Title III Crowdfunding Now Everyone Can Invest

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Well last Friday it finally happened. The SEC passed Title III of the JOBS Act which effectively allows non-accredited investors to invest in private placement investment deals. In plain English this means when you visit any of the crowdfunding platforms they will allow you to view and invest in their offers without confirming that you are an accredited investor. Well at least in theory this will be the case.

On the surface this seems like the day we have all be waiting for in the crowdfunding industry but in reality it may have limited impact. While everyone has been jumping for joy about the new legislation and don’t get me wrong there is a lot to jump for here, there are still some issues. The problems are basically due to the capital limits placed on the deals which can be offered to non-accredited investors. In the current version of Title III the maximum that can be raised in these offerings will be $1 Million dollars. This may seem like a lot, but for most high quality real estate deals the capital limit basically prevents any of these deals from opening up to the small retail investor.

In my opinion the greatest potential crowdfunding offers retail investors is precisely in these type of investments which are relatively lower risk investments compared to start-up investing. The limit will have a small impact on the start-up investing platforms such as seedrs.com and seedinvest.com as most of these offerings are for less than $1 Million dollars. This is the exact issue that Nav Athwal, CEO of Realtyshares.com addresses here.

There are other issues regarding the additional regulatory hurdles which will be placed in front of the companies wishing to take advantage of this new legislation as Tanya Prive points out as well. You can read more about her concerns here.

In contrast to the issues raised by Athwal who runs a real estate crowdfunding platform, Chance Barnett CEO of crowdfunder.com a platform for startups, was singing the praises for the new legislation in his article here.

The contrast of these two views I think is really dependent on what Athwal pointed out. The implications of Title III are vastly different for real estate platforms as opposed to start-up platforms. The start-up platforms have a lot to gain as most of their offerings will fit under the $1 Million dollar cap and due to inherent riskiness of investments into start-ups investors will in any case want to commit less of their money to these investments. The opposite is true for the real estate platforms, which need more capital for each deal and are inherently much more stable investments which attract larger investments from each investor, the investment caps on these type of deals will seriously hinder the participation of retail investors.

One of my major concerns as well is that when the legislation actually goes into effect the start-up platforms will be the first to adopt offerings under title III. The hype and exuberance on the part of many retail investors to get in on these deals will lead to money flowing in without sufficient due diligence and without the proper hedges against risk. Since these are the most risky investments in the crowdfunding space it is really a horrible place for us to have to start with retail investors. A few deals that go bad and with start-ups the majority go bad will put a black cloud over the industry in terms of retail investors and this is all before the real estate platforms will be able to figure out the proper way to take advantage of the new legislation.

I hope for the industry and for investors both platforms and investors will proceed with caution using the proper due diligence and diversification to invest.

What Is Wrong With Title III Crowdfunding

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Not everyone is so convinced about the prospects of Title III of the Jobs Act which was recently passed by the SEC.We thought we would post some thoughts from around the web on the issues with the current legislation.

Nav Athwal, CEO of Realtyshares.com voiced his concerns about the legislation because the capital limits effectively exclude real estate deals.

Athwal writes:

In theory, it seems like a win-win for both sides but putting the Title III changes into practice may not be a realistic goal at this stage of the game. At my two year old crowdfunding for real estate startup RealtyShares where the goal has always been to cater to the general public and not only Accredited Investors, we’re struggling to determine if this rule is actually as impactful as it appears to be in theory. That is because while Title III does expand crowdfunding opportunities for non-accredited investors, there are still certain requirements that have to be met and restrictions that apply.

For instance, under Title III individual investments would be limited to either 5 or 10% of the investor’s gross annual income, based on their net worth. And any investment opportunity would be capped at $1 million in total fundraising within a 12-month period. For commercial real estate, a capital intensive asset, these upper limits could be very limiting.

In recent weeks, legislators have been making a push to have the cap raised to $5 million and reduce some of the cost to crowdfunding platforms with regard to Title III offerings. It’s not clear yet which way the SEC will rule on these issues. In terms of the logistics of vetting non-accredited investors and making sure investment deals fall within the guidelines Title III imposes, the challenge may be too much of an obstacle for more nascent startup platforms to take on.

