Hi All - Happy Thursday. It’s the last day of the month, which means it’s time for the Last Cast Letter.

I hope everyone had a wonderful Thanksgiving with family and friends. I was back home in Boulder, Colorado, and it was awesome. I had some super interesting discussions about the “Deion Sanders Effect” and how Coach Prime’s presence might impact real estate in a city where 30% of the population is students.

Despite CU Football’s lackluster performance this season, Sanders was in the spotlight non-stop. So, too, was the school and city. I saw the Flatirons on ESPN almost every other weekend this fall. Boulder already sells itself and now with Sanders selling it too, many people think applications to CU will spike.

If applications spike (i.e. demand to live in the city increases), but supply stays relatively flat, well then this might put upward pressure on rents.

This is not unprecedented. Roughly a decade ago, TCU won the Rose Bowl in 2011. After the win, the university saw a more than 40% increase in applications.

Although the Frogs struggled this year, last season they made it to the National Championship game. A similar surge in applications is expected and now the university apparently costs more than Harvard.

I have a theory about what college will look like 20 years from now and how it will impact student housing, but that’s for another time.

Today I want to dive into a concept that’s been top of mind because of my work in the media space with my company Walk-On Holdings. That’s the concept of crowdfunding, specifically real estate crowdfunding.

Below is what I learned. Hopefully, you find it as interesting as I did. As I always say at the bottom of these emails, let us know if you’re interested in investing alongside us.

— Brooks

An Overview of Real Estate Crowdfunding

What Is It?

Let’s start with the basics: what is real estate crowdfunding?

Real estate crowdfunding is a method of real estate financing where a group of investors collectively pool their financial resources to fund real estate projects. So, pretty much like most other real estate ventures. But, with crowdfunding, there are a few differences.

The crowdfunding approach is typically facilitated through online platforms, allowing individual investors to participate in real estate investments with relatively small amounts of capital, which was traditionally accessible only to larger investors or institutions.

Real estate crowdfunding represents a significant shift in the landscape of property investment. By enabling a wider pool of investors to participate in real estate ventures, it has “democratized” access to a sector traditionally dominated by high-net-worth individuals and institutional investors. Companies like Robinhood use the word “democratize” to pitch their value-prop too.

Crowdfunding enables everyday investors to gain exposure to the property market and potentially earn returns from property appreciation and rental income. Often this can be done with as little as $100.

I. History of Real Estate Crowdfunding

The history of real estate crowdfunding is a relatively recent yet rapidly evolving development. It’s largely been driven by technological advancements and regulatory changes. Here's a detailed overview:

Early Beginnings (Pre-2000s)

• Traditional Real Estate Investment: Prior to the advent of crowdfunding, real estate investment was predominantly the domain of wealthy individuals, banks, and institutional investors. Small-scale investors had limited access to direct real estate investments.

Emergence of Online Crowdfunding (Early 2000s)

• Roots in General Crowdfunding: The concept of crowdfunding gained traction with platforms like Kickstarter, which emerged in the 2000s. These platforms demonstrated the power of online collective financing for various projects, setting the stage for its application in real estate.

The JOBS Act and a Paradigm Shift (2012)

• JOBS Act in the United States: A landmark moment came with the Jumpstart Our Business Startups (JOBS Act) enacted by the U.S. Congress in 2012. Title II of the JOBS Act significantly altered the landscape by relaxing securities regulations, allowing for general solicitation of private investments and enabling platforms to publicly advertise investment opportunities.

• Title III - Regulation Crowdfunding: Implemented in 2016, it further democratized investment by allowing non-accredited investors to participate in crowdfunding, including real estate crowdfunding.

Rapid Growth and Diversification (Post-2010)

• The proliferation of Crowdfunding Platforms: Post-2010 saw the emergence of dedicated real estate crowdfunding platforms like Fundrise (2010), RealtyMogul (2012), and Crowdstreet (2013). These platforms offered a variety of real estate investment opportunities, from commercial projects to residential properties.

• Global Expansion: While the U.S. led the way, other countries began to adopt similar frameworks, allowing the concept of real estate crowdfunding to gain a foothold in international markets.

Technological Integration and Maturation (Mid-2010s to Present)

• Blockchain and Tokenization: The introduction of blockchain technology and the concept of tokenization of real estate assets further revolutionized the sector, offering increased transparency, security, and ease of transaction.

• COVID-19 Pandemic Impact: The pandemic brought new challenges and opportunities. While some areas of real estate, like commercial office spaces, saw a downturn, others, like industrial real estate, gained traction. Crowdfunding platforms adapted by diversifying offerings and enhancing digital engagement.

ICYMI: Not All Real Estate Is Created Equal

Current State and Future Outlook

• Market Maturation: The market is maturing, with consolidation among platforms and increased scrutiny from investors and regulators.

• Regulatory Evolution: Ongoing regulatory developments continue to shape the landscape, balancing investor protection with market access.

