Real Estate Investment “Pivots” to Crowdfunding
Crowdfunding: Crowdfunding is an investment trend that has fueled startup development and garnered Pop Culture casche as regular people have begun investing like never before. Real Estate is the latest area to open up.
The biggest change that allowed people to begin considering real estate crowdfunding was the passage of the JOBS (Jumpstart Our Business Startups) Act in Y 2012.
With its passing, this legislation removed barriers to entry that had existed since the 1930’s, namely the ability for small businesses to raise money and advertise themselves in a more public manner.
Previously, real estate investment was all about private deals put together by investors who either knew one another or were referred by personal networks. Now with the Internet of Things such barriers and limitations have been removed.
Publicly announcing and soliciting people to invest was not allowed. Beyond such meeting restrictions, potential investors also had to come up with substantial amounts of money to meet buy-in conditions.
The JOBS Act eliminated these restrictions, meaning that investment opportunities could now be openly and publicly advertised with potential investors being allowed into deals with a relatively minimal investment.
At 1st, only accredited investors were allowed to invest through crowdfunding websites.
This accreditation meant that they needed to either have a net worth equal to $1-M or earn a minimum $200,000 a year to qualify.
Then, in October 2015, new amendments to the JOBS Act came about that would knock out this qualification as well, letting non-accredited investors pool their money together for the 1st time in private real estate investments.
The “new rules”, expected to take effect during Y 2016, will let potentially millions of people to invest in real estate deals for the 1st time.
Crowdfunding allows new investors to pool their capital together without having to rely on more traditional investment vehicles like REITs.
Below are some benefits to this new method for the newly minted real estate investor, as follows:
- Increased Transparency: Most crowdfunding websites require those seeking investment to provide all information and details during a vetting process before they are allowed to promote their investment opportunity. This transparency means that new investors know what their money precisely is going towards when submitted. These investors have access to all the information surrounding the property itself under full disclosure. REITs, on the other hand, apply an investor’s money towards a variety of different investment properties which the investors may or may not be fully informed about beforehand.
- Increased Investment Flexibility: Because crowdfunding websites do not limit investors to sticking with individual companies, investors can spread their capital around many different project opportunities, which helps reduce risk overall and increases profit potential long-term.
- New Market Accessibility: An entire asset class is open to a broad range of investors who otherwise would have been unable to put their money towards it before. Again, with the capital and advertising restrictions now gone, people with as little as $1000 on hand can put that money to work in deals that previously would have excluded them.
- Easier Due Diligence: Because crowdfunding platforms carefully vet investment opportunities before allowing them to go live, the traditional research and legwork investors needed to do before turning over their money is now handled for them up front. This vetting means that investment decisions can be made much more rapidly on promising projects since the lag time created by due diligence is substantially removed.
The Risks: Real estate investment crowdfunding faces the same risk that regular investing does, potential loss. One of the reasons accredited investors had to have access to vast amounts of money before was to spare the everyday person from investment loss.
While allowing in non-accredited investors opens up the potential capital pool, there is fear that some of these people will be investing hard-to-save disposable income or may not be savvy about how to invest. However, with the barrier to entry being relatively minimal, these risks are manageable.
Real estate investment crowdfunding is fast becoming another tool to add to one’s portfolio to increase wealth over time.
However, that portfolio needs proper tax structuring and protection through instruments such as asset protection and trusts. By doing so, you can make sure to protect your gains thoroughly.
The Heffernan Capital Management (http://heffcap.com/) team is well-versed in helping set up the necessary methods to protect investments and is available to help you do so when you are ready.