In the past, investors interested in commercial real estate development or ownership faced two options: generate enough cash to buy an entire property or qualify for a loan that would cover the investment expense. Many real estate investors need the funds to purchase an office building on their own, and therefore, they turn to private investors who offer the funds as equity. In 2012 the Jumpstart Our Business Startups (JOBS) Act opened opportunities for real estate investors, which includes non-accredited investors, to take part in crowdfunding sites for commercial real estate.
In this article, we look at the commercial aspect of real estate crowdfunding. We will go over how crowdfunding in real estate works and also discuss the advantages and disadvantages of real estate-related crowdfunding. After reading this article, prospective investors will be able to decide whether crowdfunding is an appropriate method to take part in real estate-related projects.
In First National Realty Partners, we are a private equity business that specializes in the acquisition and administration of grocery store-anchored retail centers. We also have extensive experience in commercial real estate crowdfunding. If you’re an accredited investor, a private equity company may be interested in partnering with you to provide capital to commercial real estate investors.
What is Commercial Real Estate Crowdfunding?
A lot of Commercial real estate partnerships depend on a small number of investors to fund the real estate deals the general partner covers. Crowdfunding for real estate is a funding method that depends on a wider number of investors to take in as equity shareholders. A crowdfunded project could comprise anywhere from a couple of dozen to several thousand investors participating in the same venture. Investors may contribute nearly all amounts of money to the project and get an appropriate share of ownership in equity. They are referred to as limited partners, similar to the limited partners in a conventional commercial real estate syndicate.
Commercial real estate crowdfunding is a new option that has gained popularity since the passing of the JOBS Act in 2012. Crowdfunding provides the chance for small, unaccredited investors to invest in equity investments made by commercial companies that they wouldn’t otherwise get access to. This approach can also open the doors to commercial real estate investment in those who do not have the capital needed to invest with traditional investment options as well as allow investors to attain diversification that is usually difficult to achieve in commercial real estate due to the pricey purchase prices that are associated with commercial properties.
How Does Crowdfunding Work in Commercial Real Estate?
Following the passing of the JOBS Act in 2012, numerous startups were created to assist real estate investors in taking part in crowdfunding investments on the Internet. The most well-known crowdfunding websites that support this kind of investment include Fundrise, CrowdStreet, and RealtyMogul. These sites tend to provide different kinds of real estate investments, such as multifamily or single-family properties.
The way that commercial real estate crowdfunding operates is investors sign up with one of these sites and search for deals that are compatible with their investment goals. Crowdfunding websites typically provide potential investors with a variety of commercial real estate opportunities, which means it can be long-winded to sort through the deals to determine which will be the most suitable for them.
Once an investor has narrowed down the possible deals to a small list, it’s time to figure out the amount to put into the deal or deals. One of the advantages of crowdfunding for real estate investing is that investors, regardless of wealth, can decide to invest in several deals in order to diversify their portfolios. They need to determine the amount they will invest in each deal and generally must meet a minimum investment amount.
Like other kinds of real estate investment vehicles, such as REITs traded on the public market, crowdfunding websites typically provide regular dividend payments to investors. As time passes, investors could also profit from a rise in the worth of rental property they’ve invested in.
Real Estate Crowdfunding Laws
The Securities Act of 1933 is one of the most significant pieces of legislation that is part of the United States financial system. It states that the offering, as well as the sale of securities, have to be registered unless an exemption for registration is in place. This means that every investment offered to investors located in the United States must be registered with the Securities and Exchange Commission (SEC) in the event that it is not subject to one of the few exemptions.
The JOBS Act offers a few exemptions from registration requirements. In particular, Title III of the Securities Act section 4(a)(6) in the JOBS Act provides an exemption from registration for certain crowdfunding transactions. This exemption permits early-stage companies to sell and offer securities using crowdfunding. This provision also permits crowdfunding. JOBS Act also allows companies to raise as much as $1 million over a 12-month period via crowdfunding.
