Have you heard about crowdfunding? Well, yes, you probably have. Somebody probably asks you to contribute to their new musical album through Kickstarter, or you saw some kind of peer to peer network request asking you to chip in for your neighbor's loaner car or X, Y or Z.
However, crowdfunding is more than just asking people to donate money to things. It's a new model of business that's making its way into many industries, including real estate investment.
Crowdfunding can change the whole game when it comes to putting money into REI investments – it’s giving individual investors and institutional investors extra options, and broadening the array of choices available for long-term strategic planning.
Origins of Crowdfunding
In all actuality, the idea of crowdfunding has always been with humanity, ever since the first ancestral tribes banded together to sell each other bones or stones or trinkets or whatever. You may have heard the phrase “no man is an island” – and when people think about the ageless concept of collaboration, they’re thinking about models that are a lot like crowdfunding – achieving a consensus for mutual benefit.
In the modern era, people trace early crowdfunding efforts back to literary figures like Jonathan Swift or Alexander Pope – or they talk about the joint commissioning of great works of art like Mozart compositions or enormous historic sculptures.
In the 1990s, the music world saw crowdfunding become a thing for rock stars and other musicians. That trend has continued, as more and more new songwriters and artists put out their shingles on Kickstarter instead of seeking a record contract.
Modern Crowdfunding in Business
A lot of people tie enterprise crowdfunding to the JOBS Act of 2012 passed under the Obama administration.
It's not that the JOBS act just allowed crowdfunding to happen – it’s a little more concrete than that.
Specifically, the law allowed certain startups and small businesses to offer securities on the markets, in order to facilitate different types of angel investing.
Crowdfunding opens up opportunities in the real estate investing world, partly because individual properties are expensive.
Investments in real estate aren’t low-dollar affairs; prices are often denominated in hundreds of thousands of dollars, not individual share prices at per-share rates like $10 or $100.
Under the SEC rules of the JOBS Act, FINRA oversees crowdfunding portals to make sure that they are compliant with agency standards. Anybody can invest – but they are limited to a certain investment amount, partly just to protect the average person's net worth. Other rules and restrictions apply: look carefully into rules from applicable regulators when considering working a crowdfunding strategy into your real estate investing playbook.
Types of Crowdfunding
There are four major types of crowdfunding that real estate investors may want to think about if they are interested in reaching out to a “crowd” for funding a project.
Debt-Based
The first one is debt-based crowdfunding, where investors are lending money in exchange for a return on the investment. Typically, the borrowers will attach an attractive interest rate that will provide an incentive to contribute.
Equity-Based
There's also equity-based crowdfunding, where people who put money into the hat get a stake in the company. This may be structured through dividends or other profit-taking methods.
Reward-Based
Then there's reward-based crowdfunding, where each person who donates gets a specific gift in exchange for their contribution.
Donation-Based
Donation-based crowdfunding is the most altruistic of all the crowdfunding methods. The donor actually doesn't get anything except a warm fuzzy and a sense of self-worth.
Now, a real estate investor may, in the course of his or her journey, be putting amounts into a crowdfunded investment as a way to grow money. But they may also be seeking to use crowdfunding principal to fund their own projects. Imagine if you could have a go-to investment capital source where you put 20% down and you're guaranteed that the other 80% will come in when you need it! Crowdfunding can create more confidence around a plan to raise funds. It can fill in the gaps in a logistical timeline for an investor who needs everything to work well in order to profit from a real estate deal.
To put together a full crowdfunding strategy like this, real estate investor should have certain information in hand. They should have proof of down payment and closing cost funds, an inspection report for the property, a comparable report from the local real estate market, a purchase contract, and documents showing project estimates and time frames. Some of this stuff is necessary anyway – the CMA, for example, helps to show what a given property is worth on a current market.
It's also a good idea to have credit reporting done in order to shore up financial bona fides.
All of this doesn't really sound like much when you realize how much paperwork there is in the real estate investing business as a whole. Crowdfunding can actually be a viable way to help new investors wade into the real estate market. It’s another option in addition to going to hard money lenders or other lenders in a community, which is also a viable way to start out.
Next Steps to Crowdfund Your Real Estate Investment
How about the other half of that equation? If you're looking for a new technology that will help you to spot the deals that you want, check out Privy’s real-time, in-depth real estate information platform. We go far beyond what's in the MLS to show you at a glance what's happening in a given neighborhood – what investors are doing, what they're paying, and what their improvements are netting them.
With all of this in hand, you are in good shape to come up with your own deals and then if you need to, you can seek crowdfunding opportunities to make the deal happen.
New technology and new research methods are re-inventing the possibilities in today’s real estate market. Try Privy and get your plan working.
If you're evaluating other REI investment software tools, this guide can also help you navigate your many options:
