Crowdfunding is a major buzzword in today's startup and tech scene. Simply defined, crowdfunding is the practice of funding a venture or a project by raising money from a large number of people via the internet or a specific website/application platform.
Kickstarter is the most visible crowdfunding site, launching in 2009 and raising over $700 Million dollars as of mid year 2014. Successful recent fund raises include 1) The Coolest Cooler ($13.28 Million) 2) The Veronica Mars Movie ($5.7 Million) and 3) Reading Rainbow Reboot ($5.5 Million).
The 2012 Jobs Act contained provisions that prompted similar real estate platforms to raise equity and acquire their first buildings in 2013 and 2014. This trend will likely grow exponentially when the rule making is completed for the Jobs Act and may lower the bar for non accredited investors to participate.
Real estate crowding platforms raise equity or debt to invest in specific buildings or developments. These platforms can choose debt or equity raises (ownership in shares verses lending on project). The range of minimum investment needed ranges from $100 - $250,000. Note that this investing method is limited to accredited investors.
Why is this important?
To understand the potential here, it is important to understand how things have worked in commercial real estate investing for the last 100 years. A developer or investor would use her personal balance sheet and capital to invest and borrow in a property. Historic returns typically outpace retail investment opportunities (stocks, bonds) with cash flow and asset appreciation. As this model worked very well, it usually limits the total number of projects one individual could be involved in at a given time. Thus, this developer or investor would leverage her network and raise equity from friends, family and local investors in exchange for ownership. Good developers/investors (General Partner) would build a strong networth and would reward her limited partners with strong cashflows during ownership and proceeds upon sale of assets. Institutional investors, hedge funds, and high net worth individuals have access to these partnerships the average investor does not. Private and Public REITS have gotten closer to making commercial real estate investment returns available to the general public, but typically hold large numbers of properties which diversifies risk, but takes away the opportunity to own part of a single property.
What does the future hold?
Potentially this new approach to commercial real estate investing will allow investors to diversify their investments among several large properties in smaller amounts while still taking advantage of strong returns associated with larger, successful projects. Non accredited investors may have access to this platform depending on final ruling making on the Jobs Act.
The risk this approach contains mirrors the risk current investors face while investing in commercial properties 1) The general market 2) Dependence on the General Partner's hundreds of decisions involved in acquiring and operating a commercial asset.
Tons of promise here, the devil will be in the details.
Nick Gustafson
nick@benderco.com
605-201-2809
No comments:
Post a Comment