Crowdfunding. It has worked for everything from artistic projects to disaster relief efforts, so why not investing?
While real estate finance and investing is largely limited to high net worth investors, the internet is changing the paradigm, allowing crowdfunding efforts to solicit funds from the general public. With the introduction of crowdfunding to the real estate market, the industry is poised to become more democratic in nature. While it’s impossible to predict the exact impact crowdfunding will have, choosing to fortify your portfolio with real estate investment trusts (REITs) could prove to be a durable dividend.
The benefits of REITs include, but are not limited to:
- Tax status. REITs have a unique tax status that is beneficial for investors across the nation. When President Eisenhower signed the REIT Act, he paved the way for investors to diversify their porfolio with large assets. Exempt from paying corporate income tax on qualifying moneys, REITs are investor-friendly.
- Unconventional value. The value of REITs is intrinsic to its income stream or the dividens paid. Unlike traditional investments and stocks, this means that a portfolio can be balanced with a more steady and reliable income.
- Security. It’s the goal of every investor to minimize uncessary risk while growing and creating durable assets. While there are uncertainties in fiscal cliff storms, investors can trust the security that REITs provide in their investment portfolios.
Despite the benefits of REITs, the introduction of crowdfunding to the real estate market is sure to fuel the debate over the value of private real estate investments versus publicly-traded REITs. The public offering featuring the Empire State Building for investment trusts is only expediting the shift in the market, where crowdfunding becomes a new portal for investors.
Understanding the Impact of the JOBS Act of 2012
Perhaps the largest impact in the real estate industry as far as crowdfunding is concerned is the JOBS Act of 2012. This allows licensed providers to sell securities via the internet to investors. While direct real estate investments traditionally have an entry price tag of $50,000 or more, crowdfunding allows investors to claim a slice for $5,000 instead.
While REITs and private equity account for a tremendous $1+ trillion in assets, crowdfunding is poised to re-write the rules in real estate once the JOBS Act is fully implemented. Here are some of the ways crowdfunding could impact the market:
- Localized trends. Crowdfunding gives investors the opportunity to invest in their own neighborhoods instead of turning to Wall Street. Currently, most people are invested remotely with nothing local, but this could change.
- Increased access. As direct participation is offered to millions of potential investors through the application of the JOBS Act, higher returns may be realized through institutional capital providers.
- Revitalized market. While crowdfunding itself won’t change the housing market, the shifting rules and application of democratic values have infused new energy into an otherwise stagnant industry.