Real estate crowdfunding — the practice of pooling investors’ money online to purchase properties — leaped forward in 2014, and is beginning to emerge as a viable alternative to traditional financing, according to a report by research and advisory firm Massolution.
Real estate crowdfunding allows investors to buy slices of residential, commercial and industrial properties, or fund loans used to buy such properties. Home flippers are one type of real estate business that is using the cash available through crowdfunding platforms to purchase properties.
Real estate crowdfunding grew 156 percent in 2014 to just over $1 billion in funding volume, with campaigns ranging in size from less than $100,000 to over $25 million, the report said.
Massolution sees that momentum continuing in 2015, predicting that crowdfunding will increase by 150 percent to $2.57 billion. That would make real estate crowdfunding one of the fastest-growing industry segments of “crowd capitalism,” according to the report.
“It appears that alternative finance platforms are here to stay and are starting to nibble away, albeit limitedly, at the regulated banking segment,” said Steven Cinelli, senior fellow for Massolution, in a statement.
A few real estate crowdfunders, including Fundrise and Realty Mogul, closed high-profile funding rounds in 2014 that are fueling their growth.
What sets real estate crowdfunding apart from its offline predecessor, “real estate syndication,” is that it brings more access and transparency to the marketplace.
By putting investments online, real estate crowdfunders can attract more potential investors and sell shares in properties for hundreds or thousands of dollars, instead of the hundreds of thousands typically needed to buy a property outright.
Real estate crowdfunding also makes it easier for investors to keep tabs on their investments.
Fundrise’s online portfolio, for example, lets users view updates including monthly leasing updates, photos of a property, construction invoices and geotechnical reports. The crowdfunder even shows investors the identities of their co-investors, serving up headshots with links to LinkedIn profiles pages.
Real estate crowdfunding appeals to home flippers, providing not only a source of funds they can tap to buy properties, but improve them in order to sell them at a profit.
Realty Mogul announced in September that it would funnel $73 million in loans from Direct Lending Investments to home flippers.
In 2014, North America stood as the largest region by funding volume of crowdfunded real estate deals at 56 percent market share, compared with Europe at 42 percent, according to Massolution’s report.
In 2015, the research firm expects North America to reach $1.4 billion in funding volume, and Europe to break $1 billion.
One notable finding of the report is that real estate crowdfunding is facilitating cross-border deals as it expands into other areas of the world.
That’s leading to a “dramatic increase” in real state crowdfunding in regions with markets large enough to potentially surpass the U.S. in terms of both investors and opportunities, according to Massolution.