Commercial real estate crowdfunding is a way for real estate companies to raise money, not by asking one investor for a large investment but by reaching out to a large number of investors who each contribute a small amount of money. This method of raising capital is done using an online crowdfunding portal.
If you’re considering alternative options for capital, here’s what you need to know about crowdfunding for commercial real estate.
What Is Commercial Real Estate Crowdfunding?
Commercial real estate crowdfunding uses crowdfunding to raise money for investments in real estate assets. By using an online crowdfunding platform (such as RealCrowd, CrowdStreet, or RealtyMogul), real estate developers can gain access to large networks of potential investors, including friends, family, colleagues, as well as the general public.
This type of crowdfunding is similar to equity crowdfunding in that an investor can buy into a commercial property (such as a multifamily apartment building, retail center, or office building) and become a shareholder. Rather than buying an entire property, the investor can earn a portion of the profits generated from the real estate investment. For example, any revenue generated from the building’s rental income or any proceeds from the sale of the building would be shared with the investors.
Real estate crowdfunding gives developers an alternative to traditional methods of financing, such as bringing in an accredited investor or getting a small business loan. It can also be a way to capitalize projects they may have had difficulty funding through more traditional channels.
What Is Crowdfunding?
Crowdfunding is when a “crowd” funds a project or business, rather than one or two major investors. Crowdfunding makes use of social media and crowdfunding websites to bring investors and entrepreneurs together and expand an entrepreneur’s pool of investors beyond the traditional circle of owners, family members, and venture capitalists.
In some cases, people who give to a crowdfunding campaign receive nothing in return (called donation crowdfunding); in others, they receive a reward based on how much money they give to a campaign, such as a T-shirt or the product or service itself (called rewards crowdfunding).
The two main types of crowdfunding used for real estate deals are debt-based crowdfunding, in which donors provide a loan to a company, and equity crowdfunding, in which donors receive equity in the company. (More on those below.)
How Does Commercial Real Estate Crowdfunding Work?
Commercial real estate crowdfunding deals can be divided into two main categories. Here’s a closer look at each.
Equity Crowdfunding
Equity crowdfunding is the most common type of commercial real estate crowdfunding deal. With this set-up, investors become shareholders in a specific property or group of properties. The stake they receive is proportional to the amount they invest. Returns come in the form of rental income (minus expenses of maintaining and managing the property) or, if the property is sold, a share of the appreciated value.
Debt Crowdfunding
With real estate debt crowdfunding, the investor essentially becomes a lender to the property owner and the owner must pay the investors back, plus interest. Owners typically make interest and principal payments on a set schedule, often quarterly or monthly. Debt financing deals typically have a pre-set payoff date, which can range anywhere from six to 24 months. Companies may turn to debt crowdfunding when they are unable to qualify for traditional small business loans.
Recommended: Rewards-Based Crowdfunding
Pros and Cons of Commercial Real Estate Crowdfunding
Using crowdfunding to raise capital for a real estate deal has its pluses and minuses. Here’s a look at how they stack up.
| Pros | Cons |
|---|---|
| Gives you access to a wide pool of potential investors | Will need to give up some ownership (and share profits) with equity crowdfunding |
| Doubles as a tool to promote your business | Must pay money back (plus interest) with debt-based crowdfunding |
| Offers a user-friendly investment platform | Platforms typically take a percentage of funds raised and may charge fees |
| Allows access to valuable feedback from your online community | Can be difficult to stand out on a real estate crowdfunding platform |
Pros
Real estate crowdfunding allows you to widen your potential investor base. It can also help you raise capital for projects you might have had difficulty funding through more traditional channels.
In addition, running a crowdfunding campaign can be a good way to promote your business and create buzz about your brand. The online community you build can also be a source of valuable feedback, helping you to identify and address any business flaws.
Another upside is that real estate crowdfunding websites tend to be user-friendly and make it relatively easy to launch and run fundraising campaigns. This allows you to reach a large audience without extensive effort or investment.
Cons
If you choose equity crowdfunding, you will need to give up some ownership of your business, and also share any profits. If you choose debt crowdfunding, you will need to repay the funds plus interest (however you will retain full ownership and won’t need to share profits).
There are also costs involved in crowdfunding commercial real estate. Crowdfunding platforms typically take a percentage of any money raised, and may charge other fees. And, with many sites, you can’t keep any of the investments you raise unless you reach your minimum funding goal.
Finally, this form of real estate investing has become popular in recent years. As a result, it can be difficult to stand out on a platform and attract investors.
History of Commercial Real Estate Crowdfunding
Commercial real estate crowdfunding is a relatively new phenomenon. Prior to 2012, real estate companies could not publicly solicit investors to invest in their real estate projects. In fact, they had to demonstrate they had a “preexisting relationship” with a potential investor before they could invite them to invest. As a result, a developer’s funding network was only as large as their personal connections.
This changed when Congress passed the Jumpstart Our Business Startups Act (JOBS Act) in 2012. After this law passed, real estate companies were able to advertise investment opportunities publicly.
The JOBS Act also prompted the Securities and Exchange Commission (SEC) to revise its regulations to allow real estate developers to sell securities in real estate deals. Just as someone would purchase stock in a company, they can now buy shares in commercial real estate deals. The investment is governed by SEC regulations just as they would be if the investment was a traditional security.
These changes paved the way for real estate crowdfunding sites to begin operating. There are now numerous sites that allow accredited investors to buy into a real estate deal for as little as $10,000 or $25,000. There are also platforms that have even lower thresholds and offer deals accessible to non-accredited investors. Many developers now crowdfund investment in their deals through these platforms.
The Takeaway
Commercial real estate crowdfunding is an investment avenue that uses crowdfunding, or sourcing capital from a “crowd” of investors, to raise money for investments in real estate assets like multifamily apartment buildings, retail centers, office buildings, and other types of real estate.
Whether you’re just starting a real estate business or have been investing in commercial property for years, these platforms offer an alternative way of funding your deals.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
What are some possible downsides to crowdfunding for commercial real estate?
For business owners, there are numerous fees to consider. There is also a lot of competition for investors, which means that running a successful crowdfunding campaign can take a fair amount of time and effort.
Is crowdfunding for real estate even legal?
Yes. The Jumpstart Our Business Startups (JOBS) signed by President Obama in 2012 loosened regulations instituted by the Securities and Exchange Commission (SEC) on small businesses. Real estate crowdfunding is now completely legal.
Do funds from crowdfunding have to be paid back?
It depends on which type of crowdfunding platform you use. The funds you raise on an equity-based crowdfunding site do not have to be paid back. With this model, individuals invest money in exchange for a share of your business (and a portion of its profits). With debt-based crowdfunding, however, contributors to your campaign are acting as lenders, and you need to repay the funds, plus interest.
iStock/CHUNYIP WONG
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