New laws and regulations following the JOBS Act have led to a number of online platforms, both crowdfunding and peer-to-peer, to help investors find and evaluate private offerings. There are now unprecedented opportunities for real estate developers and brokers in search of funding for their projects.
A recent report by the research group Massolution says that crowdfunding and P2P (peer to peer) investors injected $1 billion into the U.S. real estate market in 2015 and more than 2.6 billion in 2016. New debt participation structures and an increased access to non-U.S. investors are two reasons.
“It’s growing beyond expectations,” says Richard Swart, a research adviser on the report. “When the JOBS Act passed we didn’t think real estate would be a part of it, but it turns out to be a more efficient way for investors to find good deals across the spectrum. Real estate crowdfunding can be a good way for small investors to play big.”
For investors willing to throw in their money with strangers to purchase larger investments than they could afford on their own, real estate crowdfunding has become an attractive alternative investment asset class. According to the Massolution report, 2015 private placement real estate funding was 83% debt, with only 9.5% for equity.
“The excitement is giving everyone access to investing in commercial real estate,” according to Dan Miller, president of Fundrise, a leading real estate crowdfunding platform with over 72,000 users.
Real estate crowdfunding and other forms of syndication as a concept is not new. Since the 1970s publicly offered limited partnerships, often styled “syndications,” and real estate investment trusts (REITs), allowed investors to combine resources to access a diversified portfolio of larger properties.
The JOBS Act supercharged this concept.
There are roughly 100 real estate crowdfunding platforms in the U.S. and more are on the way. Finding the right ones can be intimidating and frustrating.
Through SEC Regulation S, foreign investors are now able to participate in U.S. deals. This will impact cities with heavy foreign investment.
Crowdfunding platforms earn most of their revenue by charging each issuer a flat due diligence fee, which varies, plus a percentage of funds raised at closing, typically 2% or 2 1/2%. Also, there is usually an annual servicing fee from investors of up to 0.50%.
Look for platforms with at least partially-funded deals. Committing to a deal is seen as an expression of self-confidence in a platform’s deal-selection process.
Real estate crowdfunding and real estate P2P platforms have fundamentally changed real estate financing.
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