6 Challenges in Real Estate Crowdfunding


Real estate investing has embraced the world of crowdfunding with create success. It’s an easier way to band together small backers to make big investments when compared to the Real Estate Investment Trust [REIT] Act. It lets more people get involved with large scale projects and potentially make a better return.

In other words, real estate investing is not exclusively for just the wealthy class any more.

Crowdfunding in general has been explosively successful. Rewards-based campaigns have brought in up to $13 million for just one project. On the other hand, the potential of real estate crowdfunding is double that of the rewards-based market right now. The top real estate project to be funded was $25 million. That’s equal to the top 3 rewards-based projects in comparison.

Although there are many successes in real estate crowdfunding, there are still a number of challenges that must be conquered so that there will be continuing benefits which backers will be able to experience. Risk levels are high in this crowdfunding niche. There aren’t many short-term investment options. It could be very easy to lose the money that has been committed to any given project. Even the amount of money that can be invested is a potential challenge.

With the right path around these six obstacles, however, this could be the future of the real estate investing experience.

Challenge #1: Experience

Although the initial forays into real estate crowdfunding have been surprisingly successful, this method of raising money hasn’t been around long enough to established a track record. We just don’t know yet if it can be a viable way to invest into real estate for years to come. It’s expected to be successful, but expectations and reality can sometimes be very different.

Challenge #2: Quality

Real estate crowdfunding is so new, in fact, that there really haven’t been any standards developed for it. The decision-making process isn’t always clear with a project. There isn’t even enough information available yet to distinguish what separates good crowdfunding campaigns from bad ones in this niche market. As controls and standards are put into place, this challenge should resolve itself naturally over time.

Challenge #3: Risk

There’s no guarantee that any investment is going to offer a return. This issue is expanded because the crowdfunding industry hasn’t had enough time to be tested. Backers can somewhat insure themselves against losses when they come together in large numbers, but that also limits the potential return that can be received. Until the issues of long-term risk are addressed, there will always be questions to ask about how certain an investment may be.

Challenge #4: Laws

Only 3% of accredited backers are using equity crowdfunding options right now and that includes the real estate niche. Until the full regulations of the JOBS Act are published and implemented, this is how the market is going to be. The SEC requires crowdfunding platforms to register with them to raise funds and now they are considering even tighter regulations that could force out some of the low-level accredited backers as well.

This could be the greatest challenge that will be faced in the coming months. If fewer people are able to get involved, it could become too risky for many of the backers who are trying to remain.

Challenge #5: Value

There are some crowdfunding sites that allow an investment to happen for as little as $100. That might seem great for the average person, but the average person isn’t an accredited backer. That’s pocket change for those who are looking to invest and low limits like that don’t carry much value because even a great return might buy lunch and that’s about it.

Challenge #6: Liquidity

The one advantage of the REIT is that there is a secondary market for investments. This doesn’t exist for real estate crowdfunding. Backers on a crowdfunding platform have to wait around until the project is completed to receive a return. If a crowdfunding platform could find a way to take advantage of this fact and create a secondary market, then the extra liquidity could make it be a more viable option. Until then, the risk of staying in from start until finish is going to keep a certain percentage of backers away.

Although there are a number of advantages to real estate crowdfunding, the truth is that one bad investment could potentially jeopardize an entire portfolio right now. Facing these challenges head-on will help this industry to grow and remove the veil of obscurity that currently covers it for many backers right now.