Crowdfunding
Crowdfunding is helpful to raise investment money for real estate deals. The investors in crowdfunding scenarios look for substantial returns and are more likely to invest in companies and projects managed by individuals with an extensive successful track record. Crowdfunding brings in the small investment money that in total is enough for a real estate project.
Types of Crowdfunding Real Estate Investment Opportunities
Just about any commercial real estate investment opportunity of a certain size can benefit from the crowdfunding process. Crowdfunding creates funds for hotel projects, multi-use properties, apartment buildings, shopping centers, stand-alone retail, golf courses, and more.
Smaller minimum investments are now offered in portions of huge REITS as a crowdfunding opportunity. Some of the investment minimums for a proportional participation in a REIT are as low as $5,000. Previously, these same investments were not available to smaller investors. Investors had to be “accredited,” with a net worth of over $1 million dollars and substantial annual income ($300,00+) in order to be able to invest. Most of the big REITs that are private had significant minimum investment levels previously, that were commonly $250,000. Now, there are brokers using crowdfunding to break that $250,000 minimum investment into $5,000 “bite-sized” pieces for the small investor.
Bloomberg reported on the boom in real estate crowdfunding that happened because new SEC regulations allowed the advertisement of investment opportunities to the public. Previously, this was illegal. Bloomberg also issued a very strong caution to investors, who may be unskilled in conducting due diligence. Look very carefully at the management fees.
Fancy brochures and pretty websites do not necessarily mean successful investment returns. The unscrupulous dealmakers are selling the “sizzle” not the steak. The lack of close regulatory supervision creates an opportunity for those who want to bilk investors out of their money.
Using Crowdfunding to Raise Capital
For skilled real estate developers with a record of accomplishment, crowdfunding is useful to raise money. Be sure to work with professionals who understand the new regulations and the limitations on annual fund raising using crowdfunding methodologies.
There is no need to pay high fees to those who prepare the paperwork for the deal, with the exception of those who are able to market the offering and bring in the investors. They command high commission fees if they are able to deliver the investors. The average commission is around 10% for equity capital and 2% for debt.
Make sure the deal is solid and the cash flow projections are realistic. The most successful real estate investment companies build up a big pool of satisfied investors over time and this “member” email list becomes extremely valuable.
Real estate project managers are well advised to treat investors with the greatest respect. Rather than rip them off on a one-time only, poorly constructed deal, it is better to build up investor support for deal after deal. Everybody wins when the real estate projects work out well for both the managers of the deal and the investors in the deal. There is no reason to do otherwise.
The old saying is very true. “Money goes were it is welcomed. Money stays when it is well treated.”
Reference
Inside the Real Estate Crowdfunding Landrush
http://www.bloomberg.com/news/articles/2016-05-09/inside-the-real-estate-crowdfunding-land-rush