Pros and Cons of Commercial Real Estate Crowdfunding
Crowdfunding for commercial properties, as with every investment, has pros and cons that investors must be aware of prior to investing. We’ll explore both of them in these sections.
Pros of Commercial Real Estate Crowdfunding
Let’s begin by highlighting some advantages that come with real commercial crowdfunding.
Low Minimum Investment
One of the most often-cited advantages of investing in crowdfunded commercial real estate ventures is the minimal investment requirements. For investors with less annual incomes or new to commercial real estate investment, this could be an enormous increase. Instead of having to come up with a huge down payment to buy the property on its own or obtain the status of accredited investors, individuals are able to invest as little as 10 dollars in starting with crowdfunded commercial real estate deals.
Professional Investment Managers
One of the biggest obstacles in the process of investing in real estate is the extensive information that an investor must learn before investing a significant amount of money into an investment property. Investors who are new to investing often have difficulty understanding the details of finding homes, performing due diligence, and raising funds. This is why a lot of investors have opted to stay clear of commercial real property due to a lack of understanding and difficulties in gaining access to the market.
Commercial crowdfunding for real estate has changed the field and has created new opportunities for those who do not have any experience in real estate properties. New investors can invest with experienced management teams that understand the business. A lot of these investment companies and managers have been handling commercial real estate for a long time, even before crowdfunding became a possibility in the business. They have put their expertise in the context of crowdfunding platforms, offering regular investors the chance to profit.
Diversification
Historically, commercial real property investors seeking to diversify their holdings would have to buy additional properties or find additional syndications. Both options are likely to be expensive as syndications require approval. Investors who participate in crowdfunding have the option of investing small amounts in a project along with other investors.
Crowdfunding real estate investment is advantageous because it allows for simple diversification regardless of the amount of net value. Instead of having to tie the capital of a single investment, a funder can develop a portfolio that comprises a variety of kinds of property.
Tax Benefits
The advantage that real estate investments have over all other kinds of investments is the tax advantage. IRS rules allow investors to deduct the cost of depreciation for properties that earn rental income. A lot of real estate investors make use of these deductions to reduce the tax burdens of their annual year. Similar tax benefits are also available for investors who choose to invest in crowdfunding for commercial real estate.
Another tax benefit to be considered is the potential to delay the payment of capital gains tax on the sale of an asset using a technique called the 1031 exchange.
Property Management
Real estate developers who invest in commercial properties have to think about how they will manage the ongoing maintenance and management of the properties they purchase. Commercial real estate crowdfunding offers a solution. Through this method, investors are granted partial ownership of their property or portfolio and can efficiently outsource property management to a general partner. This lets investors take care of the day-to-day operations of their portfolio, as well as allowing investors to gain the expertise and expertise of a professional property management firm.
Cash Flow
Many investors are attracted by commercial real estate due to the potential to earn passive income. The fundamental idea is that the real estate investor could make a capital investment upfront and later get cash flow through the form of distributions to the general partner. The Investor doesn’t have to continue to work in order to earn the cash flow, which is why they use”passive income.” “passive” income.
For certain investors, the cash flow may allow them to lead the life they want to live or help to achieve their financial goals. A majority of crowdfunding investments are structured to distribute funds to investors regularly, whether it’s either monthly, quarterly, or every year.
Property Value Appreciation
As with any real estate investment, whether a private or public investment, investors who choose to crowdfund can gain from appreciation in property value over time. Commercial real estate that is funded by crowdfunding may appreciate in various ways, including through forced appreciation via rehab work or increases in rent. The management teams who are the most adept at boosting their property’s value could increase the returns of investors over time.
Tangible Assets
Investors are often reassured that their money is in tangible investments. The fact that stocks are intangible market investments causes investors to have less confidence in their investments. The market value of real estate could fluctuate throughout the years. Many investors take satisfaction in the fact that they own a property that is likely to grow over time and be rented out to tenants to earn cash.
Cons of Commercial Real Estate Crowdfunding
Illiquid
Crowdfunded real estate investments may be unliquid, which means that investors might not be able to request to return their capital prior to the specified time that has expired. This could be a good thing for certain investors. However, investors with an immediate need for cash must be aware of the minimal investment period.
