How will new real estate crowdfunding rules affect agents?

by Chip Bell

Ron Miller StartEngine

Ron Miller is the CEO of StartEngine.

Chicago Agent (CA): What is the significance of Title III crowdfunding in regards to the real estate market?

Ron Miller (RM): The significance of Title III is that it’s really the first time in 80 years that non-accredited investors, as well as accredited investors, can now become investors in passive real estate opportunities. Prior to Title III, only rich people were able to participate in real estate investing.

CA: So this is sort of giving an opportunity to the “little guy”?

RM: That’s exactly right.

CA: And when people are investing in crowdsourced properties, what kind of return are they getting? Or are they getting any at all?

RM: It’s a little bit too early at this point to show with any empirical data what the returns will be from Title III-type real estate investments – only because the statute and rules went live in the middle of May. It’s much too early to be able to determine that. But the difference between real estate crowdfunding and something like Kickstarter is that here the investor gets equity, or ownership, in the deal versus with Kickstarter all you do is get a product or a t-shirt. So that’s probably the main difference. In regards to projected returns, I would expect them to be roughly similar to what accredited investors have been getting through passive real estate investments. So just as an example: I am an accredited investor, and I have been investing since the late ‘90s in mobile home parks, self-storage and other types of passive real estate investments. And typically, my returns average about 12 to 14 percent; and there’s some deals that I’ve made that pan out to 30 or 40 percent; and there’s some deals that I’ve lost completely. But on the whole, I’m averaging somewhere in the 12 to 14 percent range. And I would expect to see non-accredited investors achieve similar returns under Title III.

CA: Do you see Title III and crowdfunding, as it relates to real estate, fundamentally changing how builders and developers finance their projects?

RM: I don’t think so – at least not right away. I think, perhaps, in the future it may have a material impact. But at least initially it will begin with developers and real estate operators putting together investment opportunities for people from non-accredited and those accredited people to invest in real estate deals. That’s where it will start. One of the challenges of Title III is that the whole process generally takes two to three months from the time you create a campaign, execute and get the cash. And that’s pretty hard, as far as purchase money goes, to lock up a property for two or three months and then see whether you get funding. So I think that limitation itself is going to be pretty tough, because it doesn’t necessarily align with the natural timing of what needs to take place in a real estate transaction.

CA: What impact will Title III have on traditional lenders?

RM: I think it’s a long way off before it has any material impact on lenders.

CA: As far as real estate agents go, what should their key takeaway from Title III be?

RM: This is an opportunity for real estate developers and entrepreneurs to raise capital to achieve their vision. Once someone identifies a property or project they want to work on, they can take advantage of these new rules to raise the capital necessary to both acquire and redevelop it (to improve the property’s value).

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