Crowdfunding is pressing its way into the real estate industry and imposing some promising innovations. The traditional way to raise money for realty investment involved seeking out lenders at banks to front the investment money.
Crowdsourcing takes real estate investing to a different place. The investor can raise capital through a group of small investors.
An alternative to bank loans
Here’s how crowdfunding works. The investment proposal is presented online at a crowdfunding website. The project has access to thousands of people who might be interested in the project.
After the dollar investment amount is secured, the money is released and the project is funded. Investors like this idea because they have the option of fronting smaller amounts of cash. That reduces their risk and also opens up alternatives to bank lending.
Nav Athwal, who heads up RealtyShares, explained in a Forbes article how crowdfunding could be applied to real estate investing.
Investing on a website
At Athwal’s company, investors are able to search through the website to find real estate investment opportunities across the U.S. Crowdfund investors may search for asset types, such as homes, resort properties, or apartment buildings.
Searches can also be done on a geographic basis. Once an attractive investment is found, investors can pool their money with others to buy the property. Shares can be purchased for as little as $5,000. Website tools are available to follow investments, learn about tax treatments, and measure dollar returns.
Athwal argues that crowdfunding eliminates the tedious process that occurs in ordinary real estate investing. Traditional investing requires many hours of research to acquire basic realty investment skills.
This includes understanding how to maintain, manage, and operate the property. Realty investment regulations must also be analyzed, and these regulations differ, sometimes markedly, from state to state.
Realty crowdfunding is more of a passive investment because investors don’t need to fret about property management, and the required investment is much lower than when you do it the traditional way, Athwal said.
Finally, crowdfunding allows investors to spread their money around different properties. Diversification in this way also lowers the overall risk.
New laws to regulate crowdfunding
The trend is your friend when you consider crowdfunding in real estate. Laws are changing to meet the rapid innovations coming online to sell real estate.
That means more transparency, greater efficiency, and widespread access into the real estate market, Athwal said. That’s ideal for small investors who’d like to get a piece of the action.
The public comment period regarding rules for crowdfunding recently ended. These rules, established under Title III of the JOBS Act, will set the parameters in crowdfunding for people who have a net worth of less than $1 million.
Market Watch has covered this aspect in detail. The new rules will allow individual investors to lay out as little as $5,000 in crowdfunding real estate investments. Under the rules, investors will be able to avoid fees that REITs charge.