• Innovative Investment Structures: The introduction of novel investment structures like eREITs (electronic Real Estate Investment Trusts) and eFunds offers diversified and accessible investment products.

• Sustainable and Social Impact Investing: There’s a growing trend towards investments focused on sustainability and social impact, aligning with broader environmental and societal goals.

II. Regulation Deep-dive: The JOBS ACT

The Jumpstart Our Business Startups (JOBS) Act, enacted in the United States in 2012, was a pivotal piece of legislation that significantly impacted real estate crowdfunding. Here's a detailed overview of the Act and its influence on the sector:

Background of the JOBS Act

• Objective: The JOBS Act was designed to encourage funding of small businesses and startups by easing various securities regulations. It aimed to open up access to capital for small businesses and provide new investment opportunities for the general public.

• Context: The Act was introduced in the aftermath of the 2008 financial crisis, during a period when traditional bank financing was difficult for small businesses to obtain.

Key Titles of the JOBS Act Impacting Real Estate Crowdfunding

• Title II - Access to Capital for Job Creators: Enacted in September 2013, Title II significantly altered the U.S. securities landscape. It lifted the longstanding ban on general solicitation and advertising of private securities offerings, under Rule 506 of Regulation D. This allowed companies (including real estate investment platforms) to publicly advertise their investment opportunities, reaching a broader audience of potential investors.

• Title III - Regulation Crowdfunding (Reg CF): Implemented in May 2016, Title III allowed non-accredited investors to participate in crowdfunding, including real estate investments. This was a major shift, as previously, private investment opportunities were largely limited to accredited investors — typically, wealthier individuals who meet certain income or net worth criteria.

• Title IV - Small Company Capital Formation (Regulation A+): “Title IV of the JOBS Act, also referred to as Regulation A+, allows companies that want to raise between $3 million and $75 million* to do so from anyone – regardless of assets and income levels.” This is quoted from Manhattan Street Capital.

Sidenote: Whenever I hear “Reg-A” referenced in conversation it sounds like someone is talking about the music genre. It’s hilarious and I try not to laugh every time, mon.

III. Major Players in the Industry

The real estate crowdfunding space has several major players, each with unique features, benefits, and drawbacks. Here's an outline of some key platforms and their respective pros and cons. Full disclosure: I used ChatGPT to help me aggregate the Pros and Cons below since I haven’t used all of these platforms.

1. Fundrise

• Pros:

  • Diverse Portfolio Options: Offers a range of portfolios including eREITs and eFunds, catering to different investment strategies.

  • Low Minimum Investment: Accessible to a broader range of investors with a relatively low minimum investment threshold.

  • User-Friendly Platform: Intuitive interface, making it easy for new investors to navigate.

  • Transparency: Provides detailed information about investment properties and strategies.

• Cons:

  • Limited Liquidity: Investments in eREITs and eFunds are not as liquid as public market securities.

  • Fees: Charges management fees, which can impact net returns.

2. RealtyMogul

• Pros:

  • Variety of Investment Options: Offers both individual property investments and diversified funds.

  • Accredited and Non-Accredited Investor Access: Caters to a wide range of investors.

  • Transparency and Due Diligence: Extensive vetting process and transparent reporting on investment offerings.

• Cons:

  • Higher Minimum Investments: Generally requires higher minimum investments compared to some competitors.

  • Limited Redemption Options: Limited options for early redemption, impacting liquidity.

3. CrowdStreet

• Pros:

  • Direct Investment in Individual Properties: Allows investors to choose specific properties to invest in.

  • Commercial Focus: Specializes in commercial real estate, offering access to a market segment often reserved for institutional investors.

  • No Management Fees for Direct Investments: Attracts investors looking to avoid ongoing fees.

• Cons:

  • Accredited Investors Only: Limits access to high-net-worth individuals.

  • Higher Risk Profile: Direct investment in individual properties can carry higher risk without diversification.

4. PeerStreet

• Pros:

  • Debt-Focused Investments: Specializes in real estate debt, offering a different risk profile compared to equity investments.

  • Shorter-Term Investments: Typically offers investments with shorter durations, appealing to those seeking shorter commitment periods.

  • Auto-Invest Feature: Simplifies the investment process and helps in diversifying.

• Cons:

  • Accredited Investors Only: Not accessible to non-accredited investors.

  • No Equity Investments: Limits options for those seeking equity exposure in real estate.

5. Patch of Land

• Pros:

  • Focus on Real Estate Debt: Offers a range of debt investments in real estate, providing a steady income stream through interest payments.

  • Short-Term Investment Horizons: Attractive for investors looking for shorter commitment periods.

  • Automated Investing Options: Facilitates easy diversification and investment management.

• Cons:

  • Limited to Debt Investments: No option for equity investments, which can offer higher returns.

  • Accredited Investor Requirement: Limits accessibility to a wider audience.

IV. The Cons of Crowdfunding

There are several reasons why some people might view real estate crowdfunding as unfavorable or risky. I want to note that many of the risks below apply to all of real estate investing, not just the crowdfunding space. But they’re important to reiterate and apply to the niche sector as well.

