If you’re intrigued by the promise of commercial real estate investing, but lack the capital to buy entire properties directly or contribute your fair share into a real estate partnership, you’re not necessarily out of luck. A new, technology-driven investing strategy offers accredited and non-accredited investors access to different types of commercial real estate with low minimum investment requirements—sometimes $1,000 or less per project.
Equity Crowdfunding for Commercial Real Estate: The Basics
It’s known as equity crowdfunding. As the name implies, it’s similar to “traditional” crowdfunding. Instead of prizes or experiences, though, individual contributors (investors) get ownership shares in the funded entity. In the commercial real estate sector, equity crowdfunding can finance individual development projects, purchases of existing CRE properties for income, or diversified portfolios of physical properties or mortgage-backed securities.
Some CRE crowdfunding platforms are huge, with hundreds of open rounds at any given time. Others are small, focusing on just a handful of deals at once. Platforms typically keep a portion of investors’ funds for themselves before funding each project.
Bloomberg has described CRE equity crowdfunding as a “land rush” in the sense that it’s difficult to separate the hype from the reality. It’s still early going; the SEC just finalized its equity crowdfunding rules last year. But there’s reason to believe the skepticism is overblown.
Benefits of Equity Crowdfunding for CRE Investors
Indeed, CRE equity crowdfunding truly has the potential to open new doors. Key benefits include:
- Creating opportunity for smaller investors: Equity crowdfunding is tailor-made for investors who don’t want to go all-in on a specific sector—or simply lack the funds to do so.
- No expertise required: Equity crowdfunding investors need no special knowledge or expertise. Many platforms conduct extensive due diligence on investors’ behalf—a turnkey, if not foolproof, solution.
- Effortless diversification: With low investment minimums, broad geographical diversity, and a grab-bag of property types represented, CRE equity crowdfunding promises diversified portfolios (within the broader CRE sector) with minimal effort.
Cautions and Caveats: The Downsides of CRE Investing Through Equity Crowdfunding
CRE equity crowdfunding has a lot going for it—as long as its practitioners aren’t too sanguine. All investments present some degree of risk, and equity crowdfunding comes with unique caveats that demand attention. Among CRE equity crowdfunding’s key downsides:
- Poor project selection: Some observers worry that the promise of easy, crowdsourced money will loosen developers’ standards, encouraging speculative or marginal projects that normally wouldn’t pass muster.
- Too many shareholders: Equity crowdfunding projects have a slew of shareholders—sometimes hundreds of individual investors, each with sub-1 percent stakes. It’s hard to manage (even to communicate with) such unruly coalitions.
- Low-information shareholders: Many equity crowdfunding investors lack asset class expertise. This leads to a number of problems, including inaccurate risk self-assessments and ineffective disclosures.
- Mismatched expectations: It’s difficult for developers and majority owners to manage low-information shareholders’ expectations. If promised returns fail to materialize or market conditions threaten cash flow or project solvency, investors may revolt.
Possible Alternatives to Equity Crowdfunding
One of the key upsides of equity crowdfunding: It promises resource-challenged investors exposure to diversified alternative portfolios. However, CRE equity crowdfunding is not the only option for cash-poor investors determined to gain exposure to the commercial real estate market.
From minority partnerships and hard money loans to lease options (options to buy) and buyer-commissioned flips, plenty of strategies allow determined investors to gain CRE exposure at reasonable out-of-pocket expense. These strategies all present significant risks, but they may well carry more appeal than CRE equity crowdfunding.
Remember, you’re the boss of your own investment strategy. The moment you feel pressure to make a decision you don’t feel comfortable with, it’s time to reassess your approach and look toward a strategy that respects your investing objectives, risk tolerance, and resources.
Categories: Real Estate