Many have wondered what effect the Jobs Act will have on crowdfunding for the real estate sector. Some speculate that crowdfunding is only suitable for startups and that it’s effects on real estate sector will be limited. Others contest that crowdfunding will alter the landscape of real estate investing. Let’s discuss what changes, if any, will come from this new dynamic in real estate.
The concept of crowdfunding is nothing new in real estate. Almost all commercial real estate investments are joint ventures (a sophisticated form of crowdfunding) to some degree. Commercial real estate investments are usually syndicated out as developers reach out to institutional investors for capital.
While the concept of transacting real estate in groups or a joint venture is nothing new, these sophisticated investment opportunities have only been available to institutional or otherwise private investors with surplus capital. While the average blue or even white collar investor can purchase stock in a corporation, the same opportunities are not available outside of investing in REITs (Real Estate Investment Trusts). REITs are an excellent way to invest in real estate, but the investor will have little, if any, say on the direction of the REIT.
The most controversial aspect of the Jobs Act is that it allows for general solicitation of investment opportunities. This means that those deals that were privately offered to institutional investors could potentially be opened up to accredited investors nationwide. In no way am I suggesting that developers will submit a general solicitation to raise capital for their projects. However, I do believe that this will open up the possibility that investors (accredited and non-accredited) will welcome the chance to purchase equity/stock in real property just like they would purchase stock in Apple or Google.
The major difference between purchasing stock in real estate over a stock in a corporation is the intrinsic value of real property. People everywhere are still reeling from losses during the Great Recession. They’ve seen the value of their stock portfolio or retirement accounts evaporate into thin air. The benefits of owning equity/stock in real estate are varied. Most important is that real property unlike stock certificates will still be standing if the economy goes south. That’s why it’s imperative that investors diversify their portfolios to include real property.
It will take some time before we see the real effects of crowdfunding in real estate. Some websites have already sprung up to take advantage of the changes. I’ve personally formed a group of investors who are interested in participating in a crowdfunding capacity for real estate investments throughout New York. I look forward to updating you on our progress as well as looking back to see if this legislative change affected any real change to the real estate industry.