Other verticals, particularly those catering to startups or small businesses, will reap some positive benefits from Title III and those benefits extend to the public as a whole. Unlike real estate, oftentimes startups and small businesses do not need as much cash to hit that next milestone and thus the upper limit of $1 Million could prove workable. On the whole, however, the rules in their current form may not carry as much weight as previously thought.

You can read the full article here.

Other concerns were voiced by Tanya Prive, which concern the higher regulatory demands that will be put both on platforms and start-ups themselves to be allowed to open their offerings to non-accredited investors.

Prive writes:

Plus, a detailed due diligence screening conducted by the intermediaries or their outsourced partners will need to take place before the deal can be admitted, which can take anywhere between 15- 90 days. It will examine every little aspect of the company, its officers and major stakeholders, which depending on whether the intermediary does this in-house or outsources it, will result in additional fees, typically ranging between $2K-$5K. To build on top of that, there is no good way of making this process truly scalable as each due diligence conducted is unique in a way to the company undergoing it.

Read Prive’s full article on Forbes.

It remains to be seen how effective the new legislation will be as well as how many of the platforms will actually start adding offers under Title III. Keep reading more on this issue.

Understanding Commercial Real Estate Investment Risks

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building-Everyone is excited about investing in commercial real estate with equity based crowdfunding, after all what could be easier? You just put some money into a great commercial property and site back as you watch the 8-12% returns hit your bank account. You own part of a great commercial asset with no downside and a huge upside as real estate prices rise all while you investment is being protected from the erosion of inflation. Sounds great right? Well yes it is but every investor knows that with reward comes risk and the greater the reward the great the risks. Although commercial real estate investing, especially if you are able to get access to blue chip properties in strong locations may have less risks than other areas of real estate investing nevertheless there are risks.

In order to get a better understanding of the risks involved in commercial real estate investing in general and through crowdfunding platforms in particular we decided to share with you this great analysis from Austin @ Realcrowd.com

Rent, Risk and NOI of commercial real-estate

The rental market is the lifeblood of commercial properties. It’s the top line that affects Net Operating Income (NOI) and the main source of annual cashflow to investors. Understanding how rents are priced, why they trend up or down, and how to reasonably predict those trends, is therefore an important factor when analyzing real estate investments.

Recall, the rental market consists of property owners on the supply side, and tenants on the demand side. The dynamics between them contribute in large part to rent and occupancy levels.

Rent is the price granting the right to occupy or use a space for a predetermined period of time, often quoted on an annual basis in terms of square footage. Knowledge of the rental price for a particular property can give an idea of the supply and demand to which that property is subject.
Rent isn’t fixed. It fluctuates based on market conditions. In general, higher rental prices translate to lower supplies and higher demands. Likewise, lower prices indicate higher supplies and lower demands.
In other words, we can specifically say that vacancy rates are a key determinant in the pricing of rents, and also a measurement of the health of a property. Lower vacancy correlates to higher demand and higher pressure on rents, and vice versa.

When gauging vacancy levels, these rules of thumb are generally true:

• A market vacancy of less than 5% or 10% is generally considered a tight market,

• Between 10% and 15% is a moderate market, and

• Vacancy above 15% signifies a weaker market.

Although each product type’s typical vacancy levels can vary.

Net absorption is another key measurement of market strength. Net absorption is the rate at which available space is rented (or vacated) over time. In other words, it signifies market momentum. When net absorption is positive, more tenants are leasing space than vacating it, and vice versa.
The net absorption rate and vacancy rates also indicate how long it will take to re-release a building if a tenant vacates. If the net absorption is positive and vacancy rates are low, available space leases back up in shorter periods of time.

Lease Structures and Rent Fluctuations
Tenants of commercial properties contractually lease properties for pre-determined periods of time. The typical lease structures for various asset classes are as follows:

• Multi-family – 6 months to 1 year.

• Office – 3 to 5 years for smaller suites and 7 to 10+ years for larger suites.

• Retail – 3 to 5 years for inline space and 10+ years for anchors and pad locations.

• Industrial Distribution – 5 to 10+ years.

The fact that tenants are under contractual obligation to pay rent for fixed periods of time helps to mitigate the impact of market fluctuations on NOI and cashflow.

