What is Real Estate Crowdfunding?

Real estate crowdfunding involves the pooling of funds by multiple investors in unlisted property investments.

Typically investment offers are made via internet enabled solutions that remove some of the barriers to real estate investing.

There are two basic ways to invest in crowdfunding property deals.
  1. Investors can make equity investments in commercial or residential properties. In exchange for funding the project, the investor receives an equity stake in the property. Returns are realised in the form of a share of the rental income generated by the property and/or profits from the eventual sale of the property. Investors typically receive payouts on a quarterly basis.
  2. Debt investments are an alternative to equity. When you invest in debt, you’re investing in the mortgage loan associated with a particular property. Loans are repaid with interest, a percentage of which is then paid to each investor participating in the deal. These payments may be made monthly or quarterly.
Between the two, equity investments offer the potential for higher returns due to the fact that the profitability of a debt investment is limited by the interest rate associated with the loan. On the other hand, equity investments carry a higher degree of risk and typically require a longer holding period, which makes them more illiquid. Equity investors are also at the top of the capital stack, meaning they’re the last to be paid back.

Real Estate Crowdfunding and the Jumpstart Our Business Startups Act (Jobs) Act

US President Obama signed the Jumpstart Our Business Startups Act in 2012. This JOBS Act as it is known enacted significant changes within securities law and established new guidelines on how startups could raise capital through crowdfunding. Title III of the Act includes specific provisions for crowdfunding.

One of the most important changes associated with the JOBS Act centred on Regulation D, which previously banned general solicitation of investors. In 2013, the Securities and Exchange Commission (SEC) relaxed the rules on general solicitation of accredited investors.

The change gave rise to the real estate crowdfunding industry.

Now, instead of having to rely on people in their network to connect them with private real estate deals, investors can search for and invest in opportunities online.

Real estate crowdfunding platforms also offer real estate developers an avenue for raising capital to fund projects outside of traditional financing participants.

Who Can Invest ?

Up until recently, only accredited investors were allowed to participate in real estate crowdfunding.

Being an accredited investor means having a minimum net worth of USD 1 million or an annual income of at least USD 200,000. The income threshold increases to USD 300,000 for married investors. This standard was set because the law assumes these individuals have the requisite experience, knowledge and resources to manage their money.

In October 2015, the SEC finalised its ruling on Title III of the JOBS Act. This opened the door for non-accredited investors to participate in crowdfunding investments. Crowdfunding platforms will be able to allow investments from non-accredited investors once the provisions become final, which occurs 180 days after publication in the Federal Register.

US Residential Fund, will initially only make offers to accredited investors, as defined by the JOBS Act.