Crowdfunding: Real Estate’s Next Evolution?

In philosophical terms, the concept of crowdfunding is as American as it gets.  A few ambitious but cash-strapped entrepreneurs, nothing to their name but a webcam and a dream, pitch their game-changing idea to the world in the hope of convincing a precious few to believe in their dream as much as they do–and in doing so completely bypassing the long-established ritual of corporate investor butt-kissing.  Instead of courting the few for a lot, entrepreneurs can hone the power of the internet to court the many for a little.  For once, the masses are allowed some tangible say in what products they want to see created without waiting for the powers-that-be to decide what they want for them.

The best part?  The crowdfunding model isn’t bound to one specific industry.  Tim Schafer, a beloved video game writer and developer, received $3.3 million through Kickstarter for his adventure game Broken Age.  Pebble has rapidly built a mini smartwatch empire on the back of crowdfunding, its latest product Pebble Time shattering funding records to the tune of $20 million.  Everything from music streaming sites to 3D printers to a Reading Rainbow reboot have firm roots in crowdfunding.

And now, in 2015, the real estate industry is just beginning to take notice.

At first, projects were fairly modest in scope.  Crowdsourcing firms like Realty Mogul and Fundrise saw an opportunity to act as a platform to connect real estate companies directly with potential investors, the entry price point being as low as $100 to go toward small projects like undervalued property renovations or residential ventures below the corporate investor radar.

But the trend is rapidly gaining momentum, and several high profile projects are beginning to take advantage of the model.  Fundrise, for example, has recently launched a pitch for small time investors to claim a stake in the new World Trade Center–for only $5,000.  Rather into going into property itself, this particular investment goes toward a trust that holds $5 million share in liberty bonds, offering a 5% tax-free gross annual return over a 5-year period.

Closer to home, Miami-based investor Habitribe is launching a project on SBREfunds.com that allows accredited investors to contribute to a $50 million fund that, instead of financing a single development, will finance hundreds of real estate transactions nationwide.  While the entry point may be significantly higher than traditional crowdfunding projects ($50,000), it nevertheless gives new investors access an elite, insular real estate asset class that operates a few levels above basic home flippers.

If this and other like-minded funds prove successful and meet their projected returns, the number of crowdfunding investors on all levels could grow exponentially to the point where it becomes not just a low-risk option for entry-level investors, but the primary foundation for all investment.  If the day comes where small investments from masses can accumulate greater revenue streams than what corporate investments can provide, no leverage will be left for elite investors to properly function.  Anyone, accreditation pending, would be able to lay a stake to anything, thus ushering in an unprecedented era of business transparency.

The seeds have already been sewn.  Even today many real estate developers are relying on crowdfunding not just for investment, but as a source of equity.

While it’s still too early in the model’s life cycle to foresee potential consequences of this transition (although market observers love to speculate), there is one certainty: with such revolutionary ideas being rolled out in all industries almost on a daily basis, the future certainly won’t be boring.