In the past few months, we have been asked about real estate crowdfunding multiple times. People seem to be interested in this type of investment and understandably so. Crowdfunding, specifically for real estate, is a relatively easy way to get exposure to that asset class. Typically, it is an online platform where one can sign up, get verified, and begin investing their hard-earned money in different types of real estate without having to perform any in-depth due diligence (most sites will promote their team of analysts and their thorough due diligence process). However, what is odd is this sense of newness to such a concept. For this month’s blog, we want to hit on two topics: raising capital through crowdfunding and the desire to invest in real estate.
Crowdfunding can be defined as “the practice of obtaining needed funding (as for a new business) by soliciting contributions from a large number of people especially from the online community,” and is said to be coined by entrepreneur Michael Sullivan in 2006. Even though crowdfunding was first coined only 14 years ago, the thought process and application has been around for decades. For example, in the mid-19thcentury, people of Ireland created the Irish Loan Fund, whereby wealthier individuals provided funds to lower-income families in rural areas. This level of microfinance is noted as one of the first sources of crowdfunding.
Fast forward to the creation of the internet, and crowdfunding started to look a bit different. In 1997 a British rock band called Marillion was said to be the first successful recorded attempt at crowdfunding via the internet. Using email, they raised enough money from fans to fund their reunion tour. The use of the internet spurred new companies, with Artistshare becoming the first internet crowdfunding company that focused on musicians wanting to create a new album or go on tour. From there, companies such as IndieGoGo and KickStarter emerged.
Crowdfunding is a hype word for raising capital. The use of the internet is strategic and clever. It allows a company or individual to source multiple investors at a smaller dollar amount, allowing for more ease when raising funds. When someone participates in crowdfunding, they can participate in different ways. For example, equity crowdfunding is where an investor will give money in return for ownership in the company. There’s also rewards crowdfunding where an investor will give money but, instead of ownership, they could receive pre-orders, services, recognition, or even swag. Debt crowdfunding was made popular by companies like LendingClub, where investors will lend money to their peers with interest and principal to be paid back to the investor.
Investing in real estate is a hot topic, regardless of age. Millennials experienced an extreme depression in real estate prices and some were able to reap the rewards of such a price drop. Baby Boomers seem to live and die by real estate investing. At LBW, we don’t dismiss real estate as an investable asset. Within certain client portfolios, we might hold a mutual fund that solely invests in real estate. However, when the majority of clientele come to us and want to invest in such an asset class, they typically are looking at buying a second home or rental property. We then walk them through the conversation of what they are trying to achieve. We ask questions like, “is our goal to achieve passive retirement income? Are you looking at this as a business? Have you ever been a landlord?” The objective is to get the person sitting in front of us to understand what it means to invest, and then what it means to invest in real estate. From there, they can begin to see how they may want to obtain their real estate exposure.
If a client understands and wants to invest in real estate, a crowdfunding vehicle may make sense. What needs to be understood is that crowdfunding in real estate is no different than finding a local real estate investor and joining their private LLC or LP. Crowdfunding allows for small minimums and easier access, but that does not mean better or superior returns. The point is the word crowdfunding means nothing more than the method in which a company raises capital. An individual still needs to perform due diligence on the firm, understand its track record, and the deals they are buying into. What should be considered is this: if you are using real estate crowdfunding to participate in private real estate because you don’t have $50k readily accessible to infuse in a private fund, then not having the capital might mean you shouldn’t make such an investment in the first place.
To sum up our blog, we will leave you with a quote from Benjamin Franklin – “An investment in knowledge pays the best interest.”