The process of crowdsourcing, or collecting information or funds from a variety of people to complete a project, has gained increased popularity in the past few years with the creation of a number of online crowdsourcing platforms, like Kickstarter and GoFundMe. Originally used to solicit donations to cover the cost of creative endeavors, like recording an album or shooting a movie, crowdsourcing’s applications seem to be multiplying by the day. Now, sites exist to help patients defray the cost of their rising medical bills, to help pet owners get assistance to pay off their animal’s healthcare costs, and even to help students pay for their tuitions.
As a real estate professional, I am particularly interested by a new trend in crowdsourcing that may very well change the face of real estate investing as we know it. Since Congress passed the JOBS, or Jumpstart Our Business Startups, Act in 2012, 80 companies have now thrown their hats into the world of real estate crowdsourcing in the hope of lowering the barrier of entry to real estate investing by opening the industry up to investors who have not have the credentials or financing to have gotten involved before.
When it comes to crowdsourcing for real estate investments, a little bit of cash goes a long way.
Real estate investment crowdsourcing works like this: instead of one investor ponying up the high amount of money traditionally required to claim an investment, many people contribute smaller amounts of funding, thereby distributing the ownership and control of the investments across every person who contributes. Then, crowdsourcing real estate investment firms, like a company called Fundrise, work with these investors to counsel them on best and wisest investment practices, brokering the deals as a company and divvying up the profit amongst the investors. In the case of Fundrise, specifically, a layman can become a real estate investor simply by paying a thousand dollar minimum investment. Other firms are stricter about who can participate in these deals; some limit participants to investors who are what the SEC defines as “accredited investors,” or people who make an annual income of $200,000 or more or have assets worth more than $1 million in addition to their primary home.
Of course, there are some pitfalls to this new method of real estate investing. The companies behind real estate investment crowdfunding do charge their investors fees, both on total investments and again if the property in question sells. And traditional real estate investment firms have expressed concern about allowing inexperienced investors to participate in such large-scale deals, largely because they feel such arrangements open the door to unwise investing and the potential for tremendous financial loss if the investors aren’t given good advice.
Regardless, the invention of real estate crowdsourcing is ushering in a new era of investing and may very well turn out to be a major disruptor to an industry that has been virtually impossible to break into without the right connections in the past. And, as always, as long as you make a point of educating yourself about your financial health and options for investing, the better the likelihood will be that you’ll make informed investment decisions and end up turning a profit as a result of your hard work and efforts.