1. Market and Project Specific Risks

• Real Estate Market Fluctuations: Like any real estate investment, crowdfunding projects are subject to market dynamics, including economic downturns or regional property market fluctuations.

• Project-Specific Risks: Individual projects funded through crowdfunding may face unique risks such as construction delays, cost overruns, or management issues.

2. Liquidity Concerns

• Lack of Liquidity: Investments in real estate crowdfunding are often illiquid, meaning it can be difficult to sell or cash out your investment quickly. This contrasts with more liquid investments like stocks or bonds.

3. Limited Transparency and Due Diligence

• Dependence on Platform Due Diligence: Investors rely heavily on the crowdfunding platform’s vetting process, which may vary in thoroughness.

4. Platform Reliability and Continuity

• Platform Stability: The success of an investment can be closely tied to the stability and reliability of the crowdfunding platform itself.

• Risk of Platform Failure: If a crowdfunding platform goes out of business, it can leave investors in a difficult position regarding their ongoing investments.

Sidenote: This isn’t exactly the same, but it parallels some of the risks above. In May, an article by the Wall Street Journal highlighted the situation of Applesway Investment Group, a real estate syndication company owned by entrepreneur Jay Gajavelli. The report detailed how the firm faced foreclosure on over 3,000 apartments spread across four rental properties. The podcast is worth a listen:

5. Regulatory and Compliance Risks

• Evolving Regulations: The regulatory landscape for real estate crowdfunding is still evolving, which could introduce changes and compliance risks.

• International Regulatory Variances: For global investors, varying regulations across countries can pose additional complexities.

6. Limited Control Over Investments

• Passive Investment Nature: Investors in crowdfunding projects typically have little to no control over the management of the real estate property or project.

• Dependence on Management Teams: The success of the investment is heavily reliant on the competency of the project’s management team.

7. Fees and Costs

• Platform Fees: Most crowdfunding platforms charge fees for their services, which can impact overall returns.

• Hidden Costs: There may be additional costs or fees not immediately apparent to the investor.

8. Targeting Non-Accredited Investors

• Risk to Novice Investors: Real estate crowdfunding opens up investment opportunities to non-accredited investors who may not have the experience or knowledge to fully understand the risks involved.

9. Diversification Challenges

• Concentration Risk: Some investors might inadvertently concentrate their risk by investing in a limited number of projects or in a specific geographical area.

V. The Future of Real Estate Crowdfunding

The future of the real estate crowdfunding industry looks promising, with several factors indicating potential for continued growth and evolution.

A market research report from Zion Market Research revealed that the Global Real Estate Crowdfunding Market, valued at approximately $44.65 billion in 2022, is projected to expand to around USD $1743.13 billion by 2030. This growth represents a Compound Annual Growth Rate (CAGR) of about 58.10% from 2023 to 2030.

Here's an overview of the projected trends and growth prospects:

Continued Market Expansion

• Wider Adoption: As awareness and understanding of real estate crowdfunding increase, more investors are likely to participate, contributing to market growth.

• Global Reach: The expansion of crowdfunding platforms into new geographic markets is expected, especially in regions where similar regulatory frameworks are being established.

Technological Advancements

• Blockchain and Tokenization: The integration of blockchain technology and the tokenization of real estate assets could revolutionize the industry. This could enhance transparency, security, and ease of transaction, possibly attracting a new segment of tech-savvy investors.

• AI and Data Analytics: Advanced data analytics and artificial intelligence can provide deeper insights into market trends, risk assessment, and property valuations, leading to more informed investment decisions.

Regulatory Developments

• Regulatory Evolution: As the industry matures, further regulatory developments are anticipated. These changes will likely aim to refine investor protection while supporting industry growth.

• Standardization of Regulations: Efforts towards standardizing regulations, especially in cross-border investments, could provide a more stable and predictable environment for investors and platforms.

Diversification of Investment Products

• Innovative Investment Structures: Platforms may introduce more diverse and sophisticated investment products, such as green real estate investments or projects with social impact goals.

• Hybrid Models: The blending of traditional real estate investment models with crowdfunding elements could emerge, offering new types of investment opportunities.

Demographic Shifts

• Millennial and Gen Z Investors: Younger investors, who are generally more comfortable with digital platforms and alternative investment models, could become a significant demographic for real estate crowdfunding.

Economic Factors

• Interest Rate and Economic Conditions: The broader economic environment, including interest rates and housing market trends, will continue to influence the attractiveness and feasibility of real estate crowdfunding investments.

Risk Management and Investor Education

• Enhanced Risk Management: As the industry matures, there may be a greater emphasis on risk management practices and tools.

• Investor Education: Platforms might invest more in educating investors about real estate crowdfunding, including risks and due diligence processes.

So, there you have it, that’s all for today. I hope everyone has a wonderful holiday season. Feel free to reply with any thoughts good or bad. As always, if you’re interested in investing alongside us, fill out the form below.

— Brooks