The Jumpstart Our Business (JOBS) Act of 2012 introduced equity crowdfunding to the investment space, allowing small businesses and small investors to raise capital and build wealth. Crowdfunding is a new opportunity for non-accredited investors to give capital and receive various returns (like equity, merchandise, or early access) from a company. Since the updates made to Regulation A in 2015, commonly known as Regulation A+, investors have been able to access diverse, profitable, and impactful funds at all levels of wealth and experience. With traditional boundaries to investing and capital lowered, small businesses can be crowdfunded by an unlimited amount of investors.
According to the Massolution Crowdfunding Industry Report, $34 billion was raised through crowdfunding in 2015, which surpassed the amount funded by angel investors. Intertwined with general crowdfunding is socially-conscious crowdfunding. Socially-conscious crowdfunding and impact investing have become popular ways for individuals diversifying their portfolios to give back to their communities. Ventures looking to solve community-based issues can receive support directly from community member and others who care. As the most socially-conscious investors, millennials lead the wave when it comes to crowdfunding, with 50% of them likely to give to a crowdfunded cause and 69% of millennials using investing as a way to express their social values.
Real Estate Attracts Crowdfunding
One way funds and companies contribute directly to communities is by creating homes and housing opportunities for those in need. Shelter, along with food and water, is necessary to survive and thrive. According to Crowdnetic, out of the $870 million crowdfunded between September 2013 and September 2015, real estate led as number one in capital commitments and success rates. Real estate is an attractive asset for non-accredited investors because it has a relatively low risk with high returns, and will always be needed. Given the tricky complexities of real estate deals, there are several real estate crowdfunding platforms that offer to familiarize new millennial investors with various market portfolios and returns.
Well-known platforms among millennial investors include Fundrise and GroundFloor, which allow almost anyone to access Class A or Commercial real estate developments. Class A developments typically include brand-new renovations, new construction, or luxury-grade buildings with higher rents, and therefore, higher returns. However, real estate investors across the world have noticed an oversupply in Class A developments in the U.S. Construction for luxury apartments recently hit a seven-year high, but the rent rates have decreased, ultimately keeping the cost of investing high.
When this is paired with cash-strapped millennials entering the market by the millions, Class B and C properties have gained popularity as more stable, opportunistic investments. Class B and C properties tend to be 10-30 years old with a bit of required maintenance. Instead of being located in “destination neighborhoods”, they are found in areas with the potential to appreciate. This means that investors can acquire properties for less while maintaining a healthy cash flow with sustainable rent, making Class B and C perfect for investment. For investors looking to make a socially-conscious impact, Class B and C markets have the perfect potential to make a change.
Class B and C
Neighborhoods classified under B or C markets tend to house middle-to-low income individuals on an hourly wage. Shopping centers feature local mom-and-pop shops, and sometimes these neighborhoods have an increased rate of crime. Public spaces such as schools, parks, and roads usually need upgrading. Many residents in these areas work multiple minimum wage jobs to support families and don’t have much ability to save due to low wages and constant bills. This makes it very difficult for these families to escape the cycle of poverty and access decent providers for shelters, health, education, etc. Their struggle is often overlooked as a nuisance for luxury investors, despite the appreciation potential throughout the neighborhood. However, if capital is injected in the right places, appreciation of property value can happen much faster and build new amenities and resources in once overlooked communities.
For investors willing to recognize opportunity along with goodwill, there a few real estate project funds that address affordable housing issues and revitalization opportunities. Depending on the fund, investors are offered a variety of opportunities to participate in projects through tiers of investment, educational materials, and networking events. Through these channels, investors receive connections, equity, or direct impact in their community.
The most defining characteristics of a fund include:
- Property type: commercial, residential, industrial, land, single-family, etc
- Type of investment ex. equity or debt investments
- Available markets and target markets
- Fees and distribution schedule
- Accredited or non-accredited investors
- Minimum cost to get involved and ways to fund investment
- Value received: increased earnings, network community, education, impact
A few socially-conscious funds financial and community-based returns in the real estate industry include SmallChange, the Tulsa Real Estate Fund, Buy the Block, American Homeowner Preservation, and Housing Joint Venture. To maximize the value investors receive, some funds offer education or networking events, but for new, socially-conscious investors wanting to learn the ins and outs of real estate investing, there are limited options with a guided course to becoming a real estate investor. See below why Housing Joint Venture stands out.
SmallChange.com provides real estate offerings that innovate cities for the better. Offerings on Small Change must score at least 60% on their Change Index, which uses metrics such as public transit access, environmental impact, and job rates to measure viability. Projects include coworking/mix-use spaces and opportunity housing.
TulsaRealEstateFund.com offers shares and equity in real estate assets acquired or managed by the fund. After a minimum $500 investment, investors of all levels can access rehabilitation projects in Oklahoma, Louisiana, and New Jersey. Inspired by the horrific events that destroyed Black Wall Street of Tulsa, TREF is the first 100% black-owned Tier II real estate fund.
BuyTheBlock.com is a platform for entrepreneurs to post crowdfunding offers to the community. The platform does not have a specific housing market focus but offers a variety of minority-owned opportunities. The fund focuses on building generational wealth in historically neglected communities.
American Home Preservation (ahpfund.com) uses a minimum investment of $100 to purchases mortgages from those who are at risk of losing their home to foreclosure. Founded during the Great Recession of 2007, AHP’s impact focus is toward individual families throughout communities.
HousingJV.com is a full-service real estate investment platform that provides education for impacting communities and building long-term wealth. HJV has three affordable membership tiers that include a community network, access to growing markets, and events. HJV is a full-fledged developer and property manager for all projects, and also offers loans for residential properties and community partnerships.
The Value Perfect Mix
The new golden eggs of investment are real estate funds with a social impact value. While well-known funds can be easy to access for new, millennial, investors, they don’t specifically cater to the rise in social motivations of the new investor class. Affordable housing in increasingly expensive markets or renovation on broken-down public spaces are becoming key in driving long-term wealth for minority generations. Regulation A+ funds are becoming a more common way for real estate developers to break-ground, while community leaders are using funds to create an impact right in their community.