By Carole Hawkins, [email protected]
What are the ways to raise money for flipping houses? Turn to friends and family. Get a bank loan.
Or … use a crowdfund.
It’s a little-known option that’s been done legally for two years through online platforms like Realty Shares, Realty Mogul and Fundrise.
Now, a new federal regulation could generate more crowdfunded capital for real estate projects.
Crowdfunding, known by many in Jacksonville through the One Spark festival, has for years been used to accumulate donations for good causes and startup companies.
Then, two years ago the Securities and Exchange Commission passed a rule that let businesses use crowdfunding to raise venture capital. That includes capital for real estate deals.
Instead of a T-shirt and a thank you, crowdfund contributors would get stock in a company or ownership in a deal.
But, only the wealthy were allowed to invest.
Now the SEC has passed a rule that opens crowdfunded investing to everyone.
On Oct. 30, the SEC approved the long-awaited Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act.
The new rule allows non-accredited investors — people who make less than $200,000 a year and whose net worth is less than $1 million — to invest in crowdfunded ventures. A company may raise up to $1 million a year from such investors.
It could expand the pool of money available for real estate investing. But, industry insiders are managing expectations.
The $1 million per year fundraising limit could be too little for a capital-intensive business like real estate, Realty Shares CEO Nav Athwal wrote in an article for Forbes. In recent weeks, legislators have advocated raising the cap to $5 million.
Athwal said non-accredited investors could push capital for the $34 billion crowdfunding industry “through the roof.” But unless restrictions are eased, the effect “may feel like more of a trickle than the opening of the floodgates.”
What does real estate crowdfunding look like?
Online platforms manage the transactions that connect real estate investors with real estate dealmakers. The sites resemble a highly controlled version of eBay.
On one side is a list of real estate deals — a house-flip in Poughkeepsie, N.Y.; a retail center in Kansas City, Mo.; an apartment complex in Atlanta.
On the other side are qualified investors. Site moderators screen participants on both sides of the deal.
The moderators underwrite the real estate projects and post them. Then, investors shop for projects they’d like to invest in. When the fundraising goal is reached — a thermometer shows the progress — the cash is released.
Single-family home investor JWB Real Estate Capital was an early adopter. The Jacksonville-based real estate investment company was the eighth company to raise equity using Realty Shares.
In its most recent deal, JWB raised $1.2 million in 24 hours. It took just five more days to get the additional $800,000 it sought.
“It’s insane how fast and amazing it is,” JWB President Alex Sifakis said.
So far the company raised a total of $6 million equity combined through crowdfunding. It leveraged the equity to raise another $24 million in debt.
It’s allowed JWB to buy a lot more houses, Sifakis said.
“It took me 10 years to raise our first $20 million. And it took me a total of three weeks to raise the next $30 million,” he said. “You can get to scale much faster.”
Whether the new SEC rule will amplify crowdfunding’s benefit is uncertain, though.
Non-accredited investors will only be allowed to invest small amounts — up to 5 percent of their income if they earn less than $100,000 a year and up to 10 percent if they earn more.
The amounts may not be large enough to get the real estate crowdfunding sites interested in them, Sifakis said.
Realty Mogul, for example, currently requires a $5,000 minimum investment.
“That’s the big question,” Sifakis said. “Are these crowdfunding platforms going to start allowing these non-accredited investors? Or are they going to say, ‘Hey, your $10,000 isn’t worth it to me.’”
If liability rules can be made simple for crowdfund moderators — for example, the investor signs a document saying they are qualified to invest under SEC rules, the real estate crowdfunds might accept them, Sifakis said.
But if the burden is on the moderators to verify the income and net worth of investors, it may not be worth the risk.
The SEC’s Title III rule takes effect Jan. 29.