You may have heard about people raising thousands or even millions of dollars for business ventures on sites like Kickstarter. Known as crowdfunding, it’s a concept now making its way into real estate circles, driven by the signing of the JOBS Act in 2012, which made it legal for companies to solicit funds from and promise equity to ordinary investors online.
What’s the Appeal?
For individuals, crowdfunding makes real estate investing more accessible (minimums can be as low as $1,000). For developers, it provides a new source of capital and can help bypass a bank when the size of a project or some other factor makes it difficult to secure a loan.
There are two ways it’s been playing out. Debt crowdfunding pools money and lends it to a company with interest, similar to a mortgage. Equity crowdfunding, on the other hand, takes money in return for ownership.
Things to Know
As with any investing, crowdfunding involves risk. When considering an investment, look at the developer’s track record, determine whether they’re invested in their own project and make sure you understand what your stake in the project will be.
You should also know there are caps on how much you can invest during any 12-month period. And you may also be limited on how long you must hold the investment before selling it.
While real estate crowdfunding is still in its infancy, there’s good reason to believe it’ll keep growing. The key, of course, will be in making the right deals.