As a real estate investor, you’re probably good at asking for money. It’s the nature of our business—to be successful you’re, sooner or later, going to have to start dialing for dollars to track down the right funding source for your next deal.
Sometimes it’s a straightforward financing agreement with a bank or lender. Sometimes it’s going the private money route, soliciting the capital you need from an established investor or, even, a friend or relative. And sometimes it’s something really non-traditional—sometimes to get that deal funded, you’ve got to think outside the box. And that’s exactly where more of the focus has been lately—non-traditional avenues and, specifically, crowdsourcing.
Understanding The Crowdsourcing Universe
Chances are, you’ve seen crowdsourcing projects on sites like Kickstarter and Indiegogo—maybe you’ve even thrown a few bucks at a friend’s artisanal ketchup business or their upcoming album release. It’s an interesting concept if you’re a business owner, though—solicit your inner circle plus, literally, millions of strangers, friends of friends and passive investors to get the funding you need to complete a passion project. And it’s working—what started out as a relatively unknown investment source just a few years ago has become a billion-dollar business. It’s pretty incredible.
And even more incredible? It’s starting to seep into the real estate universe. While crowdfunding makes up about 1% of all commercial deals (and much less for residential deals), it’s starting to grow and, I’d bet, will be a living, breathing funding source for many real estate investors in the not-too-distant future. Entire websites are dedicated to crowdsourcing and business, and many of the power players in the space are even beginning to carve out sections of their sites dedicated to these kinds of opportunities.
The Good & The Bad of Crowdsourcing Your Next Deal
So before you head online to start crowdfunding your next deal, know this: it’s hard to get deals funded through these platforms. While you likely hear about the good ones—the charitable or creative initiatives that blow through their fundraising goals—there are usually twice as many that don’t get funded. And unlike sourcing funding from more common sources, if your crowdfunding program doesn’t get to 100%, you don’t see a penny. Some sites won’t even post your project if they think it’s too risky or isn’t likely to get traction—no one wants their site cluttered up with not-so-successful campaigns.
And if you do get your project approved? That’s just the first step. Unless you’ve got millions of fans, friends and followers on social media and in your extended network, you’re going to have to invest in some serious marketing might. Many of the successful crowdsourced real estate deals relied on heavy-duty marketing budgets—thousands or even tens of thousands of dollars—just to get the word out. Without some major online traction, chances are your project won’t get funded.
There also tend to be hefty legal and administrative costs associated with crowdsourcing business deals. Given the evolving laws and regulations in place, it’s essential to work with an expert to ensure you’re following the right steps every time. A violation could blow your entire budget and, likely, your entire deal.
One final drawback? Even done perfectly, crowdsourced deals take time—something we don’t always have in this industry. If you’re trying to close a deal in the next few days or, even, weeks, this might not be the right path for you.
But that’s not to say no one gets funded successfully. A commercial project at 17 John Street in New York City raised about $25 million of its initial $85 project costs through crowdsourcing. In Indiana, a company traded equity in a multi-unit apartment building in exchange for investors. Their crowdfunding campaign solicited investments of at least $5,000, and the company generated close to $9 million.
How To Get Funded
There are a number of ways to set your crowdfunding campaign up for success. For starters, be sure you’re choosing a good, reputable platform for your project. While there are hundreds of crowdfunding sites out there, no two are created the same—and that means you’ve got to do some due diligence before submitting your application. A real estate-focused site may be more welcoming, but it may not have the traction or the name recognition to get the job done. And, likewise, a major platform may be a household name, but its users may not be as welcoming to real estate investors—in a sea of charitable initiatives and passion projects, your business deal could really stand out. And not in a good way.
It’s also important investors get something out of the deal. Like I said earlier, the investment company in Indiana gave each participant a small equity stake in the company. I’ve seen others do that for a limited period of time—the first year or two or, even, a year or two after the project is in the black. It doesn’t have to be equity either. I’ve seen people offer gift cards, premium items or truly one-of-a-kind perks—naming rights to some piece of the project, a plaque on a bench in the common space and more. It’s up to you, but know that the more value you lend, the more likely folks are to open their wallets.
So what’s my take on it all? I think it’s a really interesting business proposition, for entrepreneurs, startups and real estate investors. If you can find the right platform, present a thoughtful case for your project, shore up some real value for your crowdsourced investors and put some marketing power behind your campaign, then crowdfunding can be a great way to get the job done on your terms. And, unlike other funding sources, crowdfunding comes with one massive perk: you don’t have to pay it back. The money you raise through these campaigns is earmarked for that proposed deal. You’ll want to show your investors what you did with those funds, of course, through periodic updates, photos and other “insider” information. But, except for the perks you layered in to entice investors, there’s no repayment needed.
It’s something we’re exploring more and more at the Nick Vertucci Real Estate Academy (NVREA) because, again, it’s something that I believe will be a bigger piece of the investing landscape soon enough. What’s 1% of the deals now will only grow, I’m sure, and my goal is to make sure Academy graduates have the foundations they need to not just succeed today but also have a leg up tomorrow. So enroll and let’s talk funding—traditional, non-traditional and, now, very non-traditional methods to get even more deals done.