How Crowdfunding for Real Estate Really Works
This post originally appeared in BanklessTimes.com, by Jilliene Helman.
At its core, crowdfunding means pooling money together from a group of investors to make an investment. In this sense, crowdfunding has existed in real estate for centuries.
Neighbors have bought property together, husbands and wives and their sisters and brothers have collectively bought property and even multiple institutions have come together to collectively purchase property.
The major difference between collective real estate investing of the past and crowdfunding for real estate today is the ability to transact online and the unparalleled access to deal flow by using the internet as the new distribution platform.
Given the advances in modern technology, investors can now browse investments online, securely sign legal documents online, transfer funds and have access to investor dashboards to watch how investments are performing.
Rather than doing diligence on hundreds of real estate transactions to find one to invest in, investors can browse lists of pre-curated investments through crowdfunding companies.
While the bankless business finance industry eagerly waits non-accredited crowdfunding as a result of Title III of the JOBS act, crowdfunding for real estate with accredited investors has already begun.
This new way of real estate investing all starts with curated transactions and Realty Mogul reviews every transaction in-house. We go to great lengths to fully understand the variables of each transaction including the structure, the market statistics, the property, the quality of the property and the track record, reputation and quality of the real estate investment company we are working with.
We also run background, criminal and credit checks to gain comfort with the real estate investment companies and their management teams. While no crowdfunding company can guarantee the success of any investment, and risks certainly do exist, curation is becoming a very important aspect of crowdfunding and should lead to greater protection for investors.
At Realty Mogul, we only work with best-in-class operating partners who have a history and a track record of being successful in real estate. They are not hobbyists, but rather, real estate professionals who have sometimes been in the business for centuries.
Once we find a best-in-class operating partner and a transaction that we are interested in, we set up a single purpose entity, like a Limited Liability Company (LLC). This protects investors from any additional liability beyond their initial investment and it is not uncommon in real estate today for companies to open up a separate LLC for each property they own or invest in. Investors pool money into this LLC and by owning “shares” in the LLC, they are then entitled to share in the benefits of investing in the property.
There are two types of investments you can make when using crowdfunding real estate:
Equity investments (like owning shares in an apartment building) that allow investors to share in cash flow from rents and appreciation when the property is sold
Loans that are secured by real estate (similar to a bank making a loan); these loans pay monthly interest and the investment is secured by the property
While equity investments enable investors to share in “upside” and cash flow from rents is typically distributed on a quarterly basis, loans allow the investor to receive a consistent, monthly income stream with less volatility.
In both cases, communication about the property and the performance of the property is shared on at least a quarterly basis and tax documents are provided to investors on an annual basis.
Crowdfunding for real estate enables more investors to have access to pre-vetted real estate investments that were historically unavailable outside of close-knit circles. It also allows enables investors to write smaller check sizes.
In the past, many of these best-in-class operating partners would not accept a check smaller than $100,000 or $250,000. By pooling money together online, investors can invest as little as $5,000.
By opening up the real estate investing world to a broader range of investors, it allows more and more people to benefit.
Rather than dealing with the hassles of property ownerships themselves like toilets, tenants and trash, investors now have access to real estate investments that allow them to earn passive cash-flow, all secured by a physical property.
At www.realtymogul.com, we’re excited about the future of real estate crowdfunding and looking forward to the immense expansion when the JOBS act broadens access for all investors, not just accredited investors.