Your neighbor’s teenage son who wants a new Xbox. A stranger who is hoping to make an epically delicious potato salad. The internet is full of opportunities to invest in ground-level, crowdfunded projects, some of which have skyrocketed into internet fame through sheer creativity or absurdity.
As crowdfunding evolves, though, this hot, emerging funding method is no longer just an entertainment sideshow, but a legitimate way for entrepreneurs to publicly solicit funding for their projects or ideas. While donation amounts tend to be smaller than traditional investments, the base of investors tends to be much larger. At its heart, crowdfunding captures the collective wisdom of curious, engaged, and active investors looking to fund projects that are highly likely to succeed but need an injection of capital to get off the ground.
The benefits are many. Crowdfunding helps entrepreneurs give life to worthy project proposals that would otherwise have difficulty connecting to capital markets. In addition, crowdfunding is increasingly considered a financially sound investment strategy. The investments can be a useful tool for creating a more diverse portfolio, encompassing sectors and trends that may be underrepresented or even absent from an otherwise balanced set of holdings.
Another reason for investors to love crowdfunding is that according to recent studies, the wisdom of the crowd is more than just a myth. Ethan Mollick, a professor at the University of Pennsylvania‘s Wharton School, finds in his research that “entrepreneurial quality is assessed in similar ways by both Venture Capitalists and crowdfunders, but that crowdfunding alleviates some of the geographic and gender biases associated with the way that Venture Capitalists look for signals of quality.”
In this way, pooling together collective wisdom to select investments serves as its own built-in screening method, singling out the most promising and successful opportunities for investment.
In a study by bankrate.com on investment preferences, the wisdom of the crowd also weighed in on its preferred long-term investment vehicle: real estate. According to the 2015 study, 27% of Americans cited real estate as their preferred option for long-term investment, the highest of any asset class. For comparison, only 17% said they preferred to invest in the stock market when eyeing long-term returns.
Capitalizing on these positive sentiments toward real estate and utilizing the potential of crowdfunding to reach investors worldwide, companies like RealCrowd have developed easy-to-use platforms for investors seeking exposure to commercial real estate projects through crowdfunding. The site, which is free for investors, features a variety of direct investment opportunities allowing users to purchase “shares” in multifamily residential, retail, office, industrial, and development real estate projects.
Accredited investors can use RealCrowd’s platform to access a wide array of detailed documentation about the properties, including long-term business plans, target returns and cash flow projections. They can also access expected costs for capital improvements and maintenance, giving complete transparency on expected life-cycle income and expenses. The in-depth information allows investors to make informed decisions about which opportunities make the most sense for their individual investment profiles.
For investors, real estate crowdfunding platforms like RealCrowd offer several clear advantages over other popular options for portfolio exposure to real estate, such as Real Estate Investment Trusts (REITs).
One of the most tangible benefits comes in the form of lower fees for investors. The crowdfunding platform is able to offer its services for free to investors by charging listing fees to the property managers or owners. This is in stark contrast to non-traded REITs managed by funds which can claim between 12 and 15 percent of investments in front-end fees, according to the Wall Street Journal. Benefits of crowdfunding over REITs can be found on the back-end, too, as all REITs are only legally required to distribute 90% of rental profits to shareholders, significantly tipping the scales in favor of direct ownership.
For the developers using crowdfunding platforms, the fees are well worth the expanded access to a large number of potential investors, as well as the simplicity of connecting virtually. Previously, raising private capital was a difficult and time-intensive endeavor with large, on-the-ground pushes to solicit funds from a limited pool of contacts. Crowdfunding platforms, which eliminate those costs, are subsequently well-placed to pass on some of those savings to investors.
Another benefit of crowdfunding over REITs comes in terms of exposure. Just as some investors prefer to put their money in individual stocks instead of mutual funds, would-be real estate investors may prefer to put their money in single, tangible assets that they can select singularly based on the investor’s own market outlook. While REITs encompass a large number of listings that can provide diversification within the real estate market, a knowledgeable investor may prefer to utilize his market knowledge in the hopes of better returns in stronger investment climates. Crowdfunding platforms allow investors to stick to their own desired parameters, such as a specific region or a specific type of property.
Why not go through a more traditional model of finding and investing in properties? The answer for most investors is simple: access. Traditionally, access to high-profile investments has been limited to investors that already have inside contacts and that are willing to put up large sums. Crowdfunding lowers those barriers to entry by making the connections between sponsor and investor, and also lowers the minimum buy-in requirements. RealCrowd, for example, allows investors to invest as little as $5,000 in its properties.
Although there are a growing number of real estate crowdfunding platforms offering investment services, RealCrowd stands out for its larger, high-profile commercial investment opportunities. Also noteworthy are the company’s well-connected founders; CEO Adam Hooper, CMO Roman Rosario, and the rest of the RealCrowd team boast over 30 years of combined experience in the industry, including $5 billion of combined transactional experience. The team’s industry links have earned the platform a number of prominent listings.
One such listing is Oxbow Public Market, a spirited artisanal marketplace and gathering place in Napa Valley’s wine country launched by Madison Marquette. In a recent press release, the real estate investment firm’s President Eric Hohmann described his excitement at opening up the property known as “Napa’s public square” to investors: “This rare and innovative opportunity for the region means a virtually unlimited pool of potential investors now have the chance to enjoy and own a slice of Napa’s luxury wine country lifestyle,” Hohmann said.
Oxbow, a popular destination for tourists and locals alike, has been nationally recognized as one of the leading public markets in the country. With active social programming and an ideal location along the Napa River, the 23,000-square-foot multi-vendor marketplace is poised to maintain its position as a leading location for upscale shopping and dining. Madison Marquette’s decision to open the prestigious location for investment on RealCrowd is both a boon to the site and a vote of confidence for crowdfunding in general.
Real estate has long been a road to wealth creation. Real estate crowdfunding, a niche but growing market, is making that road more accessible and more direct.
