Author Sohin Shah successfully crowdfunded Valuation App from 57 backers in 2012 and went on to start iFunding, which is now one of the leading real estate crowdfunding platforms in the world.
The American public's trust in big banks is nearing all-time lows. An increasing number of investors are tired of receiving zero to negligible net returns from their local banks. As a result, a higher percentage of investors are seeking new avenues for efficient and transparent investing.
Over the past three years, the real estate industry has been at the forefront of creating one of those new avenues - crowdfunding platforms. To give you a sense of its growth, the total combined investment funds for real estate crowdfunding platforms increased from $2.7 billion in 2012 to $5.1 billion in 2013. 2014 was on pace to exceed well over $10 billion.
It's a lucrative choice. The combined value of real estate here in the U.S. is larger than the combined bond and stock markets. Back in July 2012, the U.S. bond market was valued close to $37 trillion while the U.S. stock market was closer to $21 trillion. Yet, real estate is the largest and most valuable asset class of them all. Per a December 2014 report from the Federal Reserve, real estate continues to be the largest combined asset class worth an estimated $40 trillion. Residential real estate accounts for almost 60 percent while the commercial real estate sector represents closer to 40 percent of this total number.
The following offers insight into the state of the real estate market today and how crowdfunding platforms are proving it to be a viable investment in 2015 and beyond.
The JOBS Act and Crowdfunding
In 2012, Congress passed the JOBS Act, whose original intent was to encourage and provide efficient funding options for small businesses partly by easing securities regulations. Following this event, real estate crowdfunding received mainstream attention in 2013 when many of the current industry-leading platforms such as iFunding (my company), Fundrise, Realty Mogul and Patch of Land went live with their websites. These help to eliminate the "middleman" (aka banks and hard money lenders), and share higher profits and returns directly with investors.
What makes crowdfunding so appealing is that investors have the opportunity to invest in bigger, institutional quality properties with relatively smaller amounts of capital. Another added benefit is that they don't need to deal directly with any potential problems associated with the tenants or the buildings, thus making it a form of passive investment.
For Investors, the Value Is Clear
Crowdfunding platforms allow investors to analyze and clearly understand the opportunities for investments at the touch of their keyboard or mobile device just like with the stock market. It has introduced technology and transparency to real estate, an industry that was long overdue for disruption. As such, the more efficient use of technology is lowering the cost of capital and overhead operators, which, in turn, allows the crowdfunding platforms to share a higher percentage of their profits with their investors.Other value-added opportunities include:
- Pre-vetted investment opportunities that allow individuals with no prior real estate-investing experience to participate in deals.
- Transparent reporting that allows users to stay updated on all of their investments.
- Diversification options that offer risk mitigation.
- Analytics to guide informed investment decisions.
- Digital payments to eliminate the need to send paper checks or go to the bank to transfer funds.
- FundAmerica: Since going live with their API in November 2014, FundAmerica has emerged as a leader in providing "FinTech" services such as online escrows, state securities dealer clearance, background checks and payment processing.
- Accredify: This startup provides tax transcripts via the IRS 4506-T form to determine if investors qualify as "Accredited" Investors. They make asset verification easy using simple online bank and 4506-T forms to allow them to approve an individual's income from the IRS directly.
- LendIt: As the leading organizer of conferences for the global online lending community, LendIt introduces global P2P ("Peer to Peer") market leaders. Three of LendIt's most popular and informative regional conferences are located in the USA, Europe, and China each year.
Securities regulations may get more streamlined and efficient in 2015 in both individual states by way of automated federal regulations that are easier to understand for both investors and business owners seeking to raise new capital. If so, more successful and profitable crowdfunding platforms may lead to more jobs, higher profits for investors and increased tax revenues for the states and federal government.
As time evolves, we may see synergic deals where multiple crowdfunding platforms may be working on the same deal, providing both debt and equity while many of the local banks sit on the sidelines wondering why they are not as speedy, efficient, and affordable as real estate crowdfunding platforms.
As a result, I believe banks may soon be losing customers who are tired of earning zero to negative net returns with bank savings accounts -- and these real estate investment opportunities and solutions will be more accessible and profitable than ever.