Contractual obligations notwithstanding, tenant credit is still important in determining the risk of inherent in the income stream of an asset. If a tenant goes out of business and leaves prematurely, this will cut into NOI. Therefore, knowing the quality of tenants’ credit aids in analysing an asset’s risk. For example, leasing to Apple, Inc. carries significantly less risk than leasing to a local “Mom & Pop” venture.
When an asset is acquired, there is the possibility for the rent to either increase or decrease, and for tenants to move in or leave. Investors analyze these probabilities based on vacancy rates, net absorption, and determining the quality of tenant credit, as discussed above.
An additional tool that aids in analyzing opportunities or risk is lease comparables (or lease comps), which compares the current rent being paid to market rent. For example, if the current rent being paid is $50 per square foot annually, but market rent for comparable properties is $65 per square foot, that could indicate the potential for rental price increases and therefore increased NOI and cash flow to investors (the reverse is also true as well).

Market Segmentation

Lastly, when analyzing the real estate market, a key fact to keep in mind is that the market is not homogenous. Rents and property value are not the same from one city to the next, or even from one block to the next.
Instead, Real estate is segmented, along property usage type, on the one hand, and location, on the other. Accordingly, supply and demand always correspond to particular types of property in specific locations.
Examples of property types include office, industrial, retail, and multifamily residential. Locations refer not only to metropolitan statistical areas (MSAs), but submarkets attached to MSAs, for instance downtown areas or central business districts (CBDs) and suburban areas.
In effect, rental prices vary according to type and location. 5,000SF (square feet) of Office space in the central business district (CBD) of the metropolitan statistical area (MSA) of San Francisco will not be equivalent to 5,000SF of office space in the suburbs of Chicago. Different market and microeconomic forces ensure that demand varies from one segment to another, leading to differing levels of supply, demand, and rental prices.

To find out more about realcrowd.com check out our realcrowd.com reviews.



Regulation A+ Crowdfunding

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capitol-552645_1280 Recent legislation was just passed by the SEC referred to as Regulation A+ as Title IV of the JOBS act. This new legislation will help solve a major issue faced by most crowdfunding platforms. Until now, for platforms to open up an investment to non-accredited investors the investment would need to have passed approval by each state separately subject to their Blue Sky Laws. The process was too lengthy and costly for most of the platforms to pursue which is why these investments remained closed to non-accredited investors. With Reg. A+ the SEC basically pre-empts the rights of the individual state to review the investments and allows the sponsor to open the investment to the public in the form of a mini-ipo. This pre-emption will apply to TEIR II offerings which are for funding up to $50 Million but the investors will be subject to investment limits and the offerings will be subject to greater scrutiny. The TEIR I offerings will be increased to allow fundraising up to $20 Million and a new review system will be tested referred to as coordinated review, which will be a combined effort of the states to reduce the time and effort to gain approval for an offering.

Here are the highlights of the new legislation as outlined from Kiran Lingam, General Counsel at equity crowdfunding platform SeedInvest.

