What real estate investors don’t know about crowdfunding can really hurt their business. There are a lot of tips, services, and platforms out there offering to help real estate professionals to raise money online. However, there is a lot more to the story than many are aware of. Let’s take a look at what crowdfunding has to offer real estate investors.
While real estate crowdfunding may make up just one percent of the total transaction volume of commercial real estate deals in the U.S., and likely far less of residential transactions, it does appear to be gaining traction. More websites are popping up every day. Analysts expect volumes of capital funneled through crowdfunding platforms to have more than doubled to $2.5 billion by the end of this year. Subsequently, there appears to be no shortage of fundraisers attempting to raise money through these channels that don’t get it. Finally, we are beginning to see notable crowdfunding projects materialize, and capital being returned to investors. The more success real estate crowdfunding has, the more popular it will become.
The bad news, however, is that it may have become even harder to raise money online in the last couple of years. Entrepreneur says just 37 percent of Kickstarter campaigns get funded, and fewer on Indiegogo. Those numbers were around 50 percent at the last count. When it comes to real estate equity, crowdfunding rates drop even further due to screening. Many sites proclaim that they barely accept between one to three percent of fundraisers that apply. The net rate may drop even lower after portals run their due diligence and background checks to comply with SEC regulations. This is not any longer a channel that may be well suited to those with weak personal finances, or bad credit.
While real estate crowdfunding is likely to keep growing, and has some big leaps to make, it is still just a part of the puzzle. Most platforms and lenders still want to see skin in the game. As seen with recent deals in New York, and the Hard Rock project in Palm Springs, crowd-sourced funds may just be a part of the deal. More conventional funding can be used to make up much of the rest, after lenders see proof of demand.
Crowdfunding doesn’t work on its own, and despite the advantages heralded by the platforms themselves, the truth is that it takes a good marketing budget, and expert marketing to make it happen. This goes way beyond the materials onsite. Via Realty411 Magazine, securities attorney and crowdfunding expert Gene Trowbridge says fundraisers should plan to spend at least as much on marketing the campaign as they do on legal fees. Those figures can run into six figures really fast. Sally Outlaw who runs a couple of crowdfunding related sites suggests budgeting a more modest minimum of $20,000 per campaign. These hours and costs need to be factored into the campaign.
The JOBS Act was declared to be the democratization of investing and fundraising. Unfortunately, some cracks are showing that may tell a completely different story. For starters, Crowdfunding attorney and JOBS Act expert Kendall Almerico says to launch a Regulation A+ filing organizers should expect to pay a minimum of $100k in legal and accounting costs. Almerico also points out that the regulations are so quirky that is still pays to use the protection of a broker dealer intermediary. That, like any crowdfunding portal, adds on a whole new layer of costs. Few, if any, have seldom made investment opportunities open to non-accredited investors. So neither side has really been able to realize major monumental changes.
It appears that some of the biggest capital providers in the crowdfunding arena are actually banks and institutional lenders. According to reports from Bloomberg, Morgan Stanley, and others; these institutions are using third party originators to do deals they perhaps could not otherwise because of heavy regulation. On the bright side, that certainly suggests easier lending is on the way.
The bottom line is that crowdfunding is working for real estate investors that know how to use it. It is specifically great for donation style funding for local projects. Big money is coming through to fund all types of single-family deals, and more. Yet, in order to make it work you have to market heavy, choose the right platform, have other sources of capital, and watch for the curve.