider phasing the investment process down the road.
Also be aware that your own digital presence will make all the difference in reaching audiences online. Do you have a large social media following or a popular website? How are you going to convey this project and your brand online?
Before you launch, identify methods of gauging interest and attraction on the web, whether that be through outreach through use of a press release, email or on popular social media sites like Facebook, Twitter and Instagram.
Remember, a crowdfunding campaign can do numbers to your improve your brand online. If successful, you can start to build a solid reputation with investors. According to recent reports, real estate crowdfunding campaigns that met their goal are reported to have benefited from more venture capital after completion than those who failed to meet their original objective.
If that doesn’t spark your interest, just listed to the words of Fundrise cofounder Dan Miller:
“Like any business, particularly within the investment world, it has to be built over time as people see returns come through and developers feel like they are being treated well. It’s the kind of thing that takes a while to grow but it’s really starting to accelerate…”
Commercial real estate crowdfunding laws can be dense, yet more than ever, commercial investors are harnessing the power of the internet to raise funds on the fly.
Crowd-sourcing websites like realtyshares.com, realtymogul.com and realcrowd.com draw in droves of investors on the daily, and the demand doesn’t appear to be slowing down anytime soon. In 2015, real estate investors dropped an estimated $484 million in crowdfunding sites alone.
Dubbed “the best way to invest in real estate,” these websites have leveled the playing field for investors of all financial capacities, but it hasn’t always been that easy. In fact, small investors have only been able to invest in these ventures for just over a year.
Before real estate crowdfunding hit its stride, investors made use of a method called syndication. In effect, an investor would often hire a sponsor to essentially track down a property and manage its sale. Project investors funded a large sum of the investment and eventually split the profit evenly based on share. Syndication was challenging to market, especially considering the types of technology on the market today.
Jump ahead to 2012 and the commercial real estate crowdfunding laws change quickly — the Jumpstart Our Business Startups (JOBS) Act, Title III, was signed into law and effectively made real estate investment crowdfunding possible. The law required heavy involvement from the US Securities and Exchange Commission, which was tasked with rolling out a series of new rules before the JOBS Act went into full effect in 2015.
The SEC started with advertising by deconstructing a part of the JOBS Act called Regulation D. In 2013, the agency lifted prior restrictions that prohibited the solicitation of private offerings for accredited investors while establishing protections against fraud under rule 506(c).
In 2015, the SEC altered Regulation A+, to open crowd-sourced investment opportunities to non-accredited investors, meaning an investor who has a net worth that’s less than $1 million and a gross income of $200,000 per year.
The regulation broke asset classes into two tiers — the first at $20 million or less, and the other falling between $20 million and $50 million raised per year. With this rule, anyone has the option to invest; for non-accredited investors, the cap is 5 percent of their annual income.
Finally, in January 2016, real estate crowdfunding websites could begin registering with the SEC.
For a full guide on SEC crowdfunding rules and regulations, visit the government’s website.
This week, I’ve spent time covering popular real estate crowdfunding websites and the history behind their current popularity. While there is a lot to be excited about when it comes to crowdfunding, it’s important to remember investing is never completely risk free. I’ll cover some of the bigger concerns here and what you can do to protect your money.
One of the risks of real estate crowdfunding is treating the portals as investment advisers. While brokers like myself dive deep into the data before suggesting anything to our clients, these websites’ research is done to conclude whether the property will be built like the developer says it will and to ensure they are not committing any fraud.
The portals are not promising that the property, or you, will make money off your investment. What they are promising, is that what the developer advertised is within the realm of possibility.
So far, reputable portals have avoided any major cases of fraud, but that doesn’t mean you should excuse yourself from doing your own research on top of theirs.
Most of the investments you will make with a crowdfunding portal currently are unsecured, meaning, if the website goes under, so does your money. This may be about to change though as a couple portals, like Patch of Land Inc, respond to investor concerns. The website recently partnered with a bank to directly secure future loans in order to protect their clients against unfortunate events.
Be careful about trusting “the wisdom of the crowd.” There’s a tendency to pile-on when we see many other people doing the same thing—whether it’s the intelligent thing to do or not. Be aware of this next time you see a popular commercial property on a crowdfunding site. Don’t just invest because everyone else is, invest because you’ve done your own research and feel confident it’s a strong proposal.
As I mentioned above a handful of times, do your own research! Study the property for yourself and really understand what you’re getting into.
Study the type of the commercial real estate you’re investing in. Are retail properties a wise investment with the current market? Why is an industrial building being built so far away from any transportation routes?
