Real Estate Crowdfunding Hits Stride; $150M+ Fund Proves Its Power
Five years ago, Congress passed the landmark Jumpstart Our Business Startups Act (JOBS Act) which allowed startups and smaller businesses with innovative ideas to raise capital more easily. Its provisions loosened advertising regulations that had been in place since the great depression, allowing companies to openly market private investments to the general public.
One positive jumpstart, thanks to the JOBS Act, has been in private equity real estate, bringing new ideas to the established world of real estate syndication, where many high net worth investors (HNWI) pool their funds to buy properties. Real estate crowdfunding is really property syndication 2.0. Origin Investments and other forward-thinking firms have thrived in a challenging private equity market by embracing the newfound ability to crowdfund for their commercial real estate investments.
How Has Commercial Real Estate Investing Changed?
Origin’s commercial real estate transactions in the past were limited to private placements with no more than 100 HNWI partners, but the JOBS Act allows as many as 2,000 HNW investors in a single LLC. We can also offer HNWIs a lower minimum investment of $100,000. The result has been a fundraising success; we recently surpassed $125 million in commitments for Origin Fund III and are moving towards our $150 million target.
Our track record of net realized returns, which has consistently exceeded our conservative estimates, has helped us attain this goal. Our first two real estate funds are projected to generate more than 25 percent annualized net returns and place in the top quartile of Preqin-ranked funds, and our third fund, set to have its final close in June, should yield similar returns. Not all platforms have this kind of success: “there are more than 125 places for investors to lose their shirts in real estate crowdfunding,” Bloomberg noted.
Origin sets itself apart from other crowdfunders by finding, vetting and acting as the asset manager for all its commercial real estate deals, and as principals, David Scherer and I put up our own money alongside our investors. But the JOBS Act, which enabled the kind of smart marketing and lower entry points that have made digital fundraising possible, has resulted in three benefits for the commercial real estate market:
1. More Choices For Investors
Good properties are hard to find and costly. A single project in growing rental markets like Chicago or office markets like Raleigh-Durham costs tens or hundreds of millions of dollars. Those price tags are a stretch even for high net worth individuals or families, and analyzing and executing the deals can also prove daunting. Now, companies can market their offerings to a wider circle, allowing accredited investors to participate in the same type of high-quality investments afforded by pension funds and large institutions.
2. Speed in capital markets
Bringing investors into a real estate syndicate takes time. Most deals are put together through referrals from other investors. But the JOBS Act allows us to use online crowdfunding to attract accredited investors more quickly. This strategy helped Origin raise $10 million in one week from a geographically diverse group of high net worth individuals.
3. Better quality deals
High net worth investors now have greater access to high-quality commercial real estate properties in fast-growing markets. Origin puts “boots on the ground” to place experts in these markets who can cultivate relationships with property owners and buy at the right price. Making this information, and past performance, readily available allows high net worth investors to tap into these opportunities.
When the JOBS Act took effect, internet analyst Larry Downes called it “crowdfunding’s big-bang moment” in the Harvard Business Review. The shockwaves have spread far beyond startups as the flexible and efficient marketing the JOBS Act has enabled with crowdfunding has aided many investors and businesses—and democratized commercial real estate investing, Massachusetts Institute of Technology pointed out.