Myth 1: Crowdfunding is an entirely different way to finance real estate.
While the idea of investing online is relatively new, the notion of investors pooling their money to buy a piece of real estate is, of course, probably as old as the practice of buying real estate.
“We’re working with professional real estate companies that are in the business of buying and investing in assets,” says Jilliene Helman, CEO of Realty Mogul. “A buyer puts a building under contract and comes to us for debt capital, equity capital, or both. We’re raising capital from the crowd.”
Crowdfunding received a boost when Congress passed the Jumpstart Our Business Startups, or JOBS, Act in 2012 as a way to encourage the funding of small businesses by easing securities regulations. But how that law applies to crowdfunding real estate remains murky. The SEC monitors the selling of a security backed by real estate, but it doesn’t monitor a direct investment into the real estate. There are also provisions regarding how the bill will work that haven’t been finalized yet.
To some people, the equity structure seems very similar to a mid-2000s investment phenomenon that died off after the crash.
“It’s the same path as a tenant-in-common [TIC] structure,” says Dan Fasulo, managing director of New York–based research firm Real Capital Analytics (RCA). “The only difference is the website. These can be high-risk investments.”
Helman says her firm has incorporated lessons learned from the demise of TICs, which went from a $7.5 billion industry in 2005 to essentially nothing, according to RCA.
“One of the problems with TICs was that they didn’t have anybody who was making decisions on behalf of all of the disparate investors,” Helman says. “On equity transactions, we’re pooling all investors into a single-purpose LLC. We have the ability to make decisions and move quickly in the best interest of [the] collective investors.”
Helman would rather avoid properties with a single tenant in other commercial asset classes, which she says was a problem that plagued TICs. “That’s not a really diversified strategy,” she says. “We’ve never provided equity on an asset with a single tenant. [Though] that’s not to say we never will.”
Crowdfunding is an entirely different way to finance real estate.