For centuries, we have all been on the constant lookout for new and creative ways of both investing in and financing new projects. We have had a love affair with not only making money, but also for allowing it to make money for us. Over the years, as the property market has sizzled around the globe, the concept and passion for new methods of investing has carried over into the real estate sector. Enter real estate crowdfunding.
What Exactly is Real Estate Crowdfunding?
In a nutshell, real estate crowdfunding has provided a new pathway for investors, big and small, to get involved in such a way that is bigger and bolder than they have ever envisioned before. To be clear, the notion of crowdfunding has really caught on globally with the advent and growth of social media. Small groups of investors can use this medium to pool together their investment funds to be involved in something more than just simple bank deposits. When a new, hot investment idea would be presented, interested parties would go to various social media sites on the Internet, such as Facebook, LinkedIn, and Twitter to tell others about the new endeavor and hopefully attract yet more investors into the fold. This concept can, and has, been effective at raising necessary capital for a variety of business ideas, and real estate seemed to be a natural fit.
Under traditional means of raising money for a startup business, for example, young entrepreneurs were largely limited to their sphere of influence. It was difficult to get the message out to other groups and hope to raise investment dollars on any type of massive scale. Crowdfunding has changed all of that, however, as individuals from all walks of life are able to get involved via hearing the message via the Web. There are no geographical boundaries for such investment opportunities, and a person next door is just as likely to hear about a new possibility as someone that lives continents away. This has the real potential to exponentially increase the number of entrepreneurs entering various markets in the future, as they are able to go far beyond that traditional circle of investors. In addition, whereas a close circle of friends and family were relied on in the past for financial capital and startup costs, crowdfunding now opens a net so wide that almost anyone can jump in on the action.
Real estate crowdfunding takes this concept to an entirely new level and the amount of money being raised seems to be increasing in record time. In fact, this methodology is proving responsible for the large number of international real estate investors that are now jumping into the U.S. real estate market, whereas they have historically been left out. While this investing medium is not necessarily new, it is now beginning to catch on to a much greater degree primarily as a result of the growth of social media. It is simply far easier today to get a message out to possible investors with relative simplicity. That message can literally go viral in a matter of days, and investment dollars can begin pouring in. These investors are not just wealthier Americans either, as even small scale investors with a bit of extra money to play with are choosing to get involved in real estate crowdfunding as well. This has served to contribute to its record growth in recent years.
The Numbers Tell the Story
In recent years, real estate crowdfunding has really morphed into an industry all its own. In just the past year, crowdfunding platforms in the U.S. market alone raised in excess of $140 million. This number continues to grow every year. In addition, the number of ways that investors can enter into this particular market is growing as well. Whereas just a few years ago there were only a few players that really seemed serious about establishing a real estate crowdfunding platform, that number has now skyrocketed to well over a hundred. The United States is taking the lead in this area, with roughly 80 platforms operating for this one country alone, but international growth is showing signs of serious life as well.
Much of this growth is certainly seen to be a result of wealthy investors choosing to get involved. It appears that many are choosing to give real estate crowdfunding a serious look because of the well diversified portfolio that it offers them. They are able to invest in multiple properties throughout the country, thereby hedging their risk in the event that one of the projects would fail. This is a major benefit to large investors who had previously shied away from the real estate market due to “a win big or lose big” mentality that simply was too risky for many to stomach. This is not the only reason that real estate crowdfunding is undergoing phenomenal growth today, however, as smaller investors are getting involved as well.
Historically, individuals with small amounts of money could not get involved in the real estate investment market due to the reality that their money would be tied up for inordinately long periods of time. They simply could not afford this, so they stayed away. Real estate crowdfunding has now made this a possibility, as groups of smaller investors are now able to pool their money together into local projects that they see taking place in their communities. This type of local improvement is resulting in many urban areas seeing a resurgence in the number of real estate projects getting off the ground primarily as a result of real estate crowdfunding.
The Future is Now
Our view is that real estate crowdfunding is here to stay. The future will likely see some more regulation brought to the industry to take away some of the risk, and to ensure that only legitimate projects are actually being funded. In addition, the future will continue to see more international investors get involved in the U.S. market, while platforms also continue to develop in overseas markets.
Matthew Sullivan
Matthew Sullivan is the CEO and Founder of Crowdventure.com – @thecrowdventure
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