“Land of Opportunity”?
If you have heard about crowdfunding, then you know that commercial real estate may be another HOT industry in this area of raising capital to invest in land projects. But how hot is it really? Are there investment opportunities? Where are they and how to they measure up? How do you invest? Is real estate crowdfunding really the “land of opportunity”?
Real Estate Crowdfunding
If you have read my previous blog posts, you know that crowdfunding is the relatively new way for companies (or individuals) to raise capital from a crowd of people, lowering the cost per unit for investment in a venture. In the real estate context, crowdfunding allows for non-institutional investors and real estate owners, operators and developers of commercial real estate to come together to meet the needs for capital of a specific or a group of real estate projects. This blog post specifically focuses on commercial real estate, as residential real estate has a different set of trends and rules and market considerations.
Two things have happened to make real estate crowdfunding possible: (1) Technology and (2) the SEC’s recent change in policy embodied in Rule 506(c) which permits broad solicitation of investment opportunities to “accredited investors”. These 2 things change the game for those seeking real estate projects to invest in and for those looking for investments in their real estate projects. It makes the process easier, the solicitation easier and more accessible and there is the potential to pool more resources into a project at a faster pace.
Investment Product vs. Investment Pool
There seems to be two (2) approaches that real estate crowdfunding platforms have taken to funding real estate investments: (1) Companies will provide capital against their balance sheet and then create a derivative product that is marketed to investors or (2) Companies direct match pools of capital from investors with an investment once there is a sufficient amount of investors and monetary commitments have been made. Investors are then able to use an online dashboard to track their investments, almost like the ScottTrade or Etrade dashboards you may be familiar with to monitor stock market investments.
Crowdfunding deals in real estate are smaller than those seen from traditional investing sources. I think there are a few reasons for this:
- Real estate is very personal, not like technology. Investors may need to physically see the property and that can cause a delay in capital raising or prevent an investor from investing at all.
- The crowdfunding market may be too small for institutional investors. If it’s not worth the time of institutional investors or the rate of return is not attractive, crowdfunding in real estate may stay a market just for non-institutional investors.
- Crowdfunding may be too slow. Loans can close in 14-21 days typically. But crowdfunding is dependent on the “crowd” needed to fully fund a project and can take 30 to 90 days for an investment to be finalized. If an investor is looking for a fast “flip”, crowdfunding may be too slow of a process.
Debt deals through real estate crowdfunding has higher risk and, as expected, a higher rate of return with returns of 8-12% to investors. The typical stock portfolio has an 8% return. Platforms offer short term bridge loans for residential “fix and flip” projects and small commercial loans in the $1 to $5M range.
There are a number of crowdfunding platforms that offer preferred equity products with returns of 10-14% range and even higher terms for more risky products. These deal sizes are usually in the $5-$25M range and require a minimum of 10% investment.
So what is the future of real estate crowdfunding? It may just be a way for non-institutional investors to pool their money to invest in lower range commercial real estate. But we will discuss the future on our next Power Raisers call on Monday with Mr. John Jackson, whose job it is to analyze the commercial real estate market.
NOTE: I will be discussing this subject in detail during my “Power Raisers” weekly conference call this Monday (Aug. 24th) at 11 am with special guest John Jackson, Real Estate Analysis. See flyer below or visit my News & Events section of my website.