The Pros & Cons of Real Estate Crowdfunding
By Paul Esajian on July 17, 2015
What are the real pros and cons of real estate crowdfunding?
New crowdfunding platforms and promotions keep coming online, but how powerful is it for real estate? What don’t you know about crowdfunding that could be expensive? Is this the right way for you to raise funds? Are there better options?
The Rise of Crowdfunding
Crowdfunding, as we know it today, was really born in 2008 with the launch of Indiegogo.com. Some are just discovering it, but it isn’t new. There are many new online crowdfunding websites. There are new regulations which are making it easier for real estate entrepreneurs and companies to go beyond simple donation crowdfunding to equity and debt crowdfunding. However, the concept of multiple individuals pooling capital to finance development and investments has essentially been around since the very first settlements.
Real Estate Crowdfunding
In addition to the generic crowdfunding platforms out there, it has become so easy to launch these sites that there are tens – if not hundreds – of niche crowdfunding sites. Some focus on personal items and causes. Others focus on art or technology. Then there are those that are dedicated to real estate. Some of these hone in on fundraising for constructing new developments, others for investing in non-performing mortgage debt. Needless to say, no matter what you want more money for, there is an option for that.
A whole new industry has popped up around crowdfunding. There are many who are trying to jump on the train and offer their services for promoters. Just try starting a campaign and you’ll soon get flooded with this type of spam.
Some crowdfunding campaigns have been a wild success; even raising over $30M. But only around 50% of crowdfunding campaigns are successful. But what are the real pluses and minuses?
The Pros of Real Estate Crowdfunding
1. Funding
The main point of crowdfunding is to raise funds from the crowd. Depending on the type of campaign you run, you may raise some money for your project or real estate investment strategy, even if your campaign doesn’t hit its funding goal. Depending on what you offer in return for capital, investors can find this a far better more appealing way to raise money than borrowing from a bank or hard money lender.
2. Visibility
The potential for increased visibility, PR, and buzz generation is one of the best parts of real estate crowdfunding. In fact, many entrepreneurs are launching campaigns more for the PR than the cash. It’s a chance to get more eyes on a project and brand, to get picked up by other media, and to elevate the prestige of the project to others that may be on the fence.
3. Engagement
A crowdfunding campaign adds engagement and momentum. It’s a limited time opportunity to participate. People don’t want to miss out on things. This energy can increase sharing, response rates, and investment. It’s also a great opportunity for promoters to start ongoing conversations and warm marketing feeds.
4. Ownership
Whether you are offering a perk or actual equity position these campaigns give backers some form of ‘ownership’ in your success. They are invested in it. Having several dozen or several thousand other people invested in making your venture a success can be extremely powerful.
5. More Money
Crowdfunding is now an expected step in between starting with help from friends and family and landing big VC money. Venture capitalists want to see if a venture can succeed in a forum like this and prove demand. The odds of landing additional funding are proving to be very good.
The Cons of Real Estate Crowdfunding
1. Unexpected Costs
Running a successful real estate crowdfunding campaign costs money. There is a lot of noise out there today. And just throwing up a page on Indiegogo is going to do about as much good as throwing up a single real estate web page and never directing anyone there. So there are marketing, material creation, and PR expenses involved.
2. The Consequences of Flopping
While it isn’t the end of the world; a failed crowdfunding campaign can be a lot like flopping on an episode of the reality TV series Shark Tank. It’s really visible, and it isn’t going away. Some have said there is no such thing as bad press. But that was before the internet and smartphones.
3. Distraction
Do you really need to run a crowdfunding campaign, or will it just be a distraction? It takes a good amount of time to plan, strategize, and execute on a campaign. Is this the most efficient option?
4. Revealing Too Much
Great crowdfunding campaigns give a ton of detail about the promoters, about the workings of a business or investment model, and how money is used. We are in the sharing economy, and a rising tide lifts all boats. But how much should you giveaway?
5. Responsibility
If you accept money for a real estate project through a crowdfunding campaign you have to follow through and make it happen, and you have to invest in following up with backers. That can be notably different to just being able to walk away from an offer on a home if you change your mind. You are either all-in or not at all.
Summary
Crowdfunding can be awesome for real estate. It can also be seriously counterproductive if you aren’t prepared for what is really involved in running a successful campaign. Do the math and compare everything.