Crowdfunding is attracting quite the crowd when it comes to real estate investing.
Last year, real estate crowdfunding grew 156 percent to cross the $1 billion mark. This year, it is forecast to grow 2.5 times that to $2.57 billion, making it one of the fastest growing industry segments of crowd capitalism, according to industry research firm Massolution. In 2014, real estate campaigns ranged in size from less than $100,000 to more than $25 million. North America ranked as the largest region by funding volume, grabbing a 56 percent market share.
Since the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012, a number of crowdfunding platforms have emerged that allow accredited investors to pool their resources to buy or finance commercial and residential real estate deals. Some platforms allow nonaccredited investors to take part in deals that are less than $5 million.
This has opened the doors to real estate opportunities that were previously marketed solely to ultra–high-net-worth individuals or institutions, such as endowments and pension funds. Rather than needing millions of dollars to invest upfront, crowdfunding platforms allow accredited investors to participate in deals where minimum required investments could hover around $5,000 or $10,000.
But before participating in crowdfunding, investors must be sure to conduct careful due diligence. After all, Massolution counts 85 real estate crowdfunding sites currently in operation, meaning that there are hundreds of different types and sizes of deals available. While that number could change as new entrants join the space or sites consolidate, investors vetting an offering need to evaluate the sponsor’s depth of experience.
The crowdfunding platform Silver Portal Capital recommends that prospective investors look for platforms and sponsors that offer transparency about the potential risks involved with the project. Investors should also consider the history, focus and model of the sponsor platform to ensure it matches their personal investment goals.
While real estate crowdfunding is relatively new, there is no doubt that it is quickly gaining traction, and Silver Portal predicts that sponsors could quickly move to broaden their offerings from basic debt and equity deals to preferred or mezzanine capital. It will be exciting to watch the way crowdfunding shapes the world of real estate investing and capital raising in 2015 and beyond.
Michael Howe (michael.howe@pensco.com) is director of institutional real estate products at PENSCO Trust Co.