  • High Maximum Raise:  Issuers can raise up to $50,000,000 in a 12 month period for Tier II and $20,000,000 for Tier 1.
  • Anyone can invest:  Not limited to just “accredited investors” – your friends and family can invest.  Tier 2 investors will, however, be subject to investment limits described below.
  • Investment Limits: For Tier II, individual non- accredited investors can invest a maximum of the greater of 10% of their net worth or 10% of their net income in a Reg A+ offering (per offering).  There is no limit for accredited investors in Tier II. There are no investment limits under Tier 1.
  • Self-Certification of Income / Net Worth:  Unlike Rule 506(c) under Title II of the JOBS Act, investors will be able to self-certify their income or net worth for purposes of the investment limits so there will be no burdensome documentation required to prove income or net worth.
  • You can advertise your offering:  There is no general solicitation restriction so you can freely advertise and talk about your offering, including at demo days, on television, and via social media.
  • Offering Circular Approval Required:  The issuer will have to file a disclosure document and audited financials with the SEC.  The SEC must approve the document prior to any sales.   The proposed indicate that the Offering Circular will receive the same level of scrutiny as a Form S-1 in an IPO.    This is the biggest potential drawback of using Reg A+.   
  • Audited Financials Required:  For Tier 2, together with the Offering Circular, the issuer will be required to provide two years of audited financial statements.  Tier 1 offerings require only reviewed financials (not audited).
  • Testing the Waters:  An issuer can “test the waters” and see if there is interest in the offering prior to spending the time and money to create the Offering Circular.  This would be “Preview” mode on SeedInvest where investors can express interest, but can’t yet invest.  This is important so that companies don’t have to gamble on their fundraise and can see if there is interest prior to investing in legal and accounting fees.
  • Ongoing Disclosure Requirements:  For Tier 2, the issuer will be required to make an annual disclosure filing, a semi-annual report, and current reports, each of which are scaled back versions of Form 10-K, Form 10-Q and Form 8-K, respectively.  These reports will also require ongoing audited financials.  These disclosures can be terminated after the first year if the shareholder count drops below 300.  There are no ongoing disclosure requirements for Tier 1.
  • State Pre-Emption:  As discussed above, the old Regulation A (now Tier I) was never used because it required registering the securities in every state that you make an offer or sales.  New Reg A+ Tier 2 preempts state law – again – this is huge.  Tier 1 Reg A+ again does not have state pre-emption but will be a testing ground for NASAA Coordinated Review.
  • Shareholder Limits:  In a welcome departure from the proposed rules, it appears that the Section 12(g) shareholder limits (2,000 person and 500 non-accredited investor) will not apply to Reg A under certain circumstances.  This fixes a major problem from the proposed rules which would have limited the potential for very small investments (i.e. $100).
  • Unrestricted Securities:  The securities issued in Reg A+ will be unrestricted and freely transferable, though many issuers may choose to impose contractual transfer restrictions.
  • No Funds:  Investment companies (i.e. private equity funds, venture funds, hedge funds) may not use Reg A to raise capital.
  • Integration:  There are several safe harbors so it seems that you can use Reg A+ in combination with other offerings.  There are safe harbors for the following:

No integration with any previously closed offerings

No integration with a subsequent crowdfunding offering

No integration where issuer complies with terms of both offerings independently – can conduct simultaneous Reg D – 506(c) offering.

Bottom line, this is what we have all been waiting for or at least sort of. It remains to be seen how quickly these filing procedures will take and whether they will be quick enough for many of the platforms to make use of. Although timing may be less of a factor when a start-up is looking for funding because their product or offering is usually unique to them, this is not the case when the offering is for real estate. Since the real estate deals are basically subject to competition between sponsors who ever can close the deal and get the financing quicker is usually the winner. The projects don’t stay on the market long enough for a drawn out funding process.

It will be interesting to see how the platforms adapt to the new legislation and whether they begin to offer investments under Reg A+. I am confident there will be a solution and we can look forward to freely investing : )

For a comprehensive update on the new legislation read the full post by Kiran here. 


The potential of equity crowdfunding

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careerAs equity crowdfunding has started to take shape in the past few years and new legislation Regulation A+ was just passed, the equity crowdfunding market is ripe for explosion. The potential that this new asset class brings to the retail investor is unclear and depends mostly on how well the platforms will be able to successfully navigate and adapt to the new legislation. It will also depend on how well the public receives this asset class and starts to invest in it.

One indication that is worthwhile to look at is where is the “smart money” going. People regularly look to see what stocks investment gurus or hedge funds are investing in and they use this as a gauge for their own investment ideas. I would like to tweak that approach a bit and to take a look at an article written by  Sherwood Neiss a partner at Crowdfund Capital Advisors, an expert in the industry and consider one of the “founding fathers” of Title III of the JOBS Act.

Ness, documents the investments that VC’s are making into the crowdfunding industry in terms of funding the various platforms that exist and seed funding for new platforms. Although he looks at the overall trend of investments both within rewards based crowdfunding and equity based crowdfunding, I want to really look at the equity based platform investments. This is what Ness had to say:

More than seven equity crowdfunding platforms have received over $180 million in financing, with the oldest among them being only four-years old. This too shows validation for a business model of which one of the two models (Title III, crowdfunding for all) has yet to go into effect. We anticipate equity crowdfunding to blossom in the next 36 months, with a majority of venture capital flowing into this space as early movers are proving the model, the media is covering it with more interest, and the global appetite for this sector expands significantly.

So even though this isn’t opened up for the retail investor as of yet, you can see that the smart investor are already pouring money into this industry. This should be a good indication of what the future holds for equity crowdfunding.

