Real estate crowdfunding has gained popularity in recent years because it offers access to individual institutional-grade assets that generally require high investment thresholds. If this is an asset class you're considering dipping your toes into as a real estate investor, there are a few things you should keep in mind. (If you're completely new to the game, here's a good guide to get you up to speed.)
Keep an eye on fees
It's important to watch the fees, both those paid to the crowdfunding platform as well as to the sponsor running the deal. The crowdfunding platform fee is generally pretty consistent within a platform, where you'll see fees around 1% of your investment amount, but that can vary.
Sponsorship fees are a little bit of a different story. The deal sponsor usually gets an acquisition fee, which is expressed as a percentage of the acquisition price. This is usually in the 1% to 2% range. Sponsors also get a fee upon successfully returning a predetermined amount of cash to investors.
Are you an accredited investor?
Some crowdfunding deals are only open to accredited investors. In case you're unfamiliar with the term, the Securities and Exchange Commission (SEC) created this classification as a way to determine the sophistication level of an investor.
The SEC defines an accredited investor as an individual meeting one of the following criteria:
- Has at least $1 million in assets, excluding personal residence.
- Had income of $200,000 per year ($300,000 if combined with spouse) for the past two years, with a reasonable expectation to follow that for the current year.
- Holds a Series 7, Series 65, or Series 82 license.
The third point is a fairly recent adjustment to the SEC's accredited investor definition. In the past, the definition was purely based on net worth or income level, but investors can now earn the accreditation by passing an exam.
There will be more opportunities for non-accredited investors
In 2016, Regulation CF (Reg CF) came into effect as part of the JOBS Act. This rule allowed private companies to raise up to $1.07 million from all Americans, including non-accredited investors, while allowing for general solicitation. This was a huge step forward, as it allowed more people access to the private markets.
And this is changing once again. The amount companies are allowed to raise is changing from $1.07 million to $5 million. You'll notice that some crowdfunding platforms have deals for non-accredited investors, while many are exclusive to accredited investors. This move to $5 million should change this, as sponsors running a particular deal will be able to raise five times as much capital via Reg CF than they could before.
The Millionacres bottom line
The crowdfunding landscape continues to evolve as regulators try to match consumer demand and provide protection accordingly. If you looked into crowdfunding in the past and weren't able to access a deal that looked interesting to you, things are changing in your favor. Meanwhile, make sure you're reading the fine print on the fees before you get into a deal.