Though in it's relative infancy, real estate crowdfunding was poised to reach over $2.5 billion in 2015 to fund a wide range of property developments. But why does this matter to you? These are not major Wall Street investment firms, there are crowdfunding platforms where ordinary people can invest just a few thousand dollars to get a piece of the action.

The story itself is nothing new. Crowdfunding has exploded in multiple industries all over the country, and real estate is no exception. This article is going to go into how crowdfunding has managed to alter how people are investing in real estate.

How it Used to Work

Investing in private real estate was always about who you knew. If you look into the Securities Act of 1933 the securities of private investments, including real estate, couldn't be marketed in the public arena. That mean the ordinary man in the street had no chance of getting involved unless they knew the right people. Clearly, most people didn't have these sorts of connections.

Nevertheless, that's all changed as a result of crowdfunding. Many of the barriers have been removed, including the ability to market investing opportunities. Small businesses had the chance to raise capital publicly, for the first time in 80 years.

The Money Issue

The old way involved investing in real estate through knowing the right people. Once an investor had decided on an investment they had to come up with the money. It was common to see six-figure checks written out. Obviously, this is out of reach of most people.
With the ability to market investments, companies from all over the country can contribute small amounts of money. This enables you to get involved with as little as a few thousand dollars. And what could be better than that?

This is probably the biggest change crowdfunding has had on the real estate industry.

Breaking the Circle

An investment fifty years ago probably happened as a result of someone you knew at the country club. These were closed circles and you didn't get in unless you were already friends with someone in those circles. But today no matter where you are from you have access to investing opportunities.

The circle has been broken and crowdfunding has opened up a closed environment. It's better for people who want to receive investment as well.

Previously, they would have to find someone with deep pockets. Today that doesn't matter because crowdfunding enables you to have as many investors as needed to reach your target.

What about Transparency?

Transparency in real estate has been something that has sorely lacked over so many years. This has led to a lot of questions being raised about the industry as a whole. Crowdfunding has acted as a significant disruption to the industry because it has forced transparency.

Take MacroCrowd.com as an example. In an industry that is quickly establishing itself with investors seeking worthwhile alternatives to traditional investing, MacroCrowd has carved itself into an even deeper niche market. As the first "luxury crowdfunding" platform, MacroCrowd enables investors to take part in institutional-grade real estate deals, and concisely lays out relevant information for investors. It includes all the important figures and players in the deal, and makes clear the associated risks. There's even additional information about the local real estate market to provide context.

Fluid Market

Crowdfunding has arguably massaged the market to make it more fluid than ever before. This has happened because of the aforementioned accessibility. A more accessible market makes it more likely that people from all walks of life are likely to invest.
This market has enabled additional investment options and the chance for projects to receive the money needed to push on. In another scenario, this may not have happened. Crowdfunding has to be credited for this.

What about the Risk?

While crowdfunding has a huge upside, it can also theoretically increase the risk for some investors as a result of its own success. Since it's easier than ever to invest, there will be more and more investors who have minimal experience and knowledge of their target markets.

This represents the potential for a huge problem because, as with all investments, there is a potential for loss. It underlines the need to conduct due diligence on any pending investing opportunity. You have to consider the risk and you have to take into account what the potential pitfalls are.

Without doing a thorough inventory of any given investment opportunity, you may be taking an unnecessary risk. You could find yourself into a situation ripe for losing your capital.

Last Word

Crowdfunding has altered the real estate industry for the better. It has enabled people to invest like never before. It's enabled property owners to gain investors like never before. And that has made a huge difference to both investors and the industry as a whole.

Getting into the business of crowdfunding investing simply requires a bank account and a reliable crowdfunding platform.

Will you be investing in real estate today?

Published on: Mar 2, 2016
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.