Click here to read the entire article on VentureBeat.com





Crowdfunding vs. VC or Angel funding

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Will crowdfunded start-ups perform better than purely VC or Angel backed start-ups?
This is an interesting question to consider. On one hand if a company can raise money from a VC or Angel it is a big vote to the prospects of the company. I assume most of the really good start-ups or ideas don’t make it to the crowdfunding platforms because they are snatched up much quicker by these bigger investors. That means the investments available through crowdfunding will be second tier in many cases.

There is also an additional aspect to consider if a company is already backed by a VC they will be able to help more with the company’s management and be able to reach out to their entire business network. These VC’s will also be able to pump in more money for additional fundraising and they will be looked at as a stamp of approval by other VC’s who are considering funding as well.

So in general, I think the VC funded start-ups will perform better in the near future. Until the crowdfunding option becomes more streamlined and is able to produce some big exits I think the success will still remain with VC’s. At some point though, crowdfunding should start to attract better start-up offerings for investments.

I think the exception will be the start-ups that use a mixture of funding. In fact I think that all VC’s should encourage their portfolio companies or prospective portfolio companies to pursue a portion of their funding through crowdfunding. The reason is that this gives the company and the VC investors a very good gauge of how the public perceives this start-ups idea or vision. If the crowd is willing to put money into the idea then it is a good indication that the product or service will gain traction when it starts selling to the public. It will allow the VC investors a gauge to mitigate certain risks which will overall mean smarter investment choices. The companies who can successfully meet their crowdfunding goals will then have a better chance of success than companies who didn’t pursue (or pursued unsuccessfully) crowdfunding.

Another aspect to consider is that the crowd who invested in the project have a vested interest and financial incentive to see to the success of the company. This means the company has investors who will turn into salesmen for the product or service. They will use the product and they will tell their friends and family about the product. Although this won’t make a bad product succeed, it will certainly help to give many ideas or products a much better chance of success by getting the masses to try it out. Every investor will become a salesperson for the product without costing the company a dime.

I think in the long run this will be the model that most start-ups will pursue. I also envision a future for the crowdfunding industry when the platforms will have strategic partnerships with some big VC funds. When the platforms receive an application they will go through their regular vetting/approval processes and then these offers will be shown to the VCs. The VCs will then have an option to invest in the company and act as a sponsor on a contingency basis that they are able to raise the rest of the funding through the crowdfunding platform. This will be a win-win situation for investors-start-ups and the VC’s. The start-ups won’t have to worry about chasing down VCs and making presentations as the platforms will do much of the initial introductions. The VCs will have the advantage of committing money only on the basis that the company can find funding from the crowd. The investors will have the advantage that the companies they invest in will be backed by big VC firms which will be able to offer their experience and professional contacts. Is this the future structure of start-up funding?

In five years from now, I would love to see if crowdfunded start-ups have a better success rate than their regular non-crowdfunded counterparts.

Start-ups: Investing? Gambling? Entertainment?

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    Ok that might be a very controversial question and I think the answer will really depend on who the investor is. A few weeks ago I posed a similar question to a friend of mine who is a day trader. Basically I asked him if day trading was really a science or investing or just sophisticated gambling. Now I have never day traded and I don’t really know what these traders look at when they make their decisions but from what I did learn in school is that it is basically based on technical analysis which in itself personally never really made sense to me. I sensed he did get a bit defensive about the question and rightfully so being that is his profession. But the same question can be asked when it comes to investing in start-ups.

When you login to a platform and see a dizzying array of start-ups with no revenue where do you start? I know the first thing I would do is look around and see what kind of start-up idea or innovation makes sense to me. You will be surprised many of these ideas you will find to be pretty stupid and you will think they have no chance of ever turning profitable. That doesn’t mean to say that these companies won’t succeed after all there were VC firms that thought Facebook was stupid too and they are probably kicking themselves now. But if you don’t think the idea makes sense I don’t think you could or should invest in it. So great, you have found some start-ups that seem like they have a great idea now what? Well I guess you could do some market research although that has probably been done by the platform depending on their model (see article on platform models curated vs. non). Many sites allow you to see who else invested in the start-up which might help you decide. But in the end of the day the small investor has really no way of deciding whether this is a good investment or not. So you like the idea. Now obviously there are VC firms and savvy angel investors and they are not just investing millions of dollars based on a good idea right? Well that may be true if you are investing large sums then you can have a team of analyst model various projections and determine how this idea stacks up against others. These firms usually have experts in the field they are investing in and they really understand the ins and outs of the industry and the possibilities of the idea. These firms and investors can therefore make a much more educated investment. I would still bet that the majority of the investments are driven by the fact that the investors no matter how savvy they are like the idea. So take the “Regular Joe” who wants to invest in a start-up what does he have to rely on? I think it comes down to does he think it is a good idea? This question remains the most important. It might not be gambling after all we do many things in life because we think it is a good idea even though we may not have any past experience to base it on. But you must realize the risk in such an investment. I don’t see this becoming a real asset class for the regular investor to pursue especially if they are looking to invest only a few hundred dollars. Even if they are able to diversify a small amount of money across a wide spectrum of start-ups I would still wonder what kind of return they would have in the long run.

