Crowdfunding is basically the raising of funds, usually via the Internet, to support efforts initiated by other people or organizations. Popular with non-profit organizations and in the digital community, the practice has spread and blossomed since the introduction of the JOBS Act in early 2012.
Real Estate Crowdfunding is considered to be one of the biggest impacts of the JOBS Act. While many expected its impact in the tech industry, it was quickly apparent that its reach would be far broader and affect entrepreneurs across the board.
Twist on the Traditional
The concept of crowdfunding isn’t altogether different from traditional REIT’s, but the differences do have many wondering exactly how crowdfunding will affect the real estate investment industry. Forbes featured ten crowdfunding firms that are expected to have the biggest impact, in an issue earlier this year.
Crowdfunding offers opportunities to three distinct segments. Developers, small investors and the socially conscious.
To the developer, crowdfunding provides a new source of financing. It’s flexibility allows the developer to fund full projects or fill in the gaps between their needs and traditional funding sources.
For small investors, crowdfunding provides a novel way to invest their funds. The return on investment through crowdfunding is variable depending on the project and ideology of the firm used. Without historical records to assess, it’s impossible to accurately forecast potential returns.
But given many small investors aren’t doing it as much for the money as for the community, the potential return on investment may be less of a concern for some crowdfunding investors. Some crowdfunding firms focus on investment in local communities and farms rather than an exclusive focus on commercial properties.
A Blip on the Real Estate Radar
For the typical real estate investment professional, the introduction of crowdfunding has had a minimal to limited impact. This is expected to continue in the short term. The practice is still very much in its infancy and will likely impact major metropolitan areas before moving into wider application.
Until the Rules Change
As of the first anniversary of the JOBS Act, the SEC had yet to craft and finalize the law’s key provisions. The establishment of provisions will no doubt spur more firms into the field and become more of a competitive concern for those involved in real estate investments.
Coming to a Neighborhood Near You
While it’s not clear exactly what the impact of crowdfunding will be on real estate markets over the long term, it is a concept that you’ll want to be aware of and be ready to respond to business-wise if crowdfunding becomes a viable option within your community.
