The $100 Reason for Real Estate Crowdfunding

by David Drake

With the exception of REITs, commercial real estate transactions have so far been outside the reach of everyone except for the 3% comprising institutional investors and high net worth individuals possessing the necessary network, contacts and capability of investing large sums of money. With crowdfunded properties continuously cropping up online in recent months, critics are sending out their caveats to the public concerning this new wave of investing, alleging that deals are often costly, inefficient and time consuming. These deals usually require a large number of people to complete funding, which opens up the gateway for the possibility of many lawsuits if said deals go sour.However, the opportunity for a local to participate in the real estate development of their community is a welcome change to the industry. If any one of the remaining 97% of individuals can invest directly in commercial property through an online real estate crowdfunding platform then there is probably a strong case for crowdfunding to merit our closer attention.A startup established by brothers Ben and Daniel Miller in 2010 is one of the platforms that is giving smaller investors the chance to invest directly in commercial property transactions for sums as low as $100. The Miller brothers noticed that it was easier for an individual to invest in a country outside the United States than it was to invest in a property across the street. This problem gave birth to Fundrise.The company has raised $31 million in its first round of capital raising, led by Renren the social networking giant from China. Other investors include the CEO and the Chief Investment Officer of Silverstein Properties (owners of the World Trade Center Twin Towers) as well as the Collaborative Fund which focuses on sharable economy businesses such as TaskRabbit and Kickstarter. So far, developers are making use of the site and have raised around $20 million for 30 projects, and are now raising money at the rate of $1 million every week. The new funding will help the company to expand to new markets around the country, and interestingly, expand the reach further to institutional investors.While other real estate crowdfunding platforms like Groundfloor, iFunding and Groundbreaker focus either on specialist niches such as property flipping or on transactions, Fundrise differentiates itself by emphasizing social benefits that can be obtained by empowering investors to influence property developments in their own communities. The firm points out that investors who are residents in the neighborhood have a much better feel for projects that the community requires, rather than institutional fund managers who have dominated property investment space and can be disconnected from the properties in which they make an investment.Critics have pointed out that these are risky investments for the ordinary retail investor, and that investors have to rely entirely on the expertise and skill of the developers of the projects in which they invest. In addition, these investments are highly illiquid. However, risk is an essential part of any investment and investors must make a reasoned and objective judgment. Moreover, the Miller brothers say that Fundrise should be treated as an alternative investment, and investors should limit themselves to the normal principle of investing no more than 10%. At the minimum of $100 per investment, investors can easily diversify their risk by using the different types and locations of properties contained in the Fundrise portfolio.An insight into the way Fundrise operates can be gained from the recently released infographic with data from its third public offering which has just closed. The total offering size was $350,000 with a projected return of 8%. Any resident in DC, Virginia and Maryland could invest a minimum of $100 each. About a quarter of the 378 investors live within 1 mile of the property. Only a minority of investors (18% from DC, 24.9% from Virginia and 29% from Maryland) were accredited investors, and the average investor age was around 37 years. The maximum number of orders was for $100 apiece (100 orders) followed by orders for $500 apiece (80 orders); the average order size was $926. These figures clearly establish that what Fundrise is doing may well point the way to the future of real estate crowdfunding.Bruce Lipnick, CEO and Founder ofCrowd Alliance, believes that the Jumpstart Our Business Startups Act catalyzed the business landscape by creating ways to raise capital for enterprises around the country. He said crowdfunding flourished in almost all sectors, be it technology, health, mining, food, education, philanthropy and now in real estate, with strong push from the JOBS Act and the pursuit for its clear implementation. With raised capital then more jobs can be created. Bruce Lipnick is also the CEO and founder of Asset Alliance.

David Drake is the Chairman ofLDJ Capital, private equity advisory;Victoria Partners, a 110 family office network;Drake Hospitality Group; andThe Soho Loft Media Groupwith divisionsVictoria Global Communications,Times Impact Publications, andThe Soho Loft Conferences. Reach him directly at David@LDJCapital.com.