Disruption: Crowdfunding the Traditional Real Estate Market
The traditional real estate market used to be an exclusive market reserved for those with an elite network and high net worth, entry often reliant on ‘who you know’. Today, that market looks very different thanks to crowdfunding.
Thanks to changes in the law and technological innovation, everyone now has an equal opportunity to invest in large, institutional quality real estate opportunities regardless of wealth, risk profile, gender, profession, age, and even location (non-U.S. investors can invest too)…and for the most part, can do so in a few easy steps online.
You heard right. Everyone can invest and do so online.
For those raising capital and those looking to invest, and all the middlemen in between, real estate crowdfunding is emerging the new, shiny kid on the block and slowly but surely, putting an end to the traditional model.
So why is it so shiny?
Increased accessibility. New laws that went into effect in June 2015 (Title IV Reg A+ of the JOBS Act) provided:
- Non-accrediteds with the ability to invest in large institutional quality offerings such as private REITs so long as the offering went through a formal review and qualification process by the SEC..and the amount invested was limited to 10% of the greater of annual income or net worth.
- Issuers (those raising capital) the ability to generally solicit (market) their capital raise online through traditional marketing channels, as well as collect and process investments online.
Prior to this, the law limited investment accessibility to a certain net worth or annual income. Those without a large net worth or annual income were prohibited from investing. It also prohibited those raising capital from general solicitation. This all changed when the law changed.
More direct investments. The law ushered in a host of crowdfunding technology providers and innovators eager to fill an immediate and growing demand. Through these technology providers, issuers like us at Impact Housing REIT, benefit from greater ease, efficiency and affordability because it’s all done online in a few easy steps without the middle man. Individual investors can invest directly of their own volition with fund managers i.e. sponsors (without a financial advisor, broker or brokerage account!) thus avoiding costly intermediaries. Any ordinary individual with any amount of income, if they are over the age of 18, can invest.
Larger pool of investors. Not only has the law increased accessibility for investors, but also for developers and fund managers. There is no longer an absolute need a broker, a bank and/or a source of wealthy individuals or institutions to finance projects. There is a larger pool of potential investors and capital available — the unaccredited, which make up the overwhelming majority of the national and international public.
Greater efficiency and speed. New laws and technology also allow for greater transparency, speed, and efficiency. With an online platform, investors know exactly what they are putting their funds into and what the project is aiming to achieve, and investment can be done without the need for travel and extended waiting periods.
Opportunities for asset diversification. With crowdfunding, investors have the flexibility to cherry-pick and distribute their investment dollars by type of project and geographic area, thus diversifying and mitigating risk. Investments are hands-off thus investors are not limited by time availability, geography, or as mentioned earlier, net-worth.
Opportunities for system change via collective public. Above all that, real estate crowdfunding has the power to create systemic change in society by leveraging the wealth of the collective public to fund projects the crowd cares about and can connect with. By investing in funds that are focused on not only generating a financial return, but also solving social issues, like housing in the U.S.
The transformation of the real estate market areas of accessibility, efficiency, cost, and impact, as a result of crowdfunding, has only just begun. We don’t know about you, but we are excited to see what the future has in store.
What other crowdfunding transformations do you see?
