The $100 Reason for Real Estate Crowdfunding
by David Drake
With the exception of REITs, commercial real estate transactions
have so far been outside the reach of everyone except for the 3%
comprising institutional investors and high net worth individuals
possessing the necessary network, contacts and capability of
investing large sums of money. With crowdfunded properties
continuously cropping up online in recent months, critics are
sending out their caveats to the public concerning this new wave of
investing, alleging that deals are often costly, inefficient and
time consuming. These deals usually require a large number of
people to complete funding, which opens up the gateway for the
possibility of many lawsuits if said deals go sour.However, the
opportunity for a local to participate in the real estate
development of their community is a welcome change to the industry.
If any one of the remaining 97% of individuals can invest directly
in commercial property through an online real estate crowdfunding
platform then there is probably a strong case for crowdfunding to
merit our closer attention.A startup established by brothers Ben
and Daniel Miller in 2010 is one of the platforms that is giving
smaller investors the chance to invest directly in commercial
property transactions for sums as low as $100. The Miller brothers
noticed that it was easier for an individual to invest in a country
outside the United States than it was to invest in a property
across the street. This problem gave birth to Fundrise.The company
has raised $31 million in its first round of capital raising, led
by Renren the social networking giant from China. Other investors
include the CEO and the Chief Investment Officer of Silverstein
Properties (owners of the World Trade Center Twin Towers) as well
as the Collaborative Fund which focuses on sharable economy
businesses such as TaskRabbit and Kickstarter. So far, developers
are making use of the site and have raised around $20 million for
30 projects, and are now raising money at the rate of $1 million
every week. The new funding will help the company to expand to new
markets around the country, and interestingly, expand the reach
further to institutional investors.While other real estate
crowdfunding platforms like Groundfloor, iFunding and Groundbreaker
focus either on specialist niches such as property flipping or on
transactions, Fundrise differentiates itself by emphasizing social
benefits that can be obtained by empowering investors to influence
property developments in their own communities. The firm points out
that investors who are residents in the neighborhood have a much
better feel for projects that the community requires, rather than
institutional fund managers who have dominated property investment
space and can be disconnected from the properties in which they
make an investment.Critics have pointed out that these are risky
investments for the ordinary retail investor, and that investors
have to rely entirely on the expertise and skill of the developers
of the projects in which they invest. In addition, these
investments are highly illiquid. However, risk is an essential part
of any investment and investors must make a reasoned and objective
judgment. Moreover, the Miller brothers say that Fundrise should be
treated as an alternative investment, and investors should limit
themselves to the normal principle of investing no more than 10%.
At the minimum of $100 per investment, investors can easily
diversify their risk by using the different types and locations of
properties contained in the Fundrise portfolio.An insight into the
way Fundrise operates can be gained from the recently released
infographic with data from its third public offering which has just
closed. The total offering size was $350,000 with a projected
return of 8%. Any resident in DC, Virginia and Maryland could
invest a minimum of $100 each. About a quarter of the 378 investors
live within 1 mile of the property. Only a minority of investors
(18% from DC, 24.9% from Virginia and 29% from Maryland) were
accredited investors, and the average investor age was around 37
years. The maximum number of orders was for $100 apiece (100
orders) followed by orders for $500 apiece (80 orders); the average
order size was $926. These figures clearly establish that what
Fundrise is doing may well point the way to the future of real
estate crowdfunding.Bruce Lipnick, CEO and Founder ofCrowd
Alliance, believes that the Jumpstart Our Business Startups Act
catalyzed the business landscape by creating ways to raise capital
for enterprises around the country. He said crowdfunding flourished
in almost all sectors, be it technology, health, mining, food,
education, philanthropy and now in real estate, with strong push
from the JOBS Act and the pursuit for its clear implementation.
With raised capital then more jobs can be created. Bruce Lipnick is
also the CEO and founder of Asset Alliance.
David Drake is the Chairman ofLDJ Capital, private equity
advisory;Victoria Partners, a 110 family office network;Drake
Hospitality Group; andThe Soho Loft Media Groupwith
divisionsVictoria Global Communications,Times Impact Publications,
andThe Soho Loft Conferences. Reach him directly at
[email protected].