Investing in real estate can seem like a daunting task without working knowledge of the industry. There are several ways to get started in real estate investing, many of which have traditionally been accessible only to those highly connected to the deals, the exclusive “old boys’ club”. Marketplace lending (also known as peer-to-peer (P2P) or real estate crowdfunding (RECF)) has taken the spotlight lately as a premier passive real estate investment style open to the crowd.
Investing through Marketplace lending is a great way to become acclimated to the crowdfunded investment process. While zeal for the industry grows, it is important to remember that there are regulations dictating eligibility for real estate crowdfunding investment, for Sharestates the foremost being that an investor must be accredited.
What Does it Mean to be an Accredited Investor?
The requirements for being an accredited investor are defined by the U.S. Securities and Exchange Commission. The intent (according to the helpful definition provided by Investopedia) is to assure investors “are financially sophisticated and have a reduced need for the protection provided by certain government filings”.
The basic requirements for an individual to be considered an accredited investor are:
- A consistent annual income exceeding $200,000 (or a joint annual income of $300,000 or more if married).
- A net worth of $1 million or more, excluding the value of primary residence.
In the case of crowdfunding platforms, investors will be asked to assert that they meet this criteria.
Consequences of the JOBS Act
As previously covered in our blog post about changes to the JOBS Act, there are more updates which take effect on May 16, 2016 allowing real estate crowdfunding platforms to include non-accredited investors. This means that the investment options for those who do not meet accreditation requirements are expanded. There are still some rules that will heavily regulate investments for the non-accredited investor:
1. In a 12-month time period, startups cannot receive more than $1 million in total investments from non-accredited investors.
2. Non-accredited investors are not permitted to invest more than $2,000, or 5% of their annual income if that income is less than $100,000.
The reason that the SEC heavily regulates investments is to ensure all investments are safe for the platform as well as the investor. It is to the benefit of the investor and the health of the industry that the SEC keeps investment options controlled.
The JOBS Act Title III opened marketplace lending to non-accredited inventors but with very specific rules. One of those rules limites raises to $1M or less. Sharestates loan sizes are much larger than $1M. Title III also requires audited financials for raises over $500,000 and most short term real estate holdings to not have audited financials. These are only two of the stipulations that currently prevent Sharestates from opening its loans to non-accredited investors. To learn more about the Title III stipulations visit sec.gov.
Transparency of Real Estate Crowdfunding Platforms
You may be asking, what’s in it for me? Why do I have to adhere to these strict investment rules? Aside from the previously-acknowledged security that comes with industry regulation, investors can expect additional transparency commitments from real estate crowdfunds. In other fund-based real estate investments, investors can simply designate how much they would like to invest into real estate with no knowledge of where exactly the funds were going. Marketplace lending has changed this completely. Now, investors can select the very property that they want to invest in, as well as review documentation regarding that property.
Investors now have the option to view rehab budgets, purchase contracts, appraisals, and any other public information associated with the investment property. It is clear that real estate crowdfunds have the same commitment to their investors, as the investors have to the platform. This fosters a lasting relationship that can be seen in the repeat users of each platform. As marketplace lending grows, regulations will grow and change as well. This is just the very beginning of an industry that is here to stay!