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Published On: Thu, Apr 28th, 2016

The Crowdfunding Effect: Reshaping How Investors Find and Purchase Properties

Crowdfunding isn’t just for personal loans anymore. No, today some real estate professionals are using crowdfunding to raise money for their next real estate project. Here’s how it works.

A Basic Overview

Crowdfunding has become quite the buzzword with investors and it’s because, these days, it’s well-received in the real estate sector. While it’s still not commonly used as a way to raise money for large commercial projects, the practice is catching on. This shift has many benefits for investors and developers. But, it’s also introduced new risks.

Some of those risks include the risk of loss. There’s never a guarantee that a project will succeed. And, with new real estate developments, anything from a government permit issue to weather could slow down, or even shut down, the project. Because of this risk, investors have to be extra cautious about which projects they choose to invest in.
At the same time, the upside can be tremendous.

photo Alina Ku-Ku via Shutterstock

photo Alina Ku-Ku via Shutterstock

What Used To Happen

It used to be that if you wanted to buy or build a home, you would see EntwistleGreen for more information about good real estate buys, and then raise money for the project through a bank or angel investors. Under the Securities Act of 1933, private securities investments couldn’t be marketed directly to the general public. The only people who qualified for these types of investments would be accredited investors — people who supposedly knew what they were doing with their money.

Access to these deals was limited to investors who were able to seek them out through personal connections. This is how the rich “got richer” — they had connections that others did not have.

Unfortunately, this shut out small investors and made it harder for them to invest in opportunities with outsized returns.

The original intent of the 1933 law was to protect investors from scam artists selling phony investments. It was thought that the general public was made up of unsophisticated investors. And, that these investors could easily be fooled into bad investments. Therefore, they needed to be protected against people who might take advantage of them and exploit their ignorance.

How Crowdfunding Made It Easier

Times change, of course, and the Internet makes gathering information much easier. While investors can still be ignorant or uninformed, access to a wide range of information in “real-time” makes it much easier to access background information on a developer, ferret out deception, and crowdsource information about a real estate project before one puts any money into it.

From an investor standpoint, crowdfunding is sort of like group angel investing.

Private investors are able to pool their funds and invest in a project together. If the project is successful, they may get paid a handsome return on their investment. Or, they may make mediocre returns.

If it fails, obviously, they lose out on their investment. But, today, that risk is theirs to take.

With the passage of the Jumpstart Our Business Startups Act in 2012, many of the restrictions of the 1933 Act were removed, making it easier for investors to get in on their action they’d been missing out on for many years.

photo/ Public domain pictures via Pixabay

photo/ Public domain pictures via Pixabay

Changes In How Real Estate Crowdfunding Can Be Advertised

One of the major changes occurred with Title II of the Act, which eliminated all restrictions on general solicitation. This is the first time in 80 years that small businesses and startups could solicit investment dollars from the general public. Raising capital is now a matter of putting together an attractive advertising campaign, setting up a platform to collect money, and making sure accurate records are kept about each investor’s investment. Typically, a third-party platform handles all of the escrow and paperwork.

Crowdfunding has changed the way real estate professionals raise money. Instead of having to rely on connections to pinpoint real estate opportunities, they can seek out investors and get a smaller amount of money from each investor

Many investors need only start with a minimum of $1,000. From a risk/reward perspective, this is much easier to sell than asking a single investor for a $100,000 lump sum amount.

Because smaller investors tend to spread their risk out, smaller sums of money from individual investors tend to be easier to get, too. You’re not asking for large sums of money. If an investor loses it, it’s a small loss.

Even if a larger or more experienced investors puts up $10,000, it’s still a smaller amount than asking for $100,000.

In this way, crowdsourcing is making real estate investing not only easier, but less risky.

Guest Author :

Joanne Mack takes an interest in investing and has recently entered the property game. She enjoys sharing her knowledge with others and writes about property and investing for a small selection of websites.

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