Why Regulation A+ REITs are Real Estate Crowdfunding’s Future
When I came out with my guide on Real Estate Crowdfunding, the primary vision for the industry was to enable retail investors to invest in individual properties online. That model is quickly changing
In 2016, Fundrise sold out their first two eREITs, the Growth eREIT and Income eREIT. The platform ended up raising $100 million in total under Regulation A+ of the Jobs Act.
Fundrise also announced location-specific eREITs, including the East Coast, the Heartland (Chicago, Dallas, Huston, etc) and The West Coast.
At the time of writing, Fundrise has raised $5 million, $4.51, million, and $5.44 million for these eREITs respectively, as reported by CrowdfundInsider.
As you can see, Crowdfunded REITs are quickly gaining momentum! I think that we’re going to see this trend continue into 2017, as more and more companies adopt this financing model.
In fact, Realty Mogul has already made their move into this new section of the industry with their MogulREIT. The MogulREIT has a $1,000 investment minimum and it has seen a last annualized distribution rate of 8%.
Why Are Crowdfunded REIts Gaining Traction?
One of the major reasons that crowdfunded REITs have a great appeal to investors than the traditional real estate crowdfunding model is that both accredited and non-accredited investors can participate in the investment.
The majority of traditional real estate crowdfunding websites, like these, will only allow accredited investors to participate in the crowdfunding offerings.
In addition, while there are retail investors out there that do want to manage their investments and select the properties that will be included in their portfolio, many quite simply don’t have the time. They want a “set it and forget it” investing option.
Personally, I think that we’re still at the early stages of real estate crowdfunding. When I’m at a networking event in New York City, I’ll often times get blank stares when I mention real estate crowdfunding.
Individuals struggle to wrap their mind around how the concept works. However, when I mention a “privately traded REIT” or “crowdfunded REIT,” their ears perk up. Most investors are familiar with what a REIT is and because there’s some familiarity around that term, they are more willing and likely to adopt a new financial product.
Supply vs. Demand
Based on the results of Fundrise and other platforms in the industry, it’s pretty clear that there’s an investor appetite for new financial products like the eREIT. Now, with Regulation A+ of the Jobs Act, there is also a way for platforms to satisfy that demand.
I think that a platform’s success in this area is going to come down to a few factors. First of all, there are clear barriers to entry including technology, legal documents, and standard regulations. This is going to ensure that only well-financed and experience-rich startups begin to adopt this new model.
Second, there is a VAST information divide between the product and the customer. This means that customers must be educated about how privately traded REITs work, along with the ins and outs of the particular crowdfunding platform.
Of course, CrowdCrux and RealEstateCrowdfundingExplained are two such information sources. However, platforms themselves would be smart to begin to gain mindshare in the every day investor mindset by sponsoring general events, and reaching out to influencers in that space.
When it comes to investing, I think that the following factors play most into investing decision:
- Familiarity and trust with the offerer or marketplace
- A sense of credibility
- Results-oriented performance
Of course, results are SUPER important, but we saw with Lending Club how investor confidence can be so easily shaken with new financing products. There must be a high degree of transparency and ongoing communication to maintain positive investor relations at all times.
Lean More About eREITs
Because I’m a nerd, I put together a YouTube giving you a complete overview of REITs and how they work. Enjoy! Don’t forget to leave a comment below if you have any questions.