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Real estate's new frontier: Crowdfunding

Monday, 23 Sep 2013 | 10:44 AM ET
Real estate crowdfunding
Monday, 23 Sep 2013 | 1:22 PM ET
CNBC's Diana Olick reports that real estate crowdfunding is about to get easier and looks at Fundrise, which connect investors and projects.

It's worked for films, political candidates and disaster relief, so why not real estate? Crowdfunding, the act of soliciting funds from the public, most recently via the Internet, is already a powerful tool, but, until today, was difficult to do in real estate.

Developers were restricted from marketing projects to the public. Real estate finance was largely limited to high net worth investors and private equity firms.

(Read more: Crowdfunding college and other clever ways to cut costs)

Today, that restriction disappears, thanks to the Jumpstart Our Business Startups Act, or JOBS, passed in April 2012. Now developers can advertise and market their projects to so-called, "accredited" investors, or those with a net worth of at least $1 million and an annual income of at least $200,000.

Carrie Bottomley | E+ | Getty Images

It's exactly what Washington native Ben Miller has been waiting for. He and his brother Dan founded Fundrise, a company that facilitates crowdfunding for local real estate development. The brothers actually started two years ago, wrangling through a little-known exemption in regulations. They found Regulation A, which allowed them to market to unaccredited investors, as long as those investors were local and could utilize the projects themselves. It was very complex and limited, but it was a start.

"I submit my offering to the SEC beforehand, and they review it and clear it," explained Ben Miller, standing in the shell of a crowdfunded building on D.C.'s H Street NE, a transitional neighborhood on the outskirts of Capitol Hill. "We're then allowed to let everyone invest. You don't have to be accredited, and it really fully democratizes the investment in our city."

Fundrise raises money from hundreds of locals, who invested on average $1,000 each. In return, the investors get an ownership share of the building, as well as a percentage of the income from rent and appreciation. They can also get perks, like discounts at merchants in the buildings. Miller is turning the H Street building into what he hopes will be a popular new restaurant, market and bar on a street where flashy new eateries and boutiques are sprouting from empty lots and boarded up buildings.

(Read more: Crowdfunding for medical devices hits Web)

"The public will help you build your real estate, but actually over time you realize that the public is an incredible partner, is an incredible asset. You democratize an investment in real estate, not only do you get capital, you actually get a social power that wasn't possible before," said Miller.

Now that the rules against marketing to investors are gone, Fundrise and others like it can solicit funds far more easily. Owning a part of a building can now be just a click away. In fact, the Miller brothers have already shifted the focus of their business from real estate development to a web platform that will help others use crowdfunding for real estate.

"We've launched now with 50 developers around the country. We're in 16 cities, and the developers are doing all kinds of offerings, all kinds of real estate, urban small towns, skyscrapers, it's really a new form of fundraising, a new form of partnership with neighborhoods," said Miller.

Fundrise is not alone and not the only company that will now benefit from eased regulations. Prodigy network, which raised millions of dollars in small increments to fund a skyscraper in Bogota, Colombia, has now set its sights on a project in Manhattan.

While the JOBS Act lifts the ban on marketing today, another part of it, which allows unaccredited investors anywhere to invest up to $2,000 a year in a real estate company, is still mired in rule-making at the S.E.C. Once that is settled, the door will be wide open for crowdfunding real estate. That could give way to revenue not just from rent, but from refinancing or selling the property.

Like playing Monopoly, which is why some critics say it is too much, too fast.

(Read more: James Franco joins Hollywood's passion for crowdfunding)

"It's risky because there are possibilities of scams," argued Peter Chinloy, a professor of real estate and finance at American University's Kogod School of Business. "I would say that with new construction and with properties that don't exist that's even more of a problem because there's no guarantee that someone can't raise money and never actually see any construction take place."

Ben Miller himself is concerned that this form of fundraising will explode far too fast, much like the dot.com bubble that inevitably burst. When the regulations go into effect that allow all investors, regardless of net worth, to join in crowdfunding anywhere in the country, it could be not just a new frontier, but a new Wild West.

"I'm paranoid about quality, about looking for great developers, normally developers that we work with are the best in every city," said Miller. But he admited, "I constantly worry about other people racing to the bottom."

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

Questions?Comments? facebook.com/DianaOlickCNBC

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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