Prepare For A Crowdfunding Flood
Crowdfunding is about to make a big splash in the real estate industry. We asked experts and novices in the space to tell us why. (Speaking of splash, we're crowdfunding an umbrella for today, since we forgot one. Anybody wanna chip in?)
We're fascinated by the topic and suspect you might want to learn more, so Bisnow has produced—gulp!—a FREE video featuring Fundrise chief Ben Miller to be released this Thursday. Fundrise was the first company to successfully crowdfund an equity investment for real estate online. The video will explain how crowdfunding—often associated with financing dubious art projects—has already raised more than $135M worth of debt and equity since exploding onto the scene in 2012. Meantime, consider these five reasons why crowdfunding is making waves.
1. Bigger Money Is On The Horizon
The crowdfunding real estate market has yet to see a huge volume of deals, thanks to the small number of investors signed up. Last week at the Crowdfund Banking and Lending Summit at the Grand Hyatt, Flaster/Greenberg attorney Mark Roderick told us the Internet's arrival in real estate funding could unlock $3.5T in investable dollars. Crowdfunding could shake things up just as Uber has done for taxis. He says we are five years away from $50M deals getting done. (Now we're at $2M.)
2. Working Out the Kinks
A Crowdfund Capital Advisors study found that crowdfunding had positive effects on job growth (hiring of new employees), revenue for entrepreneurs, and follow-on interest from institutional investors, says economist John Berlau. Various securities laws still stand in its way, however, and individual states are stepping up to loosen laws (California is close to widening the types of investors who can participate). Mark points out that all it takes is lack of transparency and a few deals gone bad to turn the spigot off. It's only about a year old, so there hasn't been a chance for bad apples to be revealed or lawsuits to be filed.
3. It's a Win-Win For Developers
Crowdfunding provides a direct pipeline to capital that cuts out the middle men (lawyers, investment bankers and accountants). To find better sources of capital, DC-based Fundrise tried crowdfunding on for size and it stuck. (Now Fundrise and Realty Mogul lead the pack.) From a developer's POV, there are few drawbacks to crowdfunding: it's fast money, transaction costs are low, and deals can happen quickly. Investors move in flocks, so all it takes is a couple good returns and word of mouth takes over, says Mark.
4. New Players Are Popping Up
Take Jordan Fishfeld, a Florida broker-turned-Illinois attorney who sees enormous growth potential for senior housing in the Midwest. Next month he's launching Peer Realty, focusing on senior and student housing "between the mountain ranges" of the Appalachian and Rockies. He's helping work on legislation in Illinois to broaden the definition of "accredited investors" past income level to include qualitative metrics like a J.D. and years of experience in financial planning. Crowdfunding creates an efficiency in capital raising you can't get anywhere else, he says.
5. Platforms Are Growing At Warp Speed
LA-based Patch of Land launched a year ago and now it's active in eight states—with an additional eight more on deck for the next 60 days, CEO Jason Fritton tells us. The company gets over $100M a month in applications for funding and millions a month in funded loans. Patch of Land is able to close in less than a week from application to funding. Soon it'll be moving into longer term "buy and hold" or "buy to lease" loans, as well as being able to service much larger investment opportunities. There are some 3,500 accredited retail investors and their risk appetites span the entire spectrum, he says. Patch also has a partnership with a large institutional investor with a big interest in retail.