A year ago, the crowdfunded real estate (CFRE) space didn’t exist. Now, there are at least a dozen companies engaged in some flavor of CFRE.
While each one of them owes their marketable existence to the same two pieces of legislation, Title II and Title III of the Jumpstart Our Business Startups (JOBS) Act, their individual approaches diverge.
Despite the fact that CFRE is still in its formative days, as the space’s constituents are carving out their respective niches, broad categories are coming together. As it stands, three main angles have taken root.
The Full-stack, Pure CRE Platform
This is the approach that RealCrowd takes. Let’s unpack what it means.
RealCrowd’s platform is “full stack.” From bottom to top, RealCrowd’s technology provides all of the working parts operators and investors need in order to connect, administer, invest and transact.
It’s also a “pure” platform. In other words, RealCrowd isn’t a “broker-dealer.” Under law, this means that we receive “no compensation in connection with the purchase or sale of [the] security,” and that we also don’t take possession of customer funds or securities.
That fact is of very real benefit to investors: we don’t cut into their returns. We connect them to deals. Plain and simple.
Instead of inserting another layer of management – a source of overhead and justification for fees – our goal is to remove all possible inefficiencies in the relationship between operator and investor.
The ideal picture is of an open marketplace, where operators and investors make connections, grow networks, carry out transactions and do deals without all the institutional intermediaries and encumbrances that existed in the pre-JOBS Act era.
If RealCrowd wasn’t a full-stack pure platform, we wouldn’t be able to achieve that vision.
Hyperlocalized Crowdfunding for Smaller Investors
Another approach has been to “de-abstract” assets for investors. It presents real estate not as a series of numbers, as composed of fundamentals, or as being built of from whatever financial metrics, but as tangible property, on a real street, with real connections to the physical world and to the community it’s situated in.
The selling point for this approach is that regular people who live in or near a community, have access to certain information about properties within it that non-locals don’t have, e.g. that community’s goals, prospects, needs, etc.
Unfortunately, this is also the selling point against such an approach. It encourages the reliance on anecdote rather than data in assessing the value of real estate. “Boots-on-the-ground” type info is certainly a part of the puzzle, but it’s only a part, and because it can be an emotional one, it tends to induce biases.
Unless an investor is equipped with the analytical tools to take in the broader picture (including all the boring number crunching of financial analysis), then having privileged access to a locale doesn’t qualify them to make the best investment choice.
The goal of hyperlocalized CRE crowdfunding is certainly compelling, but it also poses an interesting question: Are the members of a given community also that community’s most capable investors?
Real Estate Funds Augmented by Crowdfunding Tech
The last approach of a Real Estate Fund augmented by technology is the most inefficient and least investor-friendly of three.
On these platforms, the investment is structured as an LLC with their investors, which will in-turn invest in another LLC that purchases the property (fund of funds).
Unfortunately, many of the problems of the fund of funds investment just get reintroduced in the attempt.
The fund of fund model introduces a big layer of inefficiencies between investor and investment. More infrastructure and management is required, additional fees are charged, tax filings get complicated, and the internal vetting process for investments is another black box into which most investors don’t have access.
So while the attraction of these funds is “Funds-Plus” the drawback is, well, “Funds-Plus.”
To the Future…
We’re still in the early days of the impact of the JOBS Act on the real estate industry. These broad-stroke categories are shifting and will probably look very differently a year out from now. Consider this a partly biased but (hopefully) informative snapshot of where crowdfunded real estate is today.
*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — Enroll Now.*