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According to research by the Cambridge Centre for Alternative Finance, which is part of the University of Cambridge's Judge Business School, the real estate crowdfunding business grew by 250% last year to $483.8 million of capital raised.
Crowdfunding involves raising capital, either debt or equity, in relatively small increments from individual investors or the crowd. Most crowdfunding is done through online platforms that serve as intermediaries between developers or property owners and prospective investors.
The Cambridge study found that since 2013, more than $50 billion of capital was raised through alternative finance platforms. $36.4 billion of that total was raised last year, the bulk of it coming from the United States.
This surge was facilitated by the Jumpstart Our Business Startups, or Jobs Act that President Obama signed into law in 2012. According to the Cambridge research, $44.3 million of capital was raised via crowdfunding the following year. That grew to 138.2 million in 2014.
While growth rates for real estate crowdfunding are impressive, they pale in comparison to those for consumer lending, which raised $25.7 billion last year.
Among the big players in real estate crowdfunding are Realty Mogul, Fundrise, iFunding and RealCrowd. Unlike other crowdfunding platforms, those dedicated to real estate typically have minimum investments of $5,000. Additionally, most platforms remain restricted to accredited investors, meaning those with net worths of at least $1 million. But that could change as regulations have shifted, opening up investing to just about anyone.
While each real estate platform typically raises capital for projects from investors via their websites, they try to differentiate themselves with their offerings. Most only raised preferred equity initially, but they have broadened their scope substantially and can now raise money for all layers of a property's capital stack.
For example, Realty Mogul raised institutional capital last year that it uses to fund bridge loans. Fundrise launched a non-traded REIT that allows its investor clients to quickly diversify their investment capital. Meanwhile, RealCrowd has been used to raise capital for investment funds that would then buy properties.
A recent entrant into the business, CapitalFund Realty Inc., or CAPFUNDR, is raising investment funds that will be capitalized by the crowd. The firm’s first such fund pursues secondary-market investments in non-traded REITs.
The company is led by two long-time commercial real estate pros, Jean-Michel "Mitch" Wasterlain and Edward C. Yu, and aims to raise a series of subsequent funds. Its goal is to provide individuals to invest in institutional funds.
While it's unlikely that the number of crowdfunding platforms will grow much this year, we'll probably see innovative offerings as sponsors of those platforms look for ways to draw prospective investors.
Original Author: Orest Mandzy