Utilizing commercial real estate assets for passive real estate investment has long been hailed as a tried-and-true technique to hit the million dollar mark and amass significant wealth. However, chances for early-stage, unaccredited investors to start that journey with this kind of real estate investing are scarce. The misconception is that you must first work hard to amass a portfolio of independently managed properties. To pay your dues, you must, in other words, live like the landlord. The tired “put in your time” defense. Anyone may use real estate investing to further their wealth-building goals without having to be a landlord. There are different choices. Today, we’ll talk about SEC’s Crowdfunding Regulation, the newest tool Astre Capital is using to make real estate investing options available to non-accredited investors. After all, our goal is to assist all people in achieving financial security, not only certified investors. However, this sort of real estate crowdfunding is distinct from others you may have seen previously, and it is just as effective as more conventional real estate syndications. This article will explain real estate crowdfunding in detail, including what it is, how it operates, how it differs from other types of investment vehicles, and much more.
How does crowdfunding work?
Imagine that you wish to spend your two weeks of summer vacation traveling to various famous National Parks. Simple to picture. It actually sounds quite wonderful! But you don’t want to spend all day traveling, looking for parking, paying for it, and munching on gas station snacks. Fortunately, you’ve discovered a rail route that will take you to each park without the inconveniences of any driving, so you need a backup method of transportation. With comfortable overnight accommodations, you may arrive in the breathtaking Big Sky Country rested and prepared to take it all in.
Imagine that you wish to spend your two weeks of summer vacation traveling to various famous National Parks in the American West. Simple to picture. It actually sounds quite wonderful! But you don’t want to spend all day traveling, looking for parking, paying for it, and munching on gas station snacks. Fortunately, you’ve discovered a rail route that will take you to each park without the inconveniences of any driving, so you need a backup method of transportation. With comfortable overnight accommodations, you may arrive in the breathtaking Big Sky Country rested and prepared to take it all in.
Only accredited investors may board that vehicle up until recently in order to make investments in real estate syndications. Now, non-accredited investors can now use the vehicle. The framework of that vehicle is made up of the Securities and Exchange Commission’s (SEC’s) crowdfunding regulations, which are a collection of guidelines, and the technology—platforms or websites—used to make the exchange possible. An operator can pick up non-accredited investors using this vehicle and invite them along for the voyage.We’ve added that real vacation package, the National Parks train journey, to our bucket list since we still like the sound of it.Now, let’s take a step back and discuss why we’ve just lately begun to consider crowdfunding as a means of making real estate investments.
Crowdfunding’s Rise: From Donation to Equity Investment
When you mention crowdfunding, many people immediately think of sites like Kickstarter, Indiegogo, or GoFundMe. Anyone may raise money using these platforms for a project, venture, cause, or virtually anything. To attract contributors, the fund’s founder might provide tier-based prizes for higher contributions or other benefits. Crowdfunding gained popularity in the last decade as a means to raise more money from friends, family, and strangers. But not all crowdfunds are created equal. Far from it. The money behind these early crowdfunds comes from contributions, not investments. Donors could get a product or a discount, but they don’t own any stock or other assets in the company. After the exchange of money and/or goods and services, their connection is over. To put it another way, these early crowdsourcing options weren’t for investing.
Rise of Equity Crowdfunding
Individuals can directly participate in tangible assets like new construction projects, multifamily properties or hotel buildings as a group through equity crowdfunding, such as real estate crowdfunding. These investors purchase genuine equity, just as they would if they were buying a single-family house to utilize as a rental property. This more contemporary kind of crowdfunding is an investment for the participants rather than a contribution.
What Is Real Estate Crowdfunding?
Many investors get together through real estate syndications and funds, often known as group investments, to buy larger assets that they would not otherwise be able to afford. We adore this type of passive real estate investment for a variety of reasons, including the fact that we don’t have to worry about tenants or landlord duties, the wonderful tax benefits, and the creation of passive income streams that enable us to live a life by choice (to name a few). When people invest in real estate that is crowdfunded, they purchase stock in the firm that owns the real estate, such as a multifamily housing complex or collection of hotels. This is a significant difference since it indicates that they are actually a portion owner of the real estate or physical assets. Due to their ownership of a portion of the corporation, they really possess a piece of that investment property.
