Many experts are excited about the potential of the industry.
At PeerRealty, we’ve talked a lot about the benefits of real estate crowdfunding. We truly believe that equity crowdfunding will open up institutional-quality real estate investments to retail investors for the first time. However, you don’t have to take our word for it. Here’s what experts and leaders in the real estate industry have to say about real estate crowdfunding:
- Securities attorney Mark Roderick says that crowdfunding for real estate is really nothing new. “Crowdfunding in its simplest form is just a different way to raise money,” says Roderick. “The reason it’s so exciting is that it’s nothing more and nothing less than the Internet coming to the capital formation industry. The Internet directly connects buyers and sellers and, in this case, developers and investors. It sweeps away all the middle men. It’s disruptive, reduces cost, and increases efficiencies.”
- Real estate sponsors and developers are taking increasing notice of crowdfunding as well. Joaquin de Monet, founder and managing principal of Palisades Realty Advisors LLC, says that crowdfunding is becoming an “emerging source” of financing for commercial real estate transactions. “Folks have created platforms and the technology around those platforms to allow accredited investors to sign up on their websites to get access to deals, and they’ve been successful at getting developers and operators to post deals on their websites in a way that’s helping them to finance their projects. From that standpoint, it’s been a success.”
- Earlier this year, a comprehensive study from research company Massolution found that worldwide total funding volume on real estate crowdfunding platforms was over $1 billion in 2014. This figure is expected to rise to $2.5 billion in 2015. Richard Swart, Massolution’s research adviser on the report, says that real estate crowdfunding is “growing beyond expectations. When the JOBS Act passed we didn’t think real estate would be a part of it, but it turns out to be a more efficient way for investors to find good deals across the spectrum.”
While we’ve discussed the benefits of real estate crowdfunding, we’ve also been upfront about the risks. Many of these risks are inherent to investing in real estate in general, but that doesn’t mean that investors should overlook them. Some industry leaders, while supportive of real estate crowdfunding, urge investors to do their due diligence on every deal:
- Paul S. Rutter, of counsel at Gilchrist & Rutter and a board member of the UCLA Ziman Center for Real Estate, discussed real estate crowdfunding in an interview with GlobeSt.com. He says that “[f]or investors making an investment in a loan, the risks are similar to those taken by any lender. The borrower might default; there could be a loss of income from defaulted interest payments and a loss of principal from a failure of the borrower to repay the loan.” He added that “[i]n the context of an equity investment through crowdfunding, the risks are similar to any other syndicated equity deal. The limited partners/members who invest are at risk of dilution through the investment of additional capital, whether to meet cost overruns, to pay deductible losses on insurance claims, to satisfy third-party claims and to pay for ongoing capital expenditures and leasing expenses.”
- Gary M. Tenzer, principal and managing director at George Smith Partners, says that “[t]he concept is still in its infancy, as the enabling legislation only became law in April 2012. Lenders look at crowdfunded equity similar to typical syndicated equity, and they will still want to see the sponsor have some personal skin in the game.”
Of course, if you’ve been following our previous PeerRealty articles, none of these risks should sound new to you. We’ve urged investors to focus on the platforms that have the clearest understanding of SEC regulations and that are the most transparent in explaining what they’re doing to maintain compliance at all times. We’ve noted that equity investments have the potential for higher returns than debt offerings, but also carry greater risk. Finally, we’ve also encouraged investors to research both the sponsor and the platform to make sure that both of their interests are aligned with the interests of investors.
Like any form of investing, real estate crowdfunding carries certain risks. As the quotes above indicate, though, crowdfunding also has incredible potential to transform the capital raising process. One of the great potential benefits of crowdfunding is the transparency that it can provide to investors. Investors can review deal information and research the sponsor, all with a few clicks of a mouse. In the long run, we expect that the platforms that are transparent about deal risks and explain what they are doing to mitigate those risks will be the most successful, while the platforms that pretend that there are no risks will suffer.