Why do I think lots of people will still invest even if they aren’t sophisticated investors? I think people like the thrill. It makes the financial news much more exciting for the small time investor when they hear the start-up they invested in is becoming very popular or contemplating an IPO. Imagine telling your friends that you were one of the early investors in Waze. I would compare this to watching the Super Bowl and watching the Super Bowl after you placed a bet on the game for $25. If you win or lose you won’t become rich but the $25 wager makes the game that much more fun and exciting. I am not sure that this type of investing will offer the small unsophisticated investor much more value than that though.

What will happen when the JOBS Act passes?

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BarackObamaSigningLegislationFirst learn the background about the JOBS act here: JOBS

Well I am not a prophet but that doesn’t mean I can’t voice my opinion. Right now you have a good number of portals working on the internet to gain the investment dollars of less than 90% of the American public which accounts for a $800 Billion dollar industry of private placement investments per year. Now if you take a look at these investments you will see that they seem very attractive you can invest in an income producing commercial real-estate building in NYC with an annual return of 10% that sounds pretty good right? Well if you are an accredited investor (link) it is a great opportunity. What will happen then when the market is opened up to the other 90% of Americans? There are two sides to look at. On one hand it seems like the demand will completely outweigh the supply. There will simply be so many potential investors out there and only so many offerings available. The result may be that these offerings will become less attractive. They sponsors will be able to offer a lower rate of return as they will be able to find investors easily. Although normal economic reasoning of supply and demand may dictate this eventually it may not be so simple.
I would consider three other factors as well. First of all as the financing for these investments becomes easier for companies and business to obtain, more and more will turn to using this avenue to raise money. As the process becomes more efficient and streamlined, it will make equity crowdfunding the most preferred way for companies to raise money. Currently only a select few companies and real estate projects have turned to this avenue for funding but as the market opens up we can expect that more offers will come to the market as well. This will at least in the long term make the supply of investments grow and will keep the returns steady. A second issue that should be considered is that investors are not foolish they realize these investments carry a certain amount of additional risk that classic equity investments usually don’t that being the case they won’t accept deals that have a lower rate of return. Lastly, when the legislation passes the non-accredited investor will still be regulated in how much they can invest. This means that although the investor pool will grow dramatically the actual amount of money available will not grow as dramatically (it will still mean a huge influx of available capital) but it won’t be 9 or 10 times what is currently available.
I wouldn’t be surprised if in the short term that there is a slight decline in the average return on these investments that the sponsors offer but in the long run it should all even out. But nobody really knows what will happen. I do not expect though that the risk adjusted returns will increase with the passage of the legislation. If you are an accredited investor and have the capital I would act now to lock up some of the great offers that are currently out there instead of waiting for these to open up to the masses.
What do you think will happen when JOBS passes?

REITS vs Crowdfunded Real Estate

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You may be wondering, if I really want to enter the commercial real estate market as an investor why would I use crowdfunding to invest? After all there already exists a great way for me to invest and gain equity exposure in commercial real estate in the form of REITs.

REITs are an acronym for Real Estate Investment Trusts. These are basically investment companies that pool together investor money and invest in a portfolio of various types of real estate investments. So what is the difference between buying a share of a REIT and owning part of an actual property through crowdfunding?

Well from an investor perspective there are a few main differences. Depending on your goals and investment horizons these may be the determining factors in which investment tool to choose.

