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What's the big deal about real estate crowdfunding?

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Lately, there’s a lot of chatter going around about real estate crowdfunding in the finance world. This is because crowdfunding regulations are changing, with the possibility that real estate investment becomes more democratized– allowing smaller players into the game. Regulatory changes by the Securities and Exchange Commission (SEC) will allow small investors (who earn less than $200K per year) to invest in real estate crowdfunding projects. Yes, smaller fishes now get to play in, well, the small leagues.

Real estate crowd funding opens up more opportunities to more people that its offline predecessor, “real estate syndication.” Investments in real estate syndication used to be limited to those investors who had a million dollars or more, or have made at least $200K per year for the last two years. Moreover, potential dealmakers had to register with the SEC, reserving these opportunities for bigger companies because of the amount of paperwork involved. If you were small time investor, you had to invest in publicly traded companies, in other words companies that tended to be larger rather than companies in your local community.

What is crowdfunding exactly?

Crowdfunding in real estate allows investors to pool money into individual projects. This was made famous by Kickstarter, an online platform that gave musicians and other artists the opportunity to fund their projects through their friends and fans.

Let’s say you want to convert an old warehouse space into residential loft spaces. These new potential SEC changes would allow you to solicit investors online to help fund your venture in exchange for part ownership in the property.

What are these so-called changes?

Traditionally, the SEC only allowed companies to raise money from investors without filing for a public offering with the SEC if the companies used a securities exemption (most don’t permit companies to publicly solicit funds). So this meant that in the past, companies couldn’t even show their investments on their website to people who weren’t credited investors (worth at least 1 million, or made at least $200K a year for the past two years).

This changed when the SEC recently implemented Title 2 of the Jumpstart Our Business Startups (JOBS) Act; which lifted the ban on general solicitation for private offerings.

But currently, many crowdfunders do not publicly display their investments because as part of the new regulation, doing so requires them to verify that their investors are accredited. If the SEC implements Title 3 of the JOBS Act, which is currently in review, companies would be able to raise money from non-accredited investors much more easily than they can now. Title 3 is largely the reason why many real estate crowdfunding platforms launched in the first place.

The regulatory change would make it possible for small companies to issue shares to the public without having to get approval from the SEC.

Why is this important?

This means that us “normal folk” would be able to invest in smaller real estate ventures that are happening in local communities. If Title 3 passes (and is expected to) real estate crowdfunding will be available to everyone with extra cash, not just those in the big leagues.

Is crowdfunding safe real estate investments? 

It’s possible these deals will earn money, and some of will. At the same time, real estate investing, and particularly development deals, is high risk. Many things can go wrong with real estate. A recent article by Zillow’s Leonard Baron suggests that one shouldn’t gamble “any funds on a private real estate deal you don’t control, unless you can afford to lose the money.”

Why it’s worth it. 

Real estate crowdfunding provides an excellent opportunity for people who have a little bit of extra money to reinvest in their own local communities. While it isn’t as safe as Blue-Chip Stocks, or AAA Rated Bonds, it’s a chance to contribute towards local development that wouldn’t have been as easy to in the past.

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