Crowdfunding – The Latest Trend in Real Estate

Posted by Rapti Gupta on Sep 11, 2014 05:21 AM EDT
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Of late, the practice of crowdfunding has become quite popular. The crowdfunding industry has come a long way from its start in 2003 and according to Forbes, grew $5.1 billion in 2013. Anything and everything you can imagine is being crowd funded now – including air fares! (Photo : Rocío Lara / Flickr Creative Commons)

Crowdfunding - "the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet" - has become quite popular of late.

The industry has come a long way since its start in 2003 and according to Forbes, grew $5.1 billion in 2013. Anything and everything you can imagine is being crowdfunded now - including air fares!

Therefore, it wasn't long that the investing trend would creep into real estate. iFunding.co, a property crowdfunding firm, claims that the combined market size of property and crowd investment is about $11 trillion.

"If only a small percentage of them (investors) invest only a small amount of their assets in real estate, the market will be trillions of dollars," Markley Roderick, a lawyer with Flaster/Greenberg PC, said at the "Innovations in Real Estate: Crowdfund Investing" conference in April 2014.

So how does real estate crowdfunding really work?

Much like any other project's funding; an interested investor can access properties through an online platform and pool money with other parties "to invest as little as $1,000 into that specific property," Nav Athwal, co-founder and CEO of RealtyShares - a crowdfunding for real estate platform, explained to Forbes.

Athwal asserts that property crowdfunding is not to be confused with investing in a Real estate Investment Trust (REIT). When you contribute towards a property through a crowdfunding portal, you are usually putting your money into a Limited Liability Company.

Unlike the REITs, you don't have ownership of the property in a crowd funded project. What you do get is access to the income generated from the property according to the terms of a governing document called an Operating Agreement.

Currently, it is only the wealthy investors that have access to the property crowdfunding market because only they can afford to chip in the relatively large minimum amount required. However, when the Jumpstart Our Business Startups (JOBS) Act, which was first drafted in 2012, comes into effect - crowdfunding will get easier for smaller investors.

Experts say crowdfunding is the future of real estate. With more than 50 platforms of property crowdfunding websites and more to come up, the trend is catching on fast. The advantage of this method of raising money is that people can now avoid the time consuming process of becoming a property manager to reap the benefits of the real estate market. Also, larger projects can take off faster as capital will be easier to pool, according to Detroit News.

"Real estate crowdfunding won't make you the next Donald Trump. But if you like the idea of getting a play on a modestly sized commercial or multifamily property and you're an accredited investor, this may be the game for you," Vanessa Grout, president of CMC Real Estate, wrote in a feature.

Correction: A previous version of the article referred to iFunding.co as iFunding.com.

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