When people think of crowdfunding, they typically think of new technology companies with transformative promises, both for the way people live and for how much more money the owners of the companies will make. But less known, yet still as important, is the potential for crowdfunding to invest in real estate opportunities such as apartment buildings, vacant lots, or multibillion-dollar redevelopment projects. Real estate and business investing used to be separate, but crowdfunding is changing that. Indeed, crowdfunding is revolutionizing capital formation, or fundraising, in the both areas.

Real estate investment trusts (REITs), along with private equity, used to be the only forms of investment for real estate development. Neither of these options was feasible for most people. On top of this, real estate developers could not solicit investments or actively market their projects because of Securities and Exchange Commission (SEC) restrictions. However, the idea of crowdfunding was growing, which caused the Jumpstart Our Business Startups (JOBS) Act of 2012 to modify specific rules under Regulation D. This opened the door to more direct solicitation and marketing to accredited investors.

The SEC is reviewing material currently in an attempt to open the market to all investors, but while that is pending, crowdfunding sites can solicit investments from high-net-worth investors and must classify each investor in order to guarantee they qualify to make the private investments in real estate.

While the SEC regulations are still pending, online portals focusing on real estate are already coming to life using the model provided by the SEC. An example is RealtyMogul, allowing accredited investors who have registered with the site to view various real estate investment opportunities. As the crowdfunding market matures, the size and complexity of such projects will likely grow significantly and quickly.

When it comes to crowdfunding, real estate has possibilities that other industries do not. Since real estate relies on location, a portal can easily specialize in a physical area, such as Houston, but then further specify commercial real estate in Downtown Houston. The list can continue apartments, shopping malls, high-end residential projects, etc. With this kind of focus, investors can more easily find what they are looking for, which will then provide developers with a reliable source of capital.

While the world has been focusing on the alluring hi-tech arena of crowdfunding, real estate crowdfunding offers significant opportunities for those who are willing to take it on.

If you have questions about real estate crowdfunding or about crowdfunding in general, contact Manfred Sternberg & Associates today.