Fees
Crowdfunded real estate investments, as with other types of real estate investment, are subject to fees. General partners are charged a fee to limited partners in order to help manage the property and capital in addition to paying salaries and other administrative costs. As time passes, fees could decrease the amount of return investors get from their investment capital, and therefore it is important for investors to be aware of the fee structure prior to investing.
Limited contact with GP
By definition, it means that the Investor is probably one of many. This is why investors may not have a lot of contacts directly with a general partner who is responsible for the management of the project. Similar to other kinds of investments, like real estate investment trusts, however, investors should be aware of whether they feel satisfied without direct contact with members of the team managing it.
Why Choose Real Estate Crowdfunding Instead of Other Investments?
There are many reasons investors decide to invest through crowdfunding in real estate, as compared to the other types of assets. One of the most frequently cited is the notion that commercial property is able to yield satisfactory returns and have lower risk in comparison to other investment classes like stocks or crypto. Many investors appreciate the security that comes with commercial real estate investment.
Furthermore, crowdfunding for real estate offers numerous benefits like other types of real estate investment. As we mentioned earlier, crowdfunding in commercial real estate has tax advantages and the possibility of generating regular cash flow from distributions.
Real estate crowdfunding can also provide investors the opportunity to diversify their portfolios away from debt and stock investments. These can be useful in periods when markets are volatile. Crowdfunding is particularly appealing for investors who want to attain this degree of diversification with an extremely small amount of capital.
Real Estate Crowdfunding vs. Traditional Real Estate Investing
Prior to the increase in the popularity of crowdfunding in real estate, there were barriers that made commercial real estate investments beyond the reach of numerous investors on their own. Investors looking to buy commercial properties typically require an unimaginably large quantity of capital. The minimal amount of capital required for this kind of investment in commercial real estate is in the six figures.
For comparison, crowdfunding allows investors to invest just $10 in certain instances. Investors are able to start small and then build an impressive portfolio of investments in time. This is a fantastic method to begin your journey into the world of real estate and to get acquainted with the process while building the capital base.
How to Get Started in Commercial Real Estate Crowdfunding
Investors wanting to begin by crowdfunding for commercial real estate must take some steps.
In the beginning, they must consider thinking about the amount of capital they can invest, the length of time they feel confident locking it up, and also what their risk tolerance is. This will help the Investor in their look for the perfect crowdfunded real estate investment.
Investors should then consider exploring various crowdfunding alternatives. There are numerous sites that provide crowdfunding for real estate investment. However, they’re not all made equal. Investors must find one which offers the kind of deals they’re looking for. Apartment properties located in the Midwest, for instance.
It is crucial that investors conduct the right amount of due diligence prior to investing in a crowdfunding real property deal. Investors must read the entire details and disclaimers supplied by the general partners and crowdfunding broker and be aware of the fee structure as well as the minimum investment requirements and time frame. Investors must also conduct due diligence on the property as well as the market in which it is located, in conjunction with general partners, to ensure that the deal is in line with their investment goals.
After these steps are completed, after which the buyer is satisfied with the arrangement, then it’s time to open an account with the crowdfunding broker and then allocate capital to the investment you have chosen. This is the moment to begin the investment that is crowdfunded. However, the Investor must be sure to check back regularly to determine whether the fund is doing as well as read any updates issued from the partner in general and know the way distributions are managed. Crowdfunding can be an excellent opportunity to generate passive revenue. However, prudent investors should regularly check in on time.
Final Thoughts
Each Investor and investment is different. Investors need to evaluate their goals for investing as well as their risk tolerance and the time frame when deciding if commercial real estate crowdfunding is the right choice for them.
A group of highly experienced investment advisors might assist investors who are interested in crowdfunding for commercial real estate in the decision-making process. For instance, investors could think about working with a CPA or tax lawyer, or financial advisor to consider the various investment options in relation to their goals.