Diversification and Risks

In terms of diversification a REIT will hold a portfolio or share of numerous properties. As an investor in the REIT you will have your money spread over the entire portfolio instead of in one property. If one property loses value or rents decrease, something needs repairs etc. the loss on one property can be offset by the gains on another property. Whereas if you crowdfund in a real estate project your entire investment is tied to one property. This makes your investment riskier as a loss to the property will no doubt translate to a negative return as there are no other properties to offset those losses. Consider this similar as owning a share in a Mutual Fund versus owning the stock of a single company.


On the other hand the diversification costs money. It costs more to receive the type of diversification that REITS offer. Unlike stocks which are relatively easier to buy and sell and create a diverse portfolio buying and selling real estate isn’t as simple which makes the costs associated with that diversification greater. As an investor you pay for that type diversification which means your yield overall will be less. Although some may claim that the yields are lower simply because it is a diverse portfolio and as there will always be some winners inevitably there will be losers which will negatively impact the yield, I don’t think this totally explains yields of 3%-3.5% that REITS are returning compared to high quality income producing commercial real estate projects that you can invest through crowdfunding paying 10% yields.

Time Horizon

Figure out how much time you are willing to tie up your money for. If you invest in a publicly traded REIT and decide you need the money in a few months all you need to do is logon to your online broker and sell your shares. When it comes to crowdfunded real estate your money is basically tied up for the duration of the investment which may be a number of years. The lack of any secondary market makes it almost impossible to sell your shares and pull out your money.

Valuation and Secondary markets

Although there exists no secondary market on which to sell your investment this may actually prove in many cases to be beneficial, especially if you don’t need your capital back in the short term. When the REIT’s shares are traded in the market it makes the valuation of your investment dependent on market factors which may not at all reflect the real value of your investment. Take for example a REIT that invests solely in properties in NYC they own Billions of dollars of commercial real estate and they have great tenants all paying rent. The yields are at 8% a year and all of a sudden there is a huge crash in real estate prices now this crash doesn’t have any real effect on property valuations in NYC as those prices keep going up. It would be hard to imagine though that the shares of your REIT would not see a sharp drop in price. This is totally based on market sentiment and not on reality but that is how the market works and any asset traded on the market is subject to the same volatility. So despite the fact that you have a 8% yield your overall return could very well be negative. The beauty of crowdfunded real estate is to give an alternative investment opportunity which is specifically not market tied. This in fact gives great deal of diversification as an asset which is part of a greater portfolio of stocks and bonds.

Although they both offer investments and exposure to the commercial real estate sector REITs and crowdfunded real estate offerings vastly differ. If you have clear goals in your investment strategy crowdfunded real estate can add an entirely new dimension to a diversified portfolio that a publicly traded REIT simply cannot offer.

Guide to Crowdfunding Investing

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crowd-trade-logo3e-transparentCrowdfunding has exploded as a great way to raise money on the internet for many different causes and projects. It basically allows anyone to share their project or cause and appeal to the masses for financial backing. It has recently been adopted (thanks to the JOBS Act) by various businesses as a new an innovative way for them to raise capital by selling equity or debt  in their project or business venture. This has evolved to create a new asset class for investors allowing “the crowd” to participate in funding start-ups, real-estate developments, or large income producing properties in return for equity or interest payments. In general I would categorize the offers available in to three groups:


Start-up businesses offer equity to investors and although this is highly speculative the returns can be huge as well. These companies may only be an innovated idea or a company with a prototype of a product. They have no revenue or past performance to base their projections on. More about funding start-ups here.

Growth Companies

Private early stage companies are small private companies which are already selling a product or service and have already generated revenue. These companies are looking for financing to increase production or expand their businesses. These investments are more stable as they have a business model which is already producing revenue although they may not yet be profitable. The returns can be forecasted with much better accuracy and the company value is easier to determine. Some of our favorite platforms offering these type of investments are Circleup.com, Seedinvest.com and crowdfunder.com. Make sure to read our full circleup reviews , seedinvest reviews and crowdfunder reviews as well for more info.

Real Estate

Real Estate companies offer a number of options as well. They may sell debt, offer equity or a combination of both. These offerings may range from development projects of high-rise apartment buildings or single family homes to income producing properties such as elderly care facilities, hotels or commercial real estate. Some of our favorite options for real estate investing are fundrise.com, realcrowd.com, realtyshares.com and realtymogul.com click to see our thoughts and reviews.