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Real Estate Crowdfunding Pros & Cons

Published on Thursday - December 26, 2013

Crowdfunding within the real estate industry is gaining more traction everyday. However, it is widely misunderstood. Both hopes and fears are dependent on this potentially revolutionary concept. So why is crowdfunding receiving so much media attention? How disruptive could crowdfunding really be for the real estate industry? What are the real pros and cons?

Crowdfunding has the potential to be a considerable game changer for the real estate industry. Many are unaware of the possibilities it can bring to fruition. Unfortunately, many still fail to fully understand what it is, how it works and the real pros/cons of raising money in this manner.

With that being said, how can real estate investors use crowdfunding to their advantage? How disastrous can it be? How can real estate investors make it better?

The Casualties of Real Estate Crowdfunding

If there is one thing that real estate investors should have learned from the recent crises, it would be to keep looking ahead and anticipate what’s next. When it comes to the rise of crowdfunding in real estate and finance, there are three potential side effects to keep an eye on.

The future ramifications of new Title II ruling is perhaps the most prominent side effect to keep in mind. The final SEC ruling fell short of what many hoped for, and some may even say it undermines the whole purpose of the JOBS Act. However, the doors are now open for real estate investors to publicly raise capital for virtually any type of project. The SEC has restricted this to raising money from ‘accredited’ investors, and firmly placed the responsibility of verifying this on those raising money. As you can imagine, if anything goes wrong in the future, it is those tasked with this burden that will be under the microscope first.

Still, it seems as if there is no stopping the evolution of fund raising in real estate. This victimizes those that refuse to embrace change over the course of their career. Accordingly, this change may not happen overnight. After all, there are those that still make real estate work for them with fax machines and home phone lines, but you get the picture.

However, banks may face the largest threat from crowdfunding campaigns. Crowdfunding means they are no longer the all-powerful gatekeepers of the gold or returns for the average individual and family. Now everyone can essentially take advantage of the best returns and wealth building. If they can’t find a crowdfunding project, they can create their own by finding great wholesale deals, property ripe for development, and homes in need of rehabbing.

What Most Don’t Understand

Most real estate investors understand that crowdfunding is an easy way to raise money, regardless of the challenges that may prevent them from receiving financing elsewhere. However, even more than this, it brings incredible efficiency and opens the door to more innovation. It can broaden spreads, increase returns, and speed up the industry.

Those that don’t really get crowdfunding may be unaware of the number of options it provides. It doesn’t have to mean giving up control. By sticking with alternative platforms like Indiegogo and Kickstarter, investors don’t even have to give up profits either.

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