Crowdfunding. People generally associate this word with startups, new gadgets or creative works pre-sold on platforms like Kickstarter or Indiegogo. Alternatively, they think of crowdfunding as a ways of raising donations to causes or people in need, on sites like GoFundMe or FundRazr. But in fact, the fastest-growing type is actually investment or equity crowdfunding and the largest type overall is debt or crowd lending.
While the BC real estate industry has adopted many new technologies, such as virtual tours, this innovation has unfolded slowly to date for real estate finance. However, globally speaking, the hottest sector for both equity and debt crowdfunding is in real estate. And although relatively new to Canada, more than $2.6 billion in global real estate projects were crowdfunded in 2015, up 156 per cent from 2014.
What is Real Estate Crowdfunding?
Real estate crowdfunding is a new financing approach where many investors team up to provide the equity or debt required to buy, finance or develop a property or real estate project, typically via an online crowdfunding platform.
With interest rates at historic lows and high demand from domestic and foreign buyers in Canada, real estate crowdfunding has evolved much more slowly than in the US. The market is about three or four years behind the US, but a look south of the border is enlightening.
More than 175 real estate crowdfunding portals are active in the US and huge sums have been raised, with rates of return as high as 8-25 per cent and minimum investments as low as $100-$5,000. FundRise claims 80,000 members and to have made US$3 billion in real estate investments. Realty Shares has raised US$130 million for 160 properties and Realty Mogul has raised US$196 million from 78,000 investors.
What is Driving Growth?
Factors include the massive wave of mobile, electronic transaction and social network adoption; liberalized securities laws, the search for alternative investments given risk volatility and soft stock market returns, and the broad interest in real estate.
A new prospectus exemption was also introduced in BC in 2015 called the Start-up Crowdfunding Exemption. Project owners can raise a maximum of $250,000 in capital twice annually and retail investors can invest a maximum of $1,500 per campaign. While the caps are modest, the exemption does open up previously inaccessible investments to regular Janes and Joes and the caps will likely rise over time. (Part two of this article will elaborate on this new investment opportunity.)
What Type of Real Estate is Crowdfunded?
In the US, the majority of funds to date have been raised for residential property development, such as multi-family buildings, and for “fix and flips.”
Markets such as California, Arizona and Florida have seen considerable interest from investors in investing in renovations that can be liquidated in relatively short timeframes to generate strong investment returns. Will this still apply in BC where more of the value is in the land versus the building? We’ll see.
Commercial real estate is next in line with some major international projects like BC Bacata Tower, a mixed-use project in Bogota, Columbia, that raised $175 million from 3,500 investors to build Columbia’s tallest building.
Many of us are comfortable with investing in real estate when talking about our primary residences or recreational properties. We deal with banks, mortgage brokers or possibly secondary lenders. But what about the opportunity to invest in entirely new opportunities like multi-family, commercial, industrial, resort or even skyscrapers? The portals are specializing in certain geographies and property niches and helping navigate the complexities, so the sky truly is the limit.
Benefits for Property Sellers and Developers
Speed, flexibility, community building and access to new investors at a lower cost than traditional funding avenues are just some of the drivers for interest in this method. The approach also allows them to seek community support for projects that may have faced resistance or low market acceptance.
Benefits for Investors
Attractive returns, transparency, access, convenience and diversification are some of the factors drawing investors to real estate crowdfunding investing.
Another way to look at real estate crowdfunding is as a new form of investor syndication with diverse opportunity selection. The portals create greater reach for the projects and, unlike REITs or Mortgage Investment Corporations (MICs), investors can select specific properties of interest.
The opportunities vary in returns, risk vs. reward and length of commitment, but the commonality is that the investments are curated by the platforms and backed by the real estate asset itself. This is quite different than investing in a business startup and hoping for an eventual return.
Liquidity varies with a typical range of six months to five years for debt liquidity and three to 10 years for equity investments, yet there are no secondary markets for the securities in the interim. Of course, all other decision factors for good investments still applies.
Next Time in Part Two
The BC real estate boom is building wealth for many homeowners, investors and developers. Yet many people feel left out for a variety of reasons including age, lack of capital or income, and external factors driving up prices. In part two, we’ll introduce new Canadian portals and discuss the foreign investment “crowdfunding” that has been in the news recently. Plus you'll learn how Canadian investors are currently using this method and the future opportunities for all of us.
About the Author
Bret Conkin is the founder and chief evangelist for CrowdfundSuite, providing services such as platform development, consulting and campaign management for real estate companies, funds, entrepreneurs and investors. Bret regularly talks alternative finance in the media, including the Globe & Mail, Vancouver Sun and CBC TV News. He also regularly appears at events, such as the Canadian Crowdfunding Summit and VanFunding 2015, and can be found on sites including Investopedia and his blog at crowdfundsuite.com. You can follow him on Twitter @bretconkin.