I promise you, I’m not crazy. Real estate crowdfunding is seeing a phenomenal level of growth. I’m honestly surprised by how well some of the platforms are doing.
For example, CrowdStreet recently reported to CrowdfundInsider that they’ve posted over $1.7 billion with 60 real estate crowdfunding offerings through their marketplace. Also, they’ve seen over $400 million in investor funds with sponsors who use their Sponsor Direct program.
Platforms like Realty Mogul have signed up more than 80,000 investors on their website, which has translated into over $200 million in investment in debt and equity transactions. They’ve also recently launched a MogulREIT, similar to Fundrise’s eReit.
So how can you get a piece of the action? That’s what I’m going to explore in todays article.
1. Start a new Real Estate Crowdfunding platform.
It’s still not too late to start your own crowdfunding platform. You could have access to a network of investors or maybe you want to build a marketplace of investors and sponsors. Given the growing popularity of REITs, you could also use Regulation A+ of the Jobs Act to offer this kind of investment vehicle to your investors.
I go through the different technical ways to start a crowdfunding platform in my Amazon ebook, Real Estate Crowdfunding Explained. There are a lot of different options that you can choose from. I also discuss the bare basics of a business plan for the website.
While it’s important to set up the right technology to ensure secure transactions on the platform, I think it’s even more important to put together a strong marketing plan.
As this industry becomes more and more crowded, you’re going to have to design a major competitive advantage over other platforms. Otherwise, how else will you stand out? How will your value proposition be different?
In my opinion, crowdfunding is still in the early stages. Education should be the top priority, which is why I’m dedicated to putting out the best information on the subject. You’re going to have to educate investors and property owners as to how they can use your platform.
2. Provide ancillary services (legal, tax, etc)
Whenever a company raises a major round of funding, there will always be legal and tax implications to take into consideration. There will also be other service providers who help with various aspects of the transaction.
Mark Roderick is one example of an attorney who is cashing in on crowdfunding, with his blog Crowdfundattny. He is one of the leading lawyers in the US in this area and recently was selected to keynote and moderate RealCapChicago, a real estate crowdfunding conference. He represents platforms, portals, issuers, and others throughout the industry.
Anytime a new industry emerges, there is always room for new experts. If you decide that you want to provide key services to players in this space, you could turn out to be the “go to service provider” and get a piece of the action.
3. Join a platform and invest!
Not every platform is open to non-accredited investors, but many are now adopting REIT-style products, like Fundrise. You can incorporate these investments as a part of your overall portfolio.
Keep in mind that many of these investments are illiquid, meaning that there is no publicly traded marketplace to redeem your shares. Depending on the type of investment, you might have to wait for a liquidation event, like the sale of a property, or for the opportunity to sell your shares to other investors on the platform.
Some debt or fixed-income focused real estate crowdfunding websites like Patch of Land advertise that you can earn up to 12% on your investments per year. Others like Fundrise tout a 13% approximate net average return in 2015. RealtyShares compares the difference between an investment in S&P 500 vs real estate in 2001. Real estate would give you a 10.75% annual return vs a 5.00% annual return for the S&P 500.
What I like about investing through one of these marketplaces is that you don’t have to commit huge sums. You can invest less than $5,000 to get a feel for the marketplace and it won’t break the bank.
I’ve outlined some of the major platforms out there here.
4. Refer investors to crowdfunding sites
If you have access to a pool of accredited or non-accredited investors, you might be able to make out a deal with a crowdfunding website to be compensated for referrals.
For example, RealtyShares has a great affiliate program that will compensate you for qualified investors that you refer to their marketplace.
Of course, your relationship with these investors is paramount. We tend to invest in companies or buy products that we know, like, and trust. I’m a huge fan of win-win scenarios where everyone gains. The investor makes money, the sponsor makes money, the platform makes money, and you get a cut for referring that investor.
5. Build a brand on a platform
Whenever a marketplace emerges, there are winners and losers. For example, if you browse the Kickstarter marketplace, it’s very easy to see which companies have crushed it and raised a bunch of money. As long as they didn’t have any fulfillment issues, they’ve officially gone down in crowdfunding history as a success story. They’ll continue to profit from the positive brand attention.
Real estate mangers or developers have the opportunity to build a strong relationship with these growing platforms. They can also put themselves in the position of developing a relationship with the community of investors. This is important for a few reasons.
First of all, it makes it easier to get future rounds of financing. If you’ve already delivered on a profitable deal with a good ROI, investors are more likely to trust you and put money into your next deal.
Second, as you build up your brand in a marketplace, you’ll begin to see side benefits emerge. That could take the form of new connections, introductions, or access to insider knowledge about the industry. This is extremely valuable because it’s a competitive advantage. You’ll have a leg up on your rivals.
Finally, naturally, the more deals you do on a particular platform, the more you’re going to grow your revenue in the longterm. You’ll also be able to carefully analyze the sticking points of your operation. Maybe you over-estimate the return that you bring to investors or you aren’t particularly accurate about the completion of a property. By having a dashboard that tracks all of the information related to the investment, you’ll be able to see where you need to improve going forward.
Conclusion
As we’ve reported in the past, RECF is primed to disrupt the entire real estate financing ecosystem. I think it will be on everyone’s radar in the next few years. For now, it’s still a fringe activity.
If you’re looking to learn more, go and check out my video that explains how Real Estate Crowdfunding Works. Also, be sure to give it a thumbs up if you enjoy it!