Learn more about the area it’s being built in. Is it a good location? What do the locals think?
Crowdfunding portals have an incentive to get their predictions correct, but that doesn’t mean you should trust them blindly. Make sure you understand personally what you are investing in.
Some portals, like saundersdailey.com, only support local investments opportunities. Properties listed on local-focused portals are often safer bets, as the brokers know the region and therefore have in-depth, regional knowledge that may be missing from a website operating a national scale.
Those who research developer projects for these websites are more likely to know if a building is going up in a bad part of town. Or if a retail center is further out of the way than most locals are willing to travel. These smaller portals offer a much more focused view on properties than their larger competitors.
Many crowdfunding portals specialize in a particular type of commercial real estate. Where one website may be an expert in office buildings, another may know everything about multi-family units. Be wary if you see a property listed that doesn’t match what you’ve come to expect from that website.
While it’s possible there’s nothing wrong with their research, there’s also a chance they’ve missed a small, but crucial, detail for a property type they’re unfamiliar with. If you notice a portal listing a property that falls outside of their usual M.O, go over their methods with a fine-tooth comb and make sure they’ve researched everything they should have.
In the worst case scenario, how would your investment in this property fare? Crunch some numbers and figure out what the investment would look like if the market dipped 10%. What if it went as low as 25%, what would your returns look like then? Some crowdfunding portals like Estateguru.co work to protect their investors as best they can against such market fluctations, but make a habit of knowing how your investments will respond under negative pressure.
This is an exciting time to be an investor! But before you hand over your money, be aware of the risks of real estate crowdfunding and how to protect yourself.
On Monday, I shared some of the best crowdfunding real estate sites available for you to invest with. Today, I’ll spend some time explaining the history of crowdfunded real estate.
In 2012, the US Congress passed the JOBS (Jumpstart Our Business Startups) act, which legalized equity crowdfunding—the sale of corporate equity stakes through online platforms—for accredited investors only. An accredited investor is someone with a net worth of over $1 million (minus their primary residence), or an annual income in excess of $200,000, and is defined by the Securities Act of 1933.
Despite the mandate to have rules set in place by the end of 2012, the SEC ended up taking until May of 2015 to release them, after a lengthy deliberative process. One of the end goals of the act was to allow startups to be able to “engage public channels, and advertise publicly to be able to solicit investment.”
In October of 2016, the SEC further expanded the pool of potential investors allowed to participate in equity crowdsourcing by ending depression era policies designed to protect inexperienced investors from fraud, and allowing non-accredited (or “less sophisticated”) investors to participate in equity crowdfunding.
The bill, which had bipartisan support, was backed by the start-up and technical world (Google, National Venture Capital Association), and was opposed by groups such as the AARP, labor unions, and the Consumer Federation of America who called the legislation “dangerous” and said it embraced “the discredited notion that the way to create jobs is to weaken regulatory protections.”
Despite fears about deregulation, as of May 2016 anyone is now allowed to invest through crowdfunding platforms. So what does this mean to non-accredited investors?
First of all, with equity crowdfunding, you become a part of a group who pool money into a specific startup in exchange for equity shares. This is the method often used to get seed funding for an early-stage company. If you’re a non-accredited investor (and willing to take some risk), you see the potential for a solid return if the startup has a successful IPO.
Second, with the new rules, you can also start participating in crowdfunding without a substantial amount of money (as little as $1000). This levels the playing field for accredited and non-accredited investors and could act as a market balancing force for capital.
So what does this mean for commercial real estate? Well, for one we’re now seeing diverse crowdfunded real estate platforms (one great example is Fundrise) with their own investment paradigms.
Some states have developed their own laws regarding real estate crowdsourcing, ahead of the SEC. Georgia and Illinois both allowed for residents to invest in crowdsourced real estate deals early in 2015, rather than waiting for the SEC to finalize its regulatory development process. The law in Illinois, for example, “reduces to $1 the minimum entry price for investments in private offerings, such as real estate development.”
According to Anthony Zeoli, the manager of crowdfundinglegalhub.com and a Chicago lawyer, the future of real estate investing in Illinois looks like this: “if you’re walking down the street in the Loop seeing all this development that’s going on and wondering how you’ll get in on it, there’ll be a sign on the construction fence saying, ‘invest in this building at our website.’”
Needless to say, we are now in the midst of an unprecedented time in capital flow—a truly democratized system where anyone—not just large banks, investment firms, or wealthy individuals can enjoy substantial returns on their real estate investments. Stay tuned to myNOI.com for videos and updates on individual crowdfunded real estate platforms.