The concept of crowdfunding is not new. Companies like Kickstarter and IndieGoGo have provided the opportunity for people to fund new products, musical and film pursuits, and even the development of iconic video games. But until recently, crowdfunding had never been used to invest in physical, tangible real estate across the country.
So … What Is Crowdfunding?
At its core, crowdfunding is pooling money together for a common purpose. In real estate, that purpose is to purchase a property, such as an apartment building, retail shopping center, or self-storage facility. Not only do investors get direct exposure to a real asset, but they also benefit from monthly or quarterly distributions procured from the rental income on those properties and the tax advantages from real estate investing, namely the ability to write off depreciation from their taxable income.
The sudden growth of crowdfunding in real estate is a direct result of new legislation called the JOBS Act. In April 2012, Congress passed the JOBS Act, which created the first change to the securities laws in over 80 years. Provisions in the JOBS Act now allow real estate companies to publicly advertise their projects and offer them to investors transparently for the first time in decades.
While some believe crowdfunding allows for the democratization of capital, we at Realty Mogul believe that crowdfunding allows for the democratization of deal flow. Historically, an investor in California would find it very difficult to get proper diversification in physical real estate. Without access to transactions across the country, that investor would have a concentrated allocation in his home state. Not only does crowdfunding allow investors to diversify across geographic lines, but it also allows for diversification across property types (think multi-family, retail, office, self-storage, residential, and even mobile home parks) and diversification across the real estate capital stack (including debt, mezzanine debt, preferred equity, and equity).
How Is It Different Than a REIT?
Crowdfunding is different than investing through a real estate investment trust (REIT) for three core reasons: 1) control 2) transparency, and 3) tax advantages. When investing through crowdfunding, investors know the exact property they are investing in. That pride of ownership is something not found with REIT investing. The investment is also more transparent as reporting is provided on a specific property as opposed to at a fund level. A REIT might own 2,000+ properties and the investor has no insight into the actual performance of property No. 1,576; nor does she even know if it is an apartment building or the retail shopping center in her own town. The last element is tax advantages. Crowdfunding transactions are most often structured as limited liability companies (LLCs) and these allow for pass-through depreciation for investors. Crowdfunding today is limited to accredited investors (those investors with a net worth above $1 million or an annual income above $200,000), the tax impact can be meaningful.
How Does It Work for Investors?
One benefit of crowdfunding is that investors can access real estate transactions from the comfort of their own home because offerings are distributed on the Internet. Investors sign up for access directly online and then have the ability to browse various investments, from apartment buildings in New York City to retail strip malls in California. The entire transaction process is online, including electronic document signing and payments via eCheck. After an investor has made a decision, he has 24/7 access to an investor dashboard to watch how his money is working for him.
In March of 2013, we launched www.realtymogul.com as the preeminent crowdfunding platform for real estate investing. With over $100 million in real estate value now funded via crowdfunding, we’re certain this funding mechanism is here to stay.
The open question is how big will this industry become?