Crowdfunding …New Concept for Portfolio Diversification

Forecasters and investors believe our economy is recovering.  In general, individuals and corporations are paying off debt and beginning to consider re-organizing their portfolios. Once the decision to precede consideration must be given to the old adage…”Don’t put all your eggs in one basket”. There are many ways to diversify. The obvious methods include the stock market, bonds, and real estate to name a few. What if you want to invest in larger properties but do not have the available capital, you could consider “Crowdfunding”. This is a tool to participate in  ownership and limit your risk at the same time. The first and primary rule is to only put investible or disposable dollars at risk. By this I mean dollars you can afford to lose.

Crowdfunding is quickly moving into the retail real estate investment arena. It is pooling of small sums of money online to bankroll startups and other enterprises. This is a new twist on the old practice of real estate syndication. Syndications had certain rules and limitations such as number of participants.  Investors can now buy a piece of a shopping center or some other property online, for as little as $5,000, while forgoing any of the operational and leasing headaches. Crowdfunding is a way to diversify your portfolio and test the market without a large obligation.

Most crowdfunding organizations are presently focusing on office and retail transactions. Although the concept initially encountered rampant skepticism, the concept has since been replaced by fervent enthusiasm. There are firms that have amassed crowdfunded investments in excess of $30 million and $200 million in properties.

 Crowdfunded retail properties are managed and controlled by a seasoned real estate “sponsor,” and investors receive distributions through monthly or quarterly rent cash flows and principal payments issued when the company sells the properties. SEC restrictions force investors to wait at least a year before reselling the assets. An owner interested in selling a property through Realty Mogul may process an application on the firm’s website, which will go directly to the underwriting team.

The door for real estate crowdfunders in the U.S. was opened with the passage of Title II of the Jumpstart Our Business Startups (JOBS) Act of 2012, which loosened restrictions on Internet marketing and sales of property to the public. Among the real estate crowd funding sources that have cropped up since Title II are CrowdStreet, Emition, Fundrise, iFunding, Patch of Land, RealtyShares and XGen Capital. 

 There is a huge misconception that creating a successful crowdfunding campaign is as simple as submitting and waiting for the project to go viral. This has occurred but the vast majority of projects require diligent effort on the part of the project creator. The use of social media, creating e-mail distribution lists before the project launches, contacting local media are necessary steps the take to launch a successful campaign and achieving your goal. This is not a platform to be compared to a free handout. If you expect people and corporations to join in your cause, you must be in a position to supply the detailed information, strategies and objectives in order to achieve the desired outcome.

 Another common misconception is that crowdfunding is only useful for small businesses and startups. This is not the case. While crowdfunding creates a funding opportunity that certain smaller businesses may not have received in the traditional way. It is also presents fundraising opportunities for established companies.

 Obviously this concept is not for every investor or business and should be carefully weighed prior to entering into crowdfunding venture of any type.

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