Introduction

Since the passage of the JOBS Act in late 2012, crowdfunding has caught fire and is being used to raise money for everything from startups to small businesses, but since May of 2016 the people that are eligible to participate in these private deals have changed for the first time in over 80 years. In fact, in 2015 alone, crowdfunding, which includes debt, equity, rewards and donation based crowdfunding, is responsible for approximately $34 billion worth of capital raised according to Massolution Crowdfunding Industry 2017 Report Total Global Crowdfunding Industry estimated fundraising volume in 2017: $34 Billion

  • Breakdown:
    • P2P Lending $25B
    • Reward and Donation Crowdfunding: $5.5B
    • Equity Crowdfunding $2.5B
Real Estate Crowdfunding Is A Game Changer

This success is nowhere more obvious than for real estate.  Although Crowdfunding for real estate is a relatively new space, over the last year, crowdfunding for real estate platforms have been responsible for raising over $100 million for hundreds of real estate properties across the U.S.  And this model is being replicated all across the world. For the first time in 80 years Regulation Crowdfunding has opened a new channel for wealth building and passive real estate investment for non-accredited investors, this means regular working people have the opportunity to invest in real estate deals without having to take all the risk or come up with a large down payment. The basic premise for real estate crowdfunding is simple.  An investor can access individual real estate properties through an online platform and pool money with other investors to invest as little as $1,000 into that specific property.  However, despite this simple premise, there are still misconceptions about the basic structure (both legal and otherwise) of a crowdfunded real estate investment.  

Debt v. Equity Real Estate Crowdfunding

Real estate crowdfunding has two subgroups – debt and equity.  In the case of a crowdfunded real estate debt investment, the participating investor is acting as a lender for rather than an owner of the property.  As such, the investor is entitled to monthly interest as well as a return of any unpaid principal at maturity but does not receive the benefit of property appreciation.  The investment is also secured by the property and if the borrower fails to pay interest and principal when due, the investor has recourse and can recover his/her investment through a foreclosure.

Understanding Equity 

An equity investment, the investor is an owner of the property, albeit an indirect one.  As such, the investor is not secured by the real property and has little recourse if the property investment turns out to be a bad one.  However, this additional risk also means the investor is entitled to a greater return, which is usually achieved through property appreciation and realized when the property is eventually sold.  To date, approximately 20% of crowdfunded real estate investments have been structured as debt with 80% structured as equity.

Takeaway

It is now more important than ever for investors to understand exactly what they are purchasing when participating in a crowdfunded real estate investment. As this sector of the real estate market grows and evolves you must continue to educate yourself on the direction of the market and the vehicles the market takes to finance real estate deals in the future. If you want to learn more about real estate crowdfunding please visit ProjectCrowd.co