Capital Markets Insights

The Complete Guide to Real Estate Crowdfunding

How creating your own crowdfunding platform can fast-track your company's growth

A combination of the global economy, the ever-accelerating pace of technological advances, and a desire to invest in tangible assets has created a burgeoning interest in real estate crowdfunding. This interest has led to a need for commercial real estate fintech sophisticated enough to serve this growing market and to support the needs of investors in markets throughout North America, Europe, and the Pacific Rim, making international real estate crowdfunding is more available than ever before.


What is real estate crowdfunding?

Real estate developers have traditionally drawn on small syndicates of private investors to facilitate the acquisition, construction, and carrying costs of their projects. Often, opportunities were scarce, even for investors of sufficient means to participate in the financial side of these projects.

In addition, for those private investors wishing to participate in funding a project, extensive knowledge of the market and the developer was necessary in order to sufficiently evaluate the investment opportunity. The due diligence necessary for ensuring that the opportunity was a good one, then evaluating its progress throughout the construction process, was a time-consuming and labor-intensive undertaking.


Perspectives on real estate crowdfunding

For the individual investor, crowdfunding provides the opportunity to take part in institutional quality investment opportunities with a much lower buy-in. It offers the security of rigorous due diligence and vetting and in many cases offers investors the flexibility of on-demand exit strategies without the need for exit upon project completion.

For the real estate companies or investment funds, crowdfunding provides a variety of different strategies for connecting financiers and developers. These include:

Equity Crowdfunding

Investors buy shares in individual assets or broader investment funds , retaining those shares until the investment  is monetized. This is a great option for both open or closed ended funds or commercial real estate developers

Debt Crowdfunding

Debt crowdfunding allows lenders to finance an asset or fund , then earn interest along with their principal repayment upon exit. This can be a great option for companies that are looking for diversifying away from traditional financing options.


Benefits of crowdfunding for commercial real estate

Real estate crowdfunding offers a solution to a variety of the difficulties associated with traditional financing options for commercial real estate developers’ large-scale new construction, renovation, and development projects. Crowdfunding allows large numbers of smaller investors to participate in funding an investment, pooling their resources to fund a wide variety of projects. This obviates the need for specialty and market-based expertise by the individual investors as due diligence and oversight is undertaken by the platform’s facilitators.

Why would a commercial real estate fund want to use this method for raising capital?

  • Crowdfunding offers access to broader capital opportunities than traditional funding sources. Rather than being dependent on the extensive requirements of bank partners or the relatively small pool of institutional investors for a given market or project, crowdfunding expands the base of possible investors, many of whom will choose to invest in multiple projects over time.
  • Real estate crowdfunding allows fund managers to leverage new regulations to raise capital efficiently. For example, Regulation A+ is popular with real estate firms in the US and Canada because of the access it provides to retail investors and the size of the capital raises, up to $50 million in a 12 month period. In the UK, property Investment Savings Accounts (ISA) enjoy widespread popularity that has continued to grow throughout their nearly 20 years of existence.
  • For those seeking to future proof their business model, real estate crowdfunding offers the opportunity to industry trends diversify their base of investors by making investment easier and reducing the necessary time commitment. In addition, technology solutions are now available such as white label real estate crowdfunding software for firms to remain relevant without the technology headaches.


How and Why to start your own crowdfunding platform

If you are interested in starting your own crowdfunding platform, there has never been a better time. Advances in technology -- like Katipult’s fintech platform solution -- make this an exceptional time to streamline the entire capital raising and investor management process. What do you need to know to get started and what are the benefits for your company?

  • Plan ahead for the rollout of your platform. Understand your existing and ideal investors, define your brand identity, and design a marketing campaign to reach the people who can help you reach your investment goals. Be sure to spend time building a team who can implement your plans effectively as well.
  • Choose the right technology for the design, setup and management of your crowdfunding platform. Don’t feel limited by the restrictions of a cookie-cutter product and don’t feel the need to create a custom solution out of whole cloth. A highly customizable product like Katipult’s white label fintech product can provide the custom options you crave and get you launched faster.
  • Build in compliance and operational advantages when you choose a syndication software that provides comprehensive solutions to the challenges presented throughout the investment life cycle. Leveraging this type of technology solution saves you time and money throughout the investment process and optimizes research and oversight capabilities as well.

Real Estate Crowdfunding vs. Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts or REITs have been a vehicle leveraged by real estate companies to pool assets; in many cases REITS are publicly traded entities. By going public they have access to more funding sources including individual investors (both accredited and retail investors) via the stock exchange.

Before the passage of the US JOBs Act in 2012 which laid out regulations for crowdfunding, real estate businesses and developers wishing to finance their projects through REITs had to go through the full process of a public listing in order to take advantage of increased access to funding. Now, however, with real estate crowdfunding companies can create funds for a specific deal or a portfolio of projects and solicit investments from all types of investors (retail to accredited) without jumping through the hoops required for a publicly traded entity.


Market data

To fully understand the impact of real estate crowdfunding, consider the following statistics compiled by CFX Investing:

  • Between 2012 and 2015, real estate crowdfunding portals grew 12 times, to $34.4 billion. The crowdfunding industry is projected to grow to more than $300 billion by 2025.
  • Title III and Regulation A+ is projected to take the pool of possible investors in the US from 8.5 million accredited investors to more than 230 million potential investors.
  • The US commercial real estate market encompasses $7 trillion in value. Of that, only $2.5 billion currently comes from crowdfunding, indicating tremendous growth potential.
  • Alternative assets like commercial real estate currently account for more than 26% of total institutional portfolios.

Numbers like these indicate not only the current impact of crowdfunding, but the huge growth potential it holds.


Regulatory issues and international real estate crowdfunding

Real estate crowdfunding both domestically and internationally is governed by the regulator of the specific country where the deal is being issued. In many cases there are rules defined for the handling of international investors as well as local investors . Fortunately, the adaptability and customization capabilities of crowdfunding platform software allows real estate companies to market their funds to investors in North America, Europe, and Asia-Pacific markets.

Regulation A+ in the US and the UK’s investment savings accounts (ISAs) provide opportunities for a wide variety of investors to participate in crowdfunding real estate projects simply and seamlessly. This provides benefits both by providing access to institutional quality investment opportunities.


White label real estate software

Rather than building custom software solutions, white label real estate software solutions provide firms the option to brand and customize an existing platform for use in capitalizing their projects and working with their investor network. Katipult’s real estate software provides added capabilities for providing liquidity for real estate companies and opportunity for investors.

Get in touch with Katipult and find out how to put their proprietary technological innovations to work for your real estate company or investment firm. Find out how to leverage exceptional tech to create extraordinary opportunities for your business.