Commercial Real Estate Investing With Equity Crowdfunding
Equity crowdfunding has been on the rise since it got its start in 2012. The term may be new to you, but you are more than likely familiar with the concept. Similar to reward-based crowdfunding like those on Kickstarter, or charitable crowdfunding like GoFundMe, equity-based commercial real estate investing brings together a broad spectrum of investors and commercial real estate (CRE) developers and operators to raise capital to invest in specific properties.
Because equity crowdfunding is a relatively new way to invest, there is still a lot for even savvy investors to learn about these opportunities. However that also means the opportunities for growth are significant, and predictions show real estate crowdfunding becoming an increasingly lucrative marketplace within the next few years. With CrowdStreet’s equity crowdfunding platform, investing in institutional-quality commercial real estate is made simple and straightforward.
The History of Equity Crowdfunding
As mentioned, investment crowdfunding and equity crowdfunding sites are relatively new. In fact, before 2012 general online solicitation for commercial real estate investments were prohibited in the United States. However, the passage of the Jumpstart our Business Startup (JOBS) act, better known as the JOBS act turned the crowdfunding industry on its head.
Signed into action by President Obama in 2012, the JOBS act amended restrictive regulations from the Securities and Exchange Commission to allow for commercial real estate firms to publicly solicit investments via crowdfunding platforms just like CrowdStreet’s. The goal was to provide better investment access for successful investors and more transparency into commercial real estate deals.
Since the JOBS act was signed into action, various portions of the bill have slowly been enacted and added to its influence. In 2016, non-accredited investors were allowed to participate in CRE equity crowdfunding for the first time, opening up investor access to offerings across the U.S. and increasing the transparency of CRE investing. While it’s still early, increased participation has seen the total amount of capital raised via online sources steadily increase since 2012.
Equity Crowdfunding vs. Debt Crowdfunding
One of the advantages of commercial real estate crowdfunding is the opportunity to choose between debt or equity crowdfunding. CrowdStreet’s CRE investing platform is mainly focused on equity crowdfunding, which can offer uncapped returns and lower fees for investors. Equity crowdfunding and debt crowdfunding deals are different in structure, so it’s important to know the difference when you choose to invest.
Equity investments are common in real estate crowdfunding deals. In an equity investment deal, investors are shareholders in a property, with there stake in the property being proportionate to the amount they invested. Investors generate returns based on a share of the income the property brings in, or by a share of the appreciated value once the property is sold. Equity crowdfunding generally carries a higher risk, but also benefits from uncapped returns and lower fees.
Debt crowdfunding is different in that the investor is lending capital to the property owner or sponsor. Because the loan is secured by the property itself, investors receive consistent returns at a fixed rate. The returns are determined by the interest rate on the loan and the total amount they invested, or loaned, to begin with. With debt crowdfunding investors are the first to claim payout as they are at the bottom of the capital stack. Debt deal have lower risk, but suffer from capped returns and generally higher fees.
The Benefits of Online CRE Equity Investing
Invest Like a CRE Expert
In the past, investing in commercial real estate online was limited to what many call the “country club” set. Meaning, if you didn’t have a previous relationship with a CRE firm through your own network you may not have access or even awareness of real estate properties to invest in. Online equity crowdfunding opens an entire new world of investing and provides an opportunity for investors to gain access to this alternative asset class.
There’s something to be said for investing in a tangible asset or a business that you truly believe in, where you can get to know the firm, their executive team and their business plan. Equity-based crowdfunding allows investors to target specific asset classes, geographies, targeted returns or holding periods or other target portfolio preferences. These targeted investments in an actual physical asset often give investors more satisfaction.
Commercial real estate returns are very attractive when compared to alternatives in other commodities like stocks, bonds and golds. The high yield is one reason why private and institutional investors are both heavily pursuing real estate investments. Over the long term, the National Council of Real Estate Investment has reported an average annual return of 8.8% over the last 15 years, 200 points above the average performance of the S&P 500.
Diversification of your portfolio is crucial to minimizing risk and achieving a higher overall blend of return. Following Modern Portfolio Theory, investors should allocate between 10%-20% of their investments into hard assets such as commercial real estate. Doing so can lead to increased returns, lower risk and moving closer to the efficient frontier. Commercial real estate allows investors to not diversify their portfolio with hard assets, but also diversify those hard assets with different property of different types, classes and geographic location.
The Risks of Online CRE Equity Investing
Due diligence limitations
Due diligence is an important piece of any investing endeavor, and for the most part it falls on the investor to carry it out. Many commercial real estate crowdfunding sites target individual investors that may or may not have the skills or expertise to properly research and analyze investment opportunities.
It can also be difficult as a commercial real estate investor to properly assess risks involved with local market factors. Region or city specific factors play important roles in real estate investors, but can be difficult to gauge for investors located in different cities. The CrowdStreet commercial real estate investing platform limits itself to only institutional-quality, expertly reviewed, commercial real estate investments, as well as provides tools to help you practice due diligence in your research and analysis.
Industry Growing Pains
The commercial real estate crowdfunding industry is still incredibly young, having only gotten its start with the passage of the JOBS Act in 2012. On top of that the availability of crowdfunding projects to non-accredited investors is even more recent, having just started in 2016. Given the relative youth of the industry their are some uncertainties associated with the experience and returns investors might expect. The best protection against youth however, is experience and due diligence. That’s why every listing on the CrowdStreet is vetted by industry experts, to provide investors with the confidence they need to know they are investing wisely.
CrowdStreet Marketplace Performance
Since launching in 2014, the CrowdStreet marketplace has published over 250 institutional-quality commercial real estate investment offerings. The majority of these deals are working through their holding periods in anticipation of future full realization. You can view a complete list of realized offerings and the average XIRR and hold periods here.
How to Get Started With Equity Crowdfunding
In order to start investing in commercial real estate with an online platform you need to determine which crowdfunding platform or portal you will use to make your investments. CrowdStreet’s marketplace offers you the ability to invest through a simple and secure platform that provides detailed offering information that allows you to make good investment decisions. The CrowdStreet marketplace has the largest and most diverse online marketplace for direct equity investments in institutional-quality commercial real estate in the U.S. Reach out to us today to learn more about how we are aiming to change real estate investing to allow better access to projects and prospects.
Invest In A Crowdfunding Platform You Can Trust
All investments come with both benefits and risks. The way you succeed as a savvy investor is finding ways to mitigate risk while identifying beneficial opportunities. One way to mitigate the risks involved with crowdfunded commercial real estate investing is to manage your investments with a platform you can trust to provide quality investment opportunities.
The listings on the CrowdStreet marketplace are institutional-quality investments, reviewed and analyzed by industry professionals. Our expert team works closely with investors and sponsors to help them through the investing process, ensure they understand the functions and capabilities of the CrowdStreet platform, and educate investors on the benefits of CRE investing. Better informed investors, make smarter investing decisions, and grow a successful and diversified real estate portfolio faster. Crowd Street is here to help you do exactly that.