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December 11, 2014
Seattle is a city known for new technology and innovation, a thriving urban landscape, and its savvy investors. Mix those factors with the region’s top quality real estate developers and it’s only a matter of time before we see a disruption of traditional real estate investment markets right here in the Northwest.
Introducing real estate crowdfunding.
What is crowdfunding?
Crowdfunding is a method for financing projects by raising money from a large group of individuals, i.e. “the crowd.” Typically this is done via the Internet since the web provides the most efficient and effective way to connect with and raise money from a large group of people.
Crowdfunding exists today in a variety of forms. Kickstarter and Indiego are popular examples of donation-based crowdfunding platforms, where participants give money to further a project, with very few strings attached. Though donors don’t receive financial benefits directly from the success of a project, there are often rewards or perks given out. Actor Zach Braff famously offered a filmmaking symposium to anyone who donated $2,500 to his campaign to raise funds for the production of an independent film.
Rewards-based crowdfunding has become so popular that companies have emerged dedicated entirely to the fulfillment of rewards that have been promised.
There is also credit- or equity-based crowdfunding, which allows a large number of individuals to invest in a project and receive compensation, often in the form of equity or debt. Made popular by groups like Lending Club, Prosper and SoFi, these efforts tend to be highly regulated by the Securities and Exchange Commission as they involve the selling of securities.
Lending Club, the leader in the space, has funded more than $6 billion of personal loans and investors have earned nearly $6 million in interest.
Real estate crowdfunding
The advent of real estate crowdfunding has the potential to disrupt one of the largest sectors of the country’s economy one that has traditionally been stagnant, slow moving and opaque. By connecting real estate companies to investors via an online platform, real estate crowdfunding allows sponsors to quickly raise flexible, affordable capital for projects, and gives investors the chance to make asset-based investments online with low minimums and low fees.
Syndicating investment from many individuals is not new to the real estate industry. Before the savings and loan crisis in the late 1980s, investment syndication is how most projects were funded. Policy changes following the S&L crisis made room for the rise of institutional investment vehicles like real estate investment trusts. As the industry grew, institutional investments became large pooled funds, such that individual investors invested into a portfolio of assets, not knowing which particular assets they invested in.
Real estate crowdfunding platforms like Fundrise allow investors to make direct investments in real estate assets. There are several advantages:
1Directly investing in real estate cuts out many of the middlemen that exist in traditional real estate investment, which can dramatically lower costs for both the investor and the real estate company.
2Investors are empowered to know the assets they are investing in and can choose to invest in their own neighborhood or around the country. Investors can make smarter choices about when and how they invest, and have full transparency into the project their money is funding.
3Allowing individuals to directly invest in commercial real estate democratizes the industry. Traditionally, a handful of large institutional investors fund the majority of the development in our cities. With crowdfunding, individuals can fund projects they deem worthy of investment in places they want to see flourish.
How does it work?
Every crowdfunding platform offers a different product: some offer equity and others offer debt; and some sell pooled funds while others focus on single assets. This is how Fundrise does it:
For the real estate company
A real estate company submits a project in need of funding to Fundrise.
Fundrise will review and underwrite a deal and then fund its position in full within 15 days. Once the deal is funded, individual investors on the platform are given the opportunity to invest in offerings tied to that deal.
By using its own balance sheet, Fundrise can increase the speed of funding and, most importantly, create certainty of execution.
For the investor
Once a user joins Fundrise (at no cost), they’ll have access to high-quality real estate investment opportunities around the country. Investors can browse available offerings, request additional documentation, view feedback from other investors, and ask questions about the project. Once invested, investors will receive regular updates, distributions, and tax documents electronically through a custom portfolio.
The flaws of corporate real estate investment have opened the door to real estate crowdfunding.
For the investor, it combines the financial benefits of real estate investment with the ease and access of the Internet. And, it allows real estate companies to raise capital at scale directly from individuals.
Crowdfunding creates a new capital source to fund real estate projects that may not fit in the institutional box, allowing developers to focus on the long-term success of the project and build a new kind of real estate product focused on the real end user you.
Katlin Jackson is vice president of real estate for Fundrise’s Pacific Northwest operations. Fundrise is a leading national real estate crowdfunding platform.