4 indicators that top real estate crowdfunding platforms will grow exponentially in 2016
January 27, 2016: Real estate crowdfunding is on the rise and is inarguably the hottest sector within the crowdfunding industry in the United States. In 2014, a total of $1 billion was raised through #realestatecrowdfunding platforms alone. This amount was expected to increase by more than 150 percent, hitting the $2.57 billion mark by the end of last year, according to the 2015 Times Realty News Real Estate Crowdfunding Report. There were over 230 real estate crowdfunding platforms in 2015, and currently being tracked by Times Realty News. As the crowdfunding industry continues to experience rapid growth, Realty Mogul, Prodigy Network, iFunding, Patch of Land and Fundrise have maintained their position as the top crowdfunding platforms for real estate.
As we move into 2016, these platforms will likely quadruple their deal flows to a total of $1.5 billion. This surge of exponential growth will be due to the following reasons:
1. Adoption of pre-vetted deals backed by institutional investors
Top real estate crowdfunding platforms, such as Realty Mogul, are increasingly attracting and forging partnerships with institutional investors. These platforms have identified capital from institutional investors as critical for expanding market share and scaling business operations. Adoption of this strategy has led to a rise in transaction volumes, as well as deal flows. Fundrise has attracted financing from six institutional investors. Realty Mogul raised a total of $323 million from institutional investors last year, according to the 2015 TRN Real Estate Crowdfunding Report. Application of pre-vetted deals with institutional financing strategy is giving top real estate crowdfunding platforms the competitive edge over other platforms, and fueling their growth.
2. Adoption of pre-funded deals backed by venture capitalists
There is a growing trend among top real estate crowdfunding platforms to adopt pre-funded deals as a competitive strategy that enables them to meet the needs of entrepreneurs and developers in the real estate sector. Pre-funded deals allow these platforms to finance developers who need to raise capital fast as a loan guarantee prior to raising funds from #investors online. Leading real estate crowdfunding platforms are progressively using the huge financing from VCs to create loan facilities, enabling the finance of real estate projects. This approach is quickly enhancing their credibility among real estate developers who often need to raise capital quickly to fund their projects. The pre-funded deals strategy is giving top real estate crowdfunding platforms an advantage over other crowdfunding platforms that do not have sufficient cash flow to allow for the pre-financing of projects.
3. Maintain and sustain profitability
Real estate crowdfunding platforms make money through deal flows and transaction volumes. The application of competitive strategies enables these platforms to achieve profitability in a significant way. This is a sign that they will continue to experience exponential growth. Real estate crowdfunding platforms such as iFunding, Patch of Land and Fundrise are tapping the deep pockets of VCs and institutional investors to ensure that their credit lines are sustained. According to the 2015 TRN Real Estate Crowdfunding Report, Patch of Land has already experienced an increased deal flow and rising transaction volumes following the adoption of competitive strategies in 2014. Daniel Miller, co-founder of Fundrise, has acknowledged that embracing competitive strategies, such as pre-funded deals, has altered the growth of Fundrise for the better.
4. Deliberate effort to reduce uncertainty among deal sponsors
Crowdfunding is an innovation that still has a lot of uncertainties, and entrepreneurs are never certain whether their projects will raise the required amount of capital within the set timeframe. Top real estate crowdfunding platforms are moving to address the challenge of delayed deal closings, failed capital targets and the various uncertainties that deal promoters constantly face. Making funding available for deal sponsors when they need it builds trust and makes real estate crowdfunding a reliable source of capital. If maintained, this kind of certainty and effectiveness will spur exponential growth among top RECF platforms in 2016.
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City-based family office, and The Soho Loft Media Group