Even if you haven’t participated in crowdfunding, you probably have an idea of what it is. If you don’t, here’s a mini lesson: In a nutshell, crowdfunding is the practice of raising money from a large group of people to fund a common product, service, or experience.
For example, a tamale maker, a foot hammock, and a documentary about the demise of the passenger pigeon are all real projects on Kickstarter – the most popular crowdfunding site. This got us thinking: If wacky, niche products can capture the attention and income of Internet users across the globe, is anyone doing the same with real estate?
As it turns out, they are. In real estate crowdfunding, investors can access real estate properties through an online platform where they pool their money with other investors to make either a debt investment or an equity investment in a specific property. Here’s a quick explanation of the difference between the two:
Debt investment: The investor acts as a lender, rather than an owner of the property. He or she is entitled to monthly interest in addition to any unpaid principle at the maturity of the loan.
Equity investment: The investor is an indirect owner of the property. The risk? The investor is pretty much out of luck if the investment turns out to be a bad one. However, this risk is balanced by the opportunity to collect a higher return at the time of sale due to property appreciation.
Most deals have annual returns of 10 – 30 percent, which is enough to double or even triple your investment. Ready to sign on the dotted line? Not so fast. As of now, most real estate crowdfunding platforms are only open to Accredited Investors with a net worth of at least $1 million. The rest of us will have to wait until provisions in the JOBS Act go into effect, making real estate crowdfunding available to the masses.
Despite its limited audience, the idea of using crowdfunding in real estate has caught on in a big way. In a recent article, Nav Athwal, cofounder and CEO of RealtyShares states, “Over the last year, crowdfunding for real estate platforms has been responsible for raising over $100 million for hundreds of real estate properties across the U.S.” The same model is being replicated worldwide in places like China, Japan, Australia, Canada, and France.
While most real estate crowdfunding platforms are currently limited to the wealthiest three percent of Americans, it will be exciting to see the changes that come about in the industry over the next year. Who knows? Maybe a site like Realty Mogul or Patch of Land will turn you into the next Ivanka Trump.