The Rise of Crowdfunding in Real Estate
With fast-paced changes in technology, investors can now make transactions from the comfort of their own homes.
Crowdfunding companies like Kickstarter have grown tremendously in recent years, helping creators find the fiscal support they need to get started on their ideas. Now, this technology is coming to real estate, making overnight investments a reality.
But what is crowdfunding? Traditionally, it is the practice of funding a project or venture by raising small amounts of money from a large number of people. It was originally used for charitable contributions or causes, but the process has now expanded into four different types:
Donation - Crowd gives money to support a cause.
Reward - Crowd gives money to business in exchange for some kind of reward.
Equity - Crowd buys a piece of the company or project and has ownership.
Debt - Investors are repaid over time plus interest.
Websites believe that they are bringing democracy to real estate investing; empowering your average Joe with the opportunity to own a piece of commercial property. Because using technology to directly connect investors is a more efficient process, there has been frustration building on Wall Street as banks worry that this development could threaten more centralized infrastructure.
Some of the most well-developed, well-respected real estate developers are leaning towards this method of investing in order to fund their projects. In 2015, with a minimum of just $5,000 and a crowdfunding platform, private investors funded and earned stake in New York City’s 3 World Trade Center through Fundrise’s real estate crowdfunding portal. The massive project was a $2.5 billion dollar deal.
Fundrise labels themselves as the first “simple, low-cost real estate investment platform” and offers three different mainstream investment plans for both experienced and new investors: supplemental income, balanced investing, and long-term growth. The currently declared dividends of Fundrise portfolios far supercede those of public REIT ETF’s and public bond ETF’s. Fundrise’s supplemental income strategy earns a dividend of 7.41% versus a dividend of 3.15% for public real estate and 2.57% for public bonds.
Moreover, investors have the benefit of no added risk when they turn to technology to do their deals. The gamble is just the same as it was the old-fashioned way, when a single investor purchased an investment property. Companies like Fundrise also ensure that there is less risk through their payment strategy. The first entity to be paid once investments come through is the bank, followed by the investors who get back income of between 12-15% a year. Lastly, the developer gets their upside. This ensures that the developer doesn’t get any money back until the corporation is fully paid, adding a layer of protection from individual investors who may just be learning the process.
Hundreds of companies are opening their doors to facilitate these online real estate investment services yearly in the United States. With greater accessibility to the market, these investments may just be the missing piece of your portfolio that you didn’t even know about.