Will Real Estate Crowdfunding Help or Hurt the Commercial Real Estate Market?

Crowdfunding is becoming a significant source of revenue for many businesses, with the funds generated nearly doubling annually for the past several years. Among the different types of crowdsourcing sites, those related to real estate investment are currently the fastest growing. According to a report from Massolution Research, crowdsourced real estate revenue in 2014 exceeded $1 billion. The scale and reach of online platforms immediately differentiate them from traditional funding sources.

The power of “the crowd” is changing the landscape in all types of industries, and commercial real estate is no exception. In recent years, the crowd-sourcing approach has been applied to real estate investment, and it’s creating new opportunities.

Source: Flickr user Rocio Lara
Source: Flickr user Rocio Lara

What is real estate crowdfunding?

The ability to invest in properties through crowdfunding has really only existed since 2012, when the JOBS Act legalized it for accredited investors (those with an annual income of $200,000 or net worth of $1 million). Since then crowdfunding has grown, making it possible for investors to participate with a smaller stake. While crowdfunding will probably not replace large-scale funding institutions, it does seem to be an excellent fit for projects in the $1-4 million range. Projects funded in this way last year ranged in value from $100,000 to $25 million.

Platforms for real estate crowdfunding are growing, and the idea is expanding in some places to include investors with less capital. In Georgia, for instance, it is legal for non-accredited investors to buy equity on crowdfunding platforms. Groundfloor is a site that relocated to that state in order to take advantage of this, and has a minimum investment of $10.  Some other leading sites for real estate crowdfunding:

ProHatch

Fundrise

Patch of Land

Lending Club

Lending Club connects investors and borrowers, and was listed in Forbes’ top 5 most promising companies for 2014. Its approach is shaking up the banking system, making lending more transparent and cost-effective. Lending Club’s recent IPO (December 2014) opened higher than expected and its market valuation of $9 billion made it the 14th largest bank in the U.S. It’s partnering with giants like Google and Alibaba.

Real estate crowdfunding is tremendously significant for both investors and developers, and will impact how we do business in the commercial real estate industry.  The ability to invest smaller sums in a range of properties helps protect individual investors, making it easier for projects to get funding quickly.  The primary benefits to the real estate crowdfunding system:

 

  • Transparency
  • Unparalleled access for investors
  • More rapid funding
  • Alternative to banks or other traditional sources

Crowdfunding sites appear to represent the future of banking in general, with less friction and low-cost operation. However, there is room for both more traditional finance and this approach. Crowdfunding sites will likely not replace existing institutions entirely, but will meet the need for faster connections between developers and smaller investors.  They’re expected to help drive the effort to reduce the cost of credit for both.

At this point, crowdfunding is adding to the options and opportunities in CRE without removing existing systems. It’s growing at a tremendous rate, and has advantages for all players. Change is good.

How do you think technology and the advances in crowdfunding will impact commercial real estate in your community? Have you seen any deals funded in your town? We’d love to hear from you. Connect today.

 

 

Article by Property Capsule

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