To those unfamiliar with real estate crowdfunding, the Fair-Haired Dumbbell development in Portland may be just the kind of wacky, esoteric project one envisions when imagining what happens when strangers pool funds online, crossing Kickstarter with construction. A pair of six-story towers connected by a skybridge, the commercial project does in fact resemble a hand weight, with an ostentatious, colorful Italianate pattern sprawled across the facade for extra impact.
Funded in part by investors who pooled money via the Crowdstreet crowdfunding platform, the building, located in a former industrial neighborhood called Burnside Bridgehead, is also open for business and looking for tenants. It’s the city’s first crowdfunded building, and a sign that the growing world of real estate crowdfunding has developed and matured since a 2012 change in investment regulations made these platforms possible.
While reliable numbers about this growing and fragmented market prove difficult to come by, research firm Massolution estimated the global market for real estate crowdfunding surpassed $3.5 billion in 2016. It’s becoming a big business, attracting larger, institutional investors, crowdfunding investment trusts, and even its own review site. Colombian investor Rodrigo Niño even crowdfunded a skyscraper in Bogota.
Platforms such as Fundrise, RealCrowd, Crowdstreet, and others have established themselves, offering wider access to the often rarified world of real estate investment. Fundrise even offers a starter portfolio for just $500.
But as more developments and investors turn to the public to help fund developments, crowdfunding in real estate is evolving, with more opportunities to focus on specific types of investments. The market isn’t just growing, but diversifying, giving smaller investors more and more freedom to target specific sectors of the real estate market—another step towards crowdfunding’s original promise of a market that’s more with lower barriers to entry.
Real estate crowdfunding grew out of the 2012 JOBS Act, which altered investment rules to allow these new platforms to take payments from accredited investors, defined as those making $200,000 a year, or who have a net worth above $1 million. Last year, JOBS act was altered again to allow anybody to participate in real estate crowdfunding, opening the doors to numerous new vehicles for investing money in real estate.
In the last few years, the market has rapidly diversified. Many new platforms have taken shape to allow small investors to zero-in on different types of projects, not just the larger commercial and real estate offerings listed on platforms such as CrowdStreet.
Patch of Land, based in LA, provides loan originations for single-family homes and small commercial projects, and raised $30 million earlier this summer. Roofstock focuses on rental homes. Small Change, launched by architect and urban planner Eve Picker, focuses on urban redevelopment projects and community development.
eFund, which works on the Fundrise platform, lets users invest in affordable starter homes, funding the acquisition, rehabilitation, and reselling of undervalued homes in major metro areas. “We’re focused on the scalable development of new homes and urban infill,” says Brandon Jenkins, the platform’s Chief Operating Officer.
eFund believes this type of platform and investment opportunity can increase the supply of affordable homes, though Jenkins makes it clear that affordable, in this case is very relative, focused on achieving prices attainable for a working professional to afford their first home. The first home on the platform, a former “hoarder’s home” near downtown LA, will sell for roughly $750,000, or a 22 percent return for the project’s roughly 6,700 investors.
Since they raise capital directly from investors, they have a more efficient means of raising funds and can build at a lower cost. Lower upfront costs translate into a cheaper end product.
“We’re connecting people directly to the project, making them advocates for taking on some of the regulatory burdens that make it so difficult to create new homes in the first place,” he says.
The platform is currently live in Washington, D.C. and LA, but has plans for expansion. The eFund is first and foremost an investment platform, so generating returns is the main focus. But if it can enlighten people on the challenges of adding new supply and encourage more investors and potential homeowners to get involved, all the better.
Another recently launched crowdfunding platform, the First RealFund, brands itself as a place to “co-invest” in commercial real estate with qualified investors. According to CEO Daniel Drew, the company utilizes a traditional underwriting system to gauge which properties and projects are worth pursuing, makes its own investments in these worthwhile assets, and invites accredited investors to participate. While all crowdfunding sites are curated, Drew believes First RealFund offers more qualified choices and certainty for investors.
“People can take advantage of our professional knowledge,” he says. “That’s why this is so compelling.”
While it’s currently only operating in the New York Metro area, listing a handful of residential properties in Brooklyn, there are plans to rapidly expand to other major markets.
For many in this new class of crowdfunding sites, it’s a little early to judge the returns and impact for new investors. In the race to become an established market leader, and gain market share, some have said the focus of new entrants to the market can lean more towards generating the most transactions possible, as opposed to strictly focusing on investor returns.
"Crowdfunding as a whole is really in its infancy, and doubly so for real estate crowdfunding,” Adham Sbeih, the CEO of Socotra Capital, a lending and investment firm that finances residential and commercial real estate purchases, told US News and World Report. “At this stage, the crowdfunders are not necessarily looking at what is in investors' best interests,"
These new platforms have clearly established themselves as a new source of targeted investment and returns for smaller real estate investors. Whether they continue to grow depends on the wisdom of the crowd.