More and more investors are looking into crowdfunding real estate. After all, it presents them with a lot of opportunities to own attractive real estate. What is this setup? Basically, it’s like your usual crowdfunding initiative wherein an initiative is set up after an idea has been established. You then wait for investors to support your initiative until you reach the targeted funds. You’ll then use these funds to execute the idea. Simply put, it’s pooling your resources together with other people so you can buy real estate.
An Example of Crowdfunding Real Estate
Let’s say that one investor stumbles upon a real estate investment that’s a possible winner. Unfortunately for him, it’s way outside his price range at $100,000. This investor can then come up with an idea on how to make money out of this investment. Once that’s established, he can try to sell this idea on a real estate crowdfunding site by setting up an initiative. On this site, other investors can pool their resources together so they can buy the real estate.
As a simple math, 10 investors can invest $10,000 each so they can invest on the real estate. With this computation, it’s easy to see why it’s gaining a lot of traction in the industry.
But is it Legal?
This is a valid question because this setup is really very different from how investors have been investing in real estate for years. This is why a lot of people are wondering if this is a legal way of investing in real estate.
The short answer to that question is yes, it is legal. However, there are several legalities involved. If you’re looking to join or start an initiative, it’s important that you’re aware of these legalities.
Legalities of Real Estate Crowdfunding
Before, it’s illegal for developers to market their projects to the public. This means that these investment opportunities were only made available to private equity firms and investors with a high net worth. Now with the JOBS (Jumpstart Our Business Startups) Act, it’s a thing of the past.
This is a law implemented in the US to funnel funds to small businesses. This is encouraged by means of the facilitation of securities regulations. This initiative is designed to help two communities. In addition to the startup community, it’s also designed to help the crowdfunding community. In addition to facilitating the sale of securities, it also legalizes it. The sale of securities is used for crowdfunding.
With this law, developers can now market their projects to investors that are accredited. In order to be accredited, the investor should have a net worth of $1,000,000 or more (excluding the house) and a yearly income of $200,000 or more.
However, developers can also market their projects to investors that are not accredited, provided that they make an investment that’s within the limit. Here are the limits:
- If both your net worth and income are less than $100,000:
- You can invest $2,000 or,
- 5% of either the net worth or annual income, whichever is higher.
An investor can invest the greater amount between the two options. Let’s say that an investor has an annual income of $50,000 and a net worth of $85,000. The investor can invest $2,000 or $4,250 (5% of the net worth since the net worth is higher than the annual income). With this, the investor can invest $4,250 since it’s higher than $2,000.
- If your net worth or income is over $100,000, you can invest up to 10% of your net worth or income, whichever is higher. Let’s say that you have an annual income of $50,000 and a net worth of $200,000. You can invest up to $20,000, which is 10% of your net worth since it’s higher than your income.
The Initiative has to be Started and Completed Using a Registered Broker-Dealer or Portal
First of all, you can’t just set up a website and post your crowdfunding initiative there. Also, you can’t use just about any crowdfunding portal, even if it’s the highly-popular Kickstarter. You need to use a portal that is registered with FINRA or SEC and it has to be registered as a portal for crowdfunding real estate.
Speaking of FINRA, they’re expected to issue rules that will administer the registration and conduct of brokers-dealers and portals as far as crowdfunding real estate is concerned.
Rules for Registered Brokers-Dealers and Portals
In addition to the need for registration with the SEC or FINRA, brokers-dealers and portals should also follow these rules set by the JOBS Act:
- Disclose all the potential risks as required by the SEC.
- Guide investors to ensure that they complete the requirements set by the SEC when it comes to investor education.
- Set up anti-fraud measures like doing background checks.
- Ensure the privacy protection of investors.
- Oversee the investors’ investments to make sure that they’re not investing over their limit.
- They shouldn’t compensate anyone for bringing investors in.
- Make sure that their own key people don’t invest in opportunities offered in their platform.
As real estate crowdfunding gains more traction, it’s expected that more rules will be implemented in the future.