Investing in commercial real estate is a pipe dream for all but the highest net worth individuals. However, in July of last year, the Hard Rock Hotel in Palm Springs defied conventional real estate logic and sold a fifteen percent stake in their property to a group of investors. Although groups of real estate investors, through more conventional models, such as REITs are increasingly more common, the Hard Rock sale was noteworthy because the money was raised using an unconventional method in commercial real estate: crowdfunding.
Crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.
The idea of equity crowdfunding – the sale of corporate equity stakes through online platforms – is relatively new. It was not until Congress passed the JOBS Act in 2012 that accredited investors (individuals with a net worth of $1 million or an annual income of $200k) could invest in such platforms. For now, equity crowdfunding is limited to these investors; however a number of firms are vying to become the next Kickstarter of commercial real estate. Unlike REITs, where investors buy common stock in the management company, crowdfunders actually provide equity to one specific piece of property.
Think crowdfunding is a flash in the pan? Think again. “According to Crowdsourcing.org, the total funds raised grew from $2.7 billion in 2012 to $5.1 billion in 2013 to a projected $10 billion this year.” Commercial real estate crowdfunding is a trend to watch, especially for smaller real estate investments. Nevertheless, unlike REITs, crowdfunding is not without the traditional risks of real estate investment. The old maxim of caveat emptor still exists, but for now the class of buyers to beware has grown exponentially.