According to Forbes, crowdfunding real estate is the twosome with staying power!
Historically a minimum of $100,000 was required before having the capacity to invest in property, but due to the Big Bang of PropTech, property investment could be available to anyone with a smartphone!
So how does this new disruptor fair against more traditional methods of funding property such as private equity funding?
Join our real estate crowdfunding experts here at Fundraisingscript.com to find out the real answer in the ‘real estate crowdfunding vs private equity funding’ debate.
So let’s get the mini takeaway before we get into more details.
Private equity real estate deals generally involve venture capitalists and business angels. This type of raising funds is usually limited to sophisticated or wealthy investors. Real estate crowdfunding allows property developers to advertise directly to smaller investors using crowdfunding platforms.
So whether you are thinking of crowdfunding from scratch or simply looking at your investing options, let’s begin by understanding a little background.
Real estate crowdfunding vs private equity real estate
So let’s look at some of the main points of private equity funding so we can more easily understand the differences between the two types of investment.
What is real estate private equity?
Private equity firms that focus on real estate, called REPE companies, raise money from Limited Partners or LPs.
This capital is used to buy, operate, improve, or develop properties with the goal of selling them for a return. In short: private equity is when someone invests money in a privately-owned company.
Private equity deals involve an investor buying a share in a private company with the eventual aim of making money from that stake.
Private equity real estate, on the other hand, is when investors pool their resources to invest in the real estate market. This happens either through public or private means.
In short, alternative asset classes are investment options that aren’t as traditional.
However, It’s important not to mix up private equity real estate with something like an equity REIT
Equity REITs and investment trusts are real estate companies that own or manage properties that produce income such as shopping malls, offices, and apartments. In turn, they lease to tenants.
How does private equity real estate work?
For wealthy individuals or HWNIs and organizations like endowments and pension funds, private equity real estate funds let them invest in both equity and debt related to real estate assets.
HWNIs, or high-net-worth individuals, have a net worth of more than $1 million. Generally, HWNIs are wealthy individuals who either inherited their wealth or earn it by starting and running successful businesses.
They often require professional financial advice and services to manage their investments. Private real estate funds are a great fit for these individuals as they provide access to high-end investments with lower risk and higher returns.
Additionally, the management fees associated with private funds are often much lower than those of traditional investment vehicles, making them an attractive option for HWNIs.
By actively managing their holdings, this type of investment takes a more diversified approach to property ownership than traditional methods.
This is mainly because it is not limited by market value.
Rather, general partners or GPs who manage these types of investments buy and sell regularly as they seek out different locations and property types that fit their strategy.
This type of real estate investment could be:
- Raw land holdings
- Completely new developments
- Redevelopment of existing properties
- Cash flow injections into properties struggling with finance
What is real estate crowdfunding?
Before the JOBS Act, people could only invest in real estate by buying physical property or investing money in a REIT.
Crowdfunding has opened up an entirely new method to invest in real estate- one in which you can buy into a property and become a partial owner without having to spend large sums of money upfront.
When you crowdfund for Real Estate, you’re essentially becoming a partner with other investors and receive profits generated from the investment.
For example, the investors would receive any money made from renting out the building or selling it.
One of the benefits of real estate crowdfunding for non-accredited investors is that usually only a low minimum investment is required.
In some cases, people can become shareholders in real estate by investing as little as $5,000.
Real estate crowdfunding also has the potential to help reduce an investor’s equity portfolio risk.
In its simplest terms, real estate crowdfunding provides investors with the opportunity to spread out their assets among different ventures instead of only having equity investments.
Investing in equity crowdfunding is similar to private equity funding, as investors become part owners of the company and can make a profit as the company grows.
However, there is no secondary market for shares purchased through equity crowdfunding investing like there is with private equity.
Once you buy them, you own them until the company exits or goes public. At that point, shares can be sold on the stock exchange.
Ok so with some of the basic differences and similarities between these two methods of investing in property, you might be wondering if there are any limits to how much you can invest.
Investment limits for real estate crowdfunding
The U.S. Securities and Exchange Commission or commonly known as the SEC is an independent federal government regulatory agency that protects investors by maintaining the fair and orderly functioning of the securities markets.
So to protect those involved in property crowdfunding against risk, the SEC has capped investments for non-accredited investors.
A non-credited investor is deemed by the SEC to be One with an annual income or net worth that is below $100,000.
Below are the SEC’s investment limits.
- You can invest up to $2,200 or 5% of your annual income/net worth during any 12 months if either your annual income or net worth is less than $107,000.
- If your annual income or net worth is at least $107,000, you can invest up to 10% of your annual income or net worth in any 12-month period. This amount cannot exceed $107,000 in total.
So it’s worth noting that one of the main differences between the two methods of investing in properties is the barrier to entry.
Private equity real estate is currently only available for accredited or institutional investors.
The typical minimum contribution for a real estate private equity fund is $250,000, though some funds require investors to contribute millions.
So as we can see one of the main differences between these types of funding is the flexibility and lower barrier to entry of crowdfunding vs the more traditional and higher threshold of private equity real estate.
As with any form of investment, there are risks attached to both so it’s wise to make sure you perform due diligence before making any kind of financial investment.
For more help on crowdfunding if you are new to real estate, head over to find out more.
And to end on…
So if your entrepreneurial spirit is leading you to the world of property and the new kid on the block, crowdfunding, then look no further.
Our team of fintech experts can help you set up your crowdfunding portal to attract investors covering a range of property deals.
From commercial to residential properties investors can join your project directly through the portal or you can design your bespoke platform with a more DIY approach!
Contact one of our experienced specialists to understand more.