NEW YORK (Reuters) - A tipping point may be near for U.S. investors seeking to benefit from crowdfunding in real estate, an industry that is a clear winner in the early stages of raising capital for small businesses over the Internet.
The amount of money raised, size of deals and the speed at which they occur - at times in a matter of hours - has steadily increased, suggesting crowdfunding for real estate is maturing.
Lifting a regulatory ban that bars ordinary investors from crowdfunding could greatly boost the volume of deals and capital raised for companies, while allowing investors to directly access annual returns of 7 to 12 percent, industry executives say.
Crowdfunding is the practice of financing a project or venture by raising small amounts of money from many people, typically through the Internet. Crowdfunding for real estate, despite rapid growth, is still a speck in the investing ecosystem, said Nav Athwal, founder and chief executive of San Francisco-based RealtyShares.
The company wants to make real estate investing as easy as investing in stocks, a common industry refrain, but a big hurdle at present is that only accredited investors - those with at least $1 million in assets excluding their home - can invest in the online marketplaces that connect borrowers with investors.
“We are very eager to one day be able to open our platform to anybody that wants to put $1,000 or a couple hundred bucks into real estate, because let’s face it, real estate is one of the best ways to build wealth and you shouldn’t have to have a certain net worth to invest in real estate,” Athwal said.
According to a posting on the website of the U.S. Office of Information and Regulatory Affairs, the implementation of Title III of the Jumpstart Our Business Startups Act - which would open crowdfunding to small investors - was tentatively expected this month.
Real estate has been the crowdfunding standout since the JOBS Act two years ago allowed an exemption to the ban on the public solicitation of private capital investments, said Crowdnetic Corp, a provider of crowdfunding data and research.
Over the two-year period ended September 2015, total capital raised for real estate development and investment in the United States through crowdfunding was $208.3 million. That represents almost a quarter of the $870 million committed since September 2013 through the 506(c) clause of the JOBS Act, Crowdnetic said in a report citing data from 18 leading intermediaries, or online platforms for crowdfunding.
The market is bigger, though, as RealtyShares has originated more than $100 million in loans via the 506(b) clause, which prohibits marketing securities by solicitation, while 506(c) allows it if all investors are accredited.
A race is now on among the online marketplaces to better vet the companies seeking capital to reduce investor risk. RealtyShares receives almost 1,000 applications a month, but puts only 5 percent onto its platforms, Athwal said.
Peer Street, a real estate platform that has been operating in beta mode since January, launched its site on Monday, hoping to tap existing loans from private money lenders. Historically it might take $100,000 to $250,000 to get into a single loan or pool of loans, said Brew Johnson, a co-founder of Peer Street.
“Now you can take that same amount of money and create a diversified portfolio across many loans to reduce the risk,” he said.
The real estate crowdfunding industry, as measured in total volume and number of deals, is poised for possible annual growth of 25 percent or more, said Luan Cox, president and chief executive of Crowdnetic.
An announcement two weeks ago that venture capital firm CSC Upshot raised $400 million to invest in startups on AngelList suggests a tipping point in crowdfunding, as it will allow small investors to mingle with angel investors, or those who back small startups or entrepreneurs, she said.
The deal is “a very public and substantive nod to the market and a signal for retail investors to follow the ‘smart money,’” Cox said.
However, most people still do not know what crowdfunding is, and those who do fail to understand how to invest through this medium, said Mark Robertson of Salisbury, North Carolina, who launched a website, CrowdDD.com, this year to facilitate the discussion of crowdfunding opportunities among investors.
Robertson said he can now invest in real estate deals that in the past required knowing the right people in a syndication.
Over the last decade Robertson might have learned of two or three investment opportunities, but crowdfunding has “democratized” investing and increased transparency.
“With crowdfunding I’ve literally looked at over 500 deals across the country in different asset classes,” he said. “Instead of money sitting in the bank earning half of 1 percent a year, I can now earn 10 to 12 percent a year.”
Editing by Matthew Lewis