Crowdfunding “Grows Up:” Q&A with ArborCrowd’s Adam Kaufman
Crowdfunding for real estate investments began in 2012, following passage of the Jumpstart Our Business Startups (JOBS) Act. In 2021, the global real estate crowdfunding market was valued at $10.78 billion, according to data from Polaris Market Research.
Connect CRE recently posed questions to Adam Kaufman, COO and co-founder of ArborCrowd, about crowdfunding’s growing popularity as a viable commercial real estate investment source.
Connect CRE: Why is crowdfunding becoming more acceptable as a real estate capital source?
Adam Kaufman: Before crowdfunding could become an “accepted” source of capital, it required buy-in from multiple stakeholders – sponsors who source and execute the deals, lenders who fund most of the capital stack, and of course, investors. Without buy-in from all three parties, crowdfunding would have remained on the fringes of the real estate industry.
In the earlier years of crowdfunding, sponsors, lenders and investors were not fully aligned. Sure, there were participants in each of these segments willing to test the waters, but that alone could not fuel this source of capital into mainstream acceptance.
As more institutional-caliber sponsors started to enter the industry, its growth accelerated. Lenders noticed that strong sponsors began viewing crowdfunding as a viable source of capital and they realized that they would have to adapt to this reality. Underwriting standards were slowly modified to allow crowdfunding, which resulted in larger more high-profile deals that attracted even more sponsors. Investors continued to get more comfortable as well and began to invest larger sums of money.
We’re at a point today where crowdfunding is no longer seen by sponsors, lenders, or investors as an experiment. We are only still in the early stages of this industry’s massive potential.
Connect CRE: What are the best uses for crowdfunding?
Adam Kaufman: The ability to make passive equity investments in institutional quality real estate.
In the past, if you wanted to build a portfolio of direct real estate investments, such as multifamily homes or commercial properties, it took incredible amounts of blood, sweat and tears. You likely would have had to take a sizeable mortgage and raise money from family and friends. With real estate crowdfunding, you can passively invest in the same type of assets without having to do the same level of work. This allows investors to accumulate a diverse portfolio of commercial real estate holdings.
Real estate crowdfunding can be an excellent alternative to investing in the volatile stock market, which as we’ve seen recently, is subject to major swings in both directions. Many individuals today are interested in investing in institutional-quality real estate because it has historically provided stable income and has been an excellent hedge against inflation, which currently sits at a 40-year high.
Connect CRE: What are some of crowdfunding’s potential pitfalls?
Adam Kaufman: Many real estate crowdfunding platforms were founded by technology entrepreneurs as opposed to seasoned real estate professionals. These tech experts have little to no experience investing in the complex and nuanced commercial real estate market. Many platforms offer investments with flashy returns not backed by strong fundamentals. This poses a risk to investors.
It’s important for investors to do their due diligence on each deal and platform that they are considering. Nothing should be taken at face value, and they should ask questions to fully understand the ins and outs before committing their hard-earned capital. This is especially important given the current turbulent economic environment.
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