Quick answer: Commercial real estate crowdfunding might be the right route if you want to use less capital and prefer a more hands-off approach. But if you want more control over the property and are willing to invest more capital, direct ownership is worth considering. Private Capital Investors can be your financing partner if you decide that direct ownership is for you. When you work with a direct lender like PCI, it’s easier to secure the capital you need to fund your commercial real estate project.
Crowdfunding and direct ownership are very distinct ways to invest in commercial real estate. To know what’s right for you, you need to understand what each route asks of you financially and operationally.
What are the essentials I need to know about CRE crowdfunding?
In commercial real estate crowdfunding, you’re pooling your money with other investors to invest in a property. You won’t usually meet the other investors in person or find out who they are because a third-party investment company acts as the intermediary between the investors and the property investments.
That investment company brings capital from you and other investors together to reach a target equity amount, which it then uses to move ahead with the transaction. This may involve acquiring a value-add property and making improvements designed to increase its income or value. If the company fails to raise the target amount, the deal may not move forward. Your money is sent back to you.
One of crowdfunding’s main attractions is its lower barrier to entry. You can invest a much smaller amount than you would typically need to purchase commercial property yourself.
What is direct ownership in CRE?
Direct ownership allows you to purchase and hold the commercial property yourself. You can choose to own it personally or through your business or another legal entity that you control.
This arrangement gives you direct exposure to the property’s income and any increase in its value. Of course, you also take responsibility for the expenses and management that come with owning the property.
Control is the biggest advantage you’ll have in direct ownership: you decide everything, from which property to buy and how to manage it, as well as which tenants to accept and how to finance it.
The property’s income also flows directly to you as the owner. And if you decide to sell, you can put the property on the market when you choose.
How do CRE crowdfunding and direct ownership compare?
The best way to compare CRE crowdfunding and direct ownership is to look at how each one benefits you as an investor.
| Factor | Commercial Real Estate Crowdfunding | Direct Ownership |
|---|---|---|
| Capital Required | You can usually invest a smaller amount in an individual property or portfolio. Minimum investments depend on the offering. | You need more capital to cover everything from the closing costs to other upfront expenses. |
| Control | Your control is limited because you’re leaving most of the property-related decisions to the sponsor or investment manager. | You have much more control, from choosing the property to making decisions about how to finance and manage it. |
| Liquidity | It can be difficult to access your money. In some cases, you can’t pull out your funds until the investment’s term ends. | You decide when to put the property up for sale. |
| Returns | Your returns depend on factors such as property income, sale proceeds, fees, and the distribution terms of the deal. | You receive the property’s net income and sale proceeds after accounting for expenses, financing, and taxes. |
| Risk | You could lose some or all of your investment because you’re dependent on the sponsor and the deal’s legal and financial structure. | You directly take on risks involving everything, such as the property and tenants, as well as repairs and unexpected expenses. |
| Time Commitment | Lower because you’re not actively managing anything. | Higher because you’re responsible for everything. |
What should I know about ‘Regulation Crowdfunding’?
This SEC exemption allows eligible companies to raise money from investors through registered crowdfunding intermediaries.
Note that there are limits on both sides. Companies can only raise up to a certain amount. The rules also limit how much non-accredited investors can put into these offerings.
Not all companies are eligible. Non-US companies are excluded from Regulation Crowdfunding. The same goes for Exchange Act reporting companies and companies that haven’t met certain annual reporting requirements from an earlier Regulation Crowdfunding offering.
What are the investment limits?
How much you can invest through Regulation Crowdfunding can depend on what you are: whether you’re an accredited or non-accredited investor.
- If you’re a non-accredited investor, there’s a cap on how much you can invest across Regulation Crowdfunding offerings during a 12-month period. Your limit depends on your annual income and net worth.
- If you’re an accredited investor, those same investment limits don’t apply to you.
Before buying into a deal, make sure that you understand how long your money could be tied up. You can’t resell securities for 12 months if you got them through Regulation Crowdfunding. However, you may be able to transfer the securities before the 12 months are up in certain cases. For example, you could sell them back to the issuer or transfer them to an accredited investor. Transfers to certain family members may also be allowed.
You also won’t find the same type of investment in every crowdfunding deal. For instance, one offering might involve equity, while another could use a different type of security. So, make sure you know exactly what you’re buying and how that investment can generate a return. You should also understand how you may eventually get your money back before you invest.
How can non-accredited investors invest in CRE?
Through the JOBS Act, you may be able to participate in certain private offerings as a direct investor. You might also have access to Regulation Crowdfunding offerings, depending on your circumstances. Some Rule 506(b) offerings can include up to 35 non-accredited investors, provided they meet applicable sophistication requirements.
Direct CRE ownership is another route no matter your accreditation status. Instead of pooling your money with other investors, you could purchase the property yourself and arrange the financing you need to complete the transaction.
This is where you can turn to direct lenders for support through bridge or hard-money financing, so you don’t have to borrow through a traditional bank.
How does financing work with crowdfunding vs direct ownership?
In crowdfunding, the sponsor typically arranges any financing used for the property, so you usually won’t be dealing with the lender yourself. If you buy CRE directly, financing becomes your responsibility. A direct lender can extend bridge or hard-money financing to complete the purchase if you need more flexibility than a traditional lender can give you.
| Comparison Point | CRE Crowdfunding | Direct Ownership |
|---|---|---|
| Who arranges the property financing? | The sponsor or deal operator typically arranges any financing used for the property. Individual crowdfunding investors usually do not negotiate directly with the lender. | You arrange the financing yourself as the property buyer. |
| When might a direct lender be involved? | A sponsor may use outside financing as part of the deal, but the crowdfunding investor is generally not the borrower. | A direct lender can finance the acquisition, particularly when you need a bridge loan or hard-money loan to close quickly. |
| Who repays the loan? | The borrowing entity associated with the property is responsible for repayment under the loan terms. | You or your property-owning entity repay the lender according to the loan agreement. |
| What does the lender have a claim on? | This depends on how the sponsor structures the financing and what collateral secures the loan. | The lender will commonly take a lien on the property as security for the loan. |
| How much control do you have over financing? | Usually limited. The sponsor selects the lender and negotiates the loan terms. | Much greater. You can compare lenders and negotiate financing based on the property and transaction. |
Looking for a direct lender?
If direct ownership fits the way you want to invest in commercial real estate, financing is one of the next pieces you’ll need to consider.
Private Capital Investors provides direct short-term loans you can secure for commercial real estate nationwide. Arrange a meeting with us to learn how we can address your financing needs. Call 972-865-6205.
Sources:
- https://www.thompsonhine.com/insights/crowdfunding-basics-regulation-of-crowdfunding-intermediaries/
- https://realwealth.com/learn/what-is-an-accredited-investor-vs-non-accredited/
- https://www.sofi.com/learn/content/real-estate-crowdfunding-explained/
- https://www.kisergroup.com/blog/reits-crowdfunding-or-direct-ownership-what-is-the-best-way-to-invest-in-real-estate/
- https://www.realvantage.co/insights/academy-module-004-topic-001-direct-ownership-vs-indirect-ownership/
