Inside the $650 million rush to US real estate crowd funding

In the United States property syndication, via established electronic platforms is rapidly gaining acceptance as investors seek to access physical assets.

US Residential Fund has announced its intention to the Australian Securities Exchange (ASX), to make available to third party investors the opportunity to co invest alongside the ASX listed Fund.

As part of that US Residential Fund's strategy, it is expected that accredited investors will be able to access opportunities such as the foreshadowed Patriot's Pointe, North Carolina multifamily apartment deal, through one or more of the electronic syndication platforms known as Crowd funding sites.



US crowd funding platforms invested $US484 million on real estate in 2015.

On the 19 May 2016, the Australian Financial Review reproduced the following Washington Post article.

Last month a Texas entrepreneur took to Craigslist with a surprising offer: For $US50,000 ($68,000), the author of the listing would part with 5 per cent of a real estate crowd funding startup that he said would generate profit within three months.

Seemant Nakra, who posted the ad, said it hasn't led to new investment in his Austin-based company, Equity Brick, but has generated interest from people who want to make crowd funding investments in Texas apartment complexes. It doesn't take a lawyer to suggest that Craigslist might be a bad place to source startup investments, but the post illustrates what some real estate investors have noticed: These crowd funding platforms are everywhere.

Investors used US real estate crowd funding platforms to pour $US484 million ($664 million) into real estate projects last year, according to research published last month by the Cambridge Judge Business School. That's more than three times the amount in 2014. Meanwhile, the US has more than 125 real estate crowd funding sites, according to Jason Best, a partner at Crowdfund Capital Advisors, who helped conceive the framework for crowd funding. Less than three years after the JOBS Act made it legal to solicit investments online, real estate crowd funding sites are all over the place.

NOT JUST FOR RICH PEOPLE

The idea behind crowd funding, whether for gadgets on Kickstarter or medical procedures on GoFundMe, is to create an online place where people who need money can meet people who have it. In the case of real estate, that often means house flippers who buy, renovate, and sell single-family homes seeking loans from accredited investors roughly speaking, people who make enough money that they can afford to lose some of it.

Some platforms also let investors buy equity stakes in real estate projects or fund loans for larger commercial projects. At least two companies, Washington-based Fundrise, and Atlanta-based GroundFloor, have created mechanisms to let anyone invest, not just rich people.

But calling yourself a crowd funding platform and actually functioning as a marketplace are separate things, according to Ian Ippolito, a real estate investor in Florida who has been tracking the proliferation of real estate crowd funding platforms. Last summer, Ippolito evaluated more than 100 sites for transparency, low fees, active investment opportunities, and venture capital backing, among other criteria that make a crowd funding site attractive to investors.

Only one in five of the sites passed the sniff test. "Real estate crowd funding is still in the hype phase, where everyone has an inflated opinion about it," Mr Ippolito said. "I think it will be at least another year or two before the expectations become more realistic. In the meantime, hordes of these platforms feel that 'if I build it they will come'."

LIMITS AND CAPS

There's good reason to think the field will keep on growing. On May 16, new Securities and Exchange Commission rules take effect, allowing non-accredited individuals to invest on crowd funding platforms.

The rule limits the amount of money that ordinary joes can plunk down in a given year and caps the amount that a given project can raise from non-accredited investors at $1 million a year. That will limit the appeal for most real estate developers, though a bill has already been introduced in Congress to raise those limits.

Just as with traditional real estate investing, crowd funding platforms will likely vary in composition and scale. "When you go into a town there's a couple big real estate brokerages and there's a couple boutique brokerages, and I think that would be true in real estate crowd funding as well," said Marshall Saunders, managing partner at SaundersDailey, which specialises in crowd funding investments in small apartment complexes in the Minneapolis area. His company has raised money from 40 investors for eight property deals.

THREE PLATFORMS IN 24 MONTHS

Bigger platforms may be better equipped to solve the conundrum common to marketplace businesses: To attract investors, crowd funding sites need projects for them to invest in; to persuade real estate developers to post deals, crowd funding sites need investors ready to throw down dollars. "In 24 months, I think we'll be down to three platforms," said Nav Athwal, chief executive at RealtyShares, a San Francisco-based company that's placed more than $150 million across 330 investments.

Mr Best, whose company has advised government agencies and financial institutions, thinks there could be room for as many as 50 real estate crowd funding platforms, because investors like asset-backed securities in general and property in particular. Even at that size, investors will have to be careful to pick the right deals on the best platforms. Said Mr Best: "They need to carefully look at what they're considering."


The Washington Post


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