This is made possible by crowdfunding platforms, which are just websites designed to link real estate investors with operators while abiding by all applicable laws. This is the precise procedure employed in the majority of real estate syndications. The crowdfunding route is distinct since it uses a platform (or particular website) to adhere to crucial securities regulations that safeguard investors. This is the car we were talking about previously. Let’s explore why this Regulation Crowdfunding (Reg CF) instrument is just now being used to assist other investors in leveraging real estate in their investment portfolio (sadly not the one that is going to famous National Parks).The main point to remember is that Reg CF now enables non-accredited investors to take advantage of real estate investing’s advantages, including recurring cash flow dividends and gains from building sales. Naturally, the investors also assume the risk of capital loss if the operator doesn’t manage the property effectively, just like with the 506(b) and 506(c) offers we’ll describe later.
Why Are Real Estate Crowdfunding Sites Only Recently Available to Non-Accredited Investors?
The JOBS Act, passed by Congress in 2012, made investing in real estate syndications easier for everyday investors. The Securities and Exchange Commission (SEC) adopted Regulation crowdfunding (Reg CF) in 2016 to implement a specific section of the JOBS Act, which also created the 506(b) and 506(c) rules used in real estate syndications. These SEC rules were developed to protect investors from fraud, and eligible companies must follow strict protocols to avoid making bad investments.
What Is A Crowdfunding Platform For Real Estate?
Real estate crowdfunding offers an alternative way to incorporate real estate investments into anyone’s investment portfolio, without the need for landlord management. The new Reg CF rule allows any investor to participate in equity investments, but the biggest opportunity lies for non-accredited investors. Real estate crowdfunding platforms streamline costs and help operators follow regulations that protect real estate investors. Existing real estate syndication regulations have allowed accredited investors to participate in passive real estate investments, but non-accredited investors were harder to find due to stricter rules and higher costs. Real estate crowdfunding platforms have become a vehicle to house the legal structure, allowing more investors to participate in passive commercial real estate investments, particularly non-accredited investors who were previously excluded from many investing options.
What Is A Real Estate Crowdfunding Offering And How Do I Start Investing In It?
We’ll detail three questions you should respond to in order to provide you a roadmap of the procedure for investing in a real estate crowdfunding campaign.
#1: Which Commercial Real Estate Investments Can I Make To Achieve My Objectives?
Crowdfunding offers access to commercial real estate investment opportunities, making it easier for individual investors to invest in residential real estate without the help of a larger group. There are various types of commercial real estate, and deciding which to invest in depends on your goals and the desired outcomes. To start leveraging real estate crowdfunding, define your investing goals and learn about passive real estate investing. Start with an essential guide to real estate syndications and create a list of your investing goals. Consider asset classes like multifamily apartments, hotels, and self-storage to determine if they will help you reach your goals. The structure of the deal and the operator’s track record in delivering on their business plan often determine the success of real estate crowdfunding.
#2: How much can I invest through real estate crowdfunding platforms?
The minimum investment amount for real estate crowdfunding investment opportunities should be clearly stated on any platform. The minimum amount for individual real estate investment opportunities is determined by Reg CF rulings. The platform handles this math when answering profile questions. If your income or net worth is less than $124,000 (as of 2023), you can invest up to $2,500 or 5% of your annual income or net worth each year. If your net worth or income is over $124,000, the amount increases to 10% but no more than $124,000. Accredited investors are not limited to the amount they can invest, and if you’re unsure, check out the accredited investor definition overview. This investment restriction is due to inherent risks in real estate investing and helps protect non-accredited investors from losing everything.
#3: Which Crowdfunding Platform for Real Estate Is Best For Me?
Real estate crowdfunding platforms offer investors the opportunity to invest in a portfolio of properties, ranging from high-growth to high-income. These portfolios may be conservative or aggressive, with conservative investing focusing on capital protection and long-term returns, while aggressive investing targets high-growth in a shorter time period. Portfolio sites can help meet goals, but it’s crucial to understand the underlying assets and business plans within these portfolios. This information should be part of your due diligence, and it doesn’t have to take a lot of time.
Start Working On Your Upcoming Real Estate Project Right Away
Many more people may be able to take advantage of passive real estate investing thanks to crowdfunded real estate. More ambitious investors may now take advantage of the beauty of rental income on a monthly or quarterly basis, lessen their tax burden, and devote more time to enjoying a life that they have chosen.