Real Estate Crowdfunding: What is it, and How Will it Impact Real Estate’s Future?
Real estate crowdfunding is just as the namesake implies; CrowdStreet, a real estate crowdfunding platform sums it up on its website: “You, along with dozens or even hundreds of other investors, purchase a portion of interest in a property or real estate project, similar to owning shares in a company.” Crowdfunding allows individuals that otherwise would not have the capital to come together and hopefully make a joint profit. Comparing real estate crowdfunding to the stock market can provide a sense of the concept in practice, but there are differences. Most importantly, according to Investopedia, “Depending on the investment and unlike the stock market — your money may be tied up for years.”
The main draw of crowdfunding is the collective power of individuals. Websites like Kickstarter and Indiegogo allow for consumer interest to fund products, business ventures, and charities. There is no need for budgets or loans as long as the public invests enough for the project to come to fruition. With the minimum investments for DiversyFund and Fundrise being $500 and $10, respectively, the bar for entry is significantly lowered for prospective investors. According to Fatpos Global, “Global Real Estate Crowdfunding Market is expected to project a notable CAGR of 24.67 percent in 2030.” The CAGR, or compound annual growth rate, is a prediction that anticipates returns. “It is essentially a number that describes the rate at which an investment would have grown if it had grown at the same rate every year and the profits were reinvested at the end of each year,” according to Investopedia. While simply projections, crowdfunding real estate is expected to grow rapidly to reflect “substantial demand for raising funds for the construction of schools, hospitals, malls, and shopping centers in the emerging economies.” For investors that would rather hold a piece than the whole pie, real estate crowdfunding will facilitate that increasingly growing desire.
Since crowdfunding reflects the public’s will, the types of properties invested in will theoretically reflect the needs and desires of the community. Crowdfunding website Small Change features a “Change Index.” Mobility, Community, and Economic Vitality are the three focuses, giving investors a broad overview of how this investment will affect the community in which it is placed. By documenting and summating “an area’s walk — and bike-ability, public transit access, proximity to green space, availability of commercial and cultural amenities and other measures of quality of life” and more, Small Change specifically highlights and encourages green real estate; properties have to hit 60 percent of Small Change’s criteria to gain a spot on their website.
Environmental, social, and governance standards (ESG) are becoming more prominent within real estate. Just as the Change Index aggressively polices its projects for environmental standards, properties can become more marketable by complying with ESG standards. On the opposite side of the spectrum, a property plagued with ESG issues may be heavily discounted but also incur greater risks. Investing in property that will use a large amount of water or destroy the land it sits on might not pay out, but it will also harm the planet.
Crowdfunding real estate is situated to grow exponentially. As construction costs increase for companies, both individual and institutional investing will help bridge the gap. The biggest players like DiversyFund, Crowdstreet, and RealtyMogul will continue to grow their shares. Though smaller (and, by virtue of its name, aware of it), Small Change sets out to establish environmental and community standards for the properties they fund. If these environmental standards become the norm for crowdfunding sites, the projected growth of the industry could influence how buildings are funded and built in the future.