Why Crowdfunding Is Changing Real Estate Investing

The value of 'location, location, location' hasn't changed but the access to funding and ownership has. JL

Nav Athwal comments in Forbes:

Crowdfunding platforms generally operate with a goal of offering investors as much detail about an investment as possible. Crowdfunding has also injected a new level of accessibility into the market. It’s opened up an entirely new asset class to a wider pool of investors without placing a high premium on the minimum amount needed to invest. And for real estate companies and operators, it has made access to capital more efficient.
Crowdfunding has become something of a buzzword among investors these days and it’s been particularly well received in the real estate sector. Though it’s still in its infancy, real estate crowdfunding is rapidly reshaping the way individuals find and invest in properties. This shift has brought benefits not only for investors but also for real estate companies and for the real estate market as a whole. But this rapid growth also means important considerations for investors when choosing a platform to invest their capital with.
The old rules for real estate investing
In the pre-crowdfunding era, investing in private real estate was all about who you knew. Under the Securities Act of 1933, private securities investments (including securities of real estate companies) could not be marketed publicly. That meant that access to private deals was limited to investors who were able to seek them out through connections in their personal network. Or to better phrase it, the old country club model of finding and investing in real estate.
Once an investor was able to locate a private investment, she would then have to provide the necessary funding. The minimum threshold for gaining access to these exclusive properties could easily run into the six-figure range. These high buy-in requirements and the ban against publicly soliciting for these investments effectively shut the average investor out of a large segment of the real estate market. And for real estate companies, this meant access to capital for deals was also restricted to who they knew thus making capital very inefficient.
How crowdfunding has made access easier
From an investing standpoint, crowdfunding is a relatively new idea but it’s made big waves in the real estate industry thus far. With the passage of the Jumpstart Our Business Startups Act in 2012, some of the barriers that had previously existed for investors who sought a foothold in real estate were removed.
Specifically, Title II of the Act eliminated the restriction on general solicitation. For the first time in nearly 80 years, small businesses and start-ups were able to raise capital and advertise their offerings in a much more public way. That concept quickly carried over to the real estate industry and real estate crowdfunding took off with hundreds of millions of dollars raised through crowdfunding for real estate in 2015.
Through crowdfunding, instead of having to rely on connections to pinpoint real estate deals and having to put $100,000 or more into a single deal, investors can access these deals from the convenience of their laptop or tablet. And as the Founder and CEO of crowdfunding for real estate platform, RealtyShares, I’ve witnessed first hand the quick adoption by first time and veteran real estate investors of this new way of investing in a far too familiar asset class. In addition to better access to pre-vetted deals, crowdfunding platforms also make it possible to begin investing with as little as $1,000.
The industry continues to evolve and the latest development has been the redefinition of who can invest in crowdfunded real estate deals. Up until recently, only accredited investors who had a net worth of $1 million or more or earned $200,000 a year were able to invest through crowdfunding platforms.
In October, the SEC finalized proposed rules for Title III of the JOBS Act, allowing non-accredited investors entry into the real estate crowdfunding arena on a widespread scale. Once these new guidelines take effect in 2016, millions of new investors will have an opportunity to invest in private real estate deals for the first time.
Why crowdfunding is good for real estate
“Disruption” is a term that’s frequently tossed around in discussions of real estate crowdfunding but that’s not necessarily a bad thing. The advent of crowdfunding has definitively changed real estate investing in more ways than one and the effects have been largely positive.
For example, it’s brought an increased degree of transparency to real estate investing that wasn’t there before. Previously, investors might go into a deal knowing very little about the property in question. In terms of monitoring the investment’s progress, updates might be infrequent at best.
Crowdfunding platforms, on the other hand, generally operate with a goal of offering investors as much detail about an investment as possible. Property investments are typically vetted beforehand and investors have a broad range of information available to help guide their investment decisions. Investors have the ability to view their holdings online to see how well a particular property is doing.
Aside from greater transparency, crowdfunding has also injected a new level of accessibility into the market. It’s opened up an entirely new asset class to a wider pool of investors without placing a high premium on the minimum amount needed to invest. And for real estate companies and operators, it has made access to capital more efficient. No longer does your deal have to be restricted to who you know. Crowdfunding provides a platform to market your deals to a wider segment of the public.
Real estate investing involves risk, just like any other investment. In terms of the drawbacks associated with real estate crowdfunding, the potential for loss is always a key concern.  In limiting large-scale real estate investments to accredited investors, the SEC was effectively trying to protect smaller investors. The rationale is that investors with a higher net income or net worth would be more savvy about choosing investments, and more able to absorb the risk of loss.
While opening the floor to non-accredited investors may increase the size of the crowdfunding market, it could come with negative consequences. Specifically, there’s an increased possibility for non-accredited investors to get hurt because they may have less disposable income to put at risk or may lack the necessary knowledge to make informed investment decisions. However, your income or net worth does not always dictate your level of sophistication. A non-accredited trader may have far more sophistication when it comes to investing than an accredited physician.  Unfortunately, however, the rules were intended to create a clear line thus historically precluding investors that did have the level of sophistication to make an informed investment decision.
Gauging real estate’s outlook for the new year
With 2015 drawing to a close, investors should be setting their sights on what lies ahead for real estate in the coming year.
According to PwC’s 2016 Emerging Trends in Real Estate Report, there will be a push for workers to leave the suburbs behind and move closer to major metro areas. The result is that locations like Nashville, Raleigh and Austin are poised to see an influx of new residents who want an affordable big city alternative. For investors, the rise of these so-called “18-hour cities” represents a unique opportunity.
As far as real estate crowdfunding goes, conditions are favorable for the industry to expand at a rapid clip. Existing crowdfunding platforms will face competition from newcomers as companies attempt to respond to the demand that’s expected, as non-accredited investors begin making their way into the market.
The crowdfunding industry is projected to hit the $3.5 billion mark in 2016.  All signs seem to indicate that real estate crowdfunding will continue to shake things up in the commercial and residential investment markets in the new year.