FREE TRAINING
What is Real Estate Crowdfunding?
Learn how to build wealth and earn passive income in real estate while someone else does all the work.
204 Ben Miller, Co-Founder, CEO Fundrise
Ben Miller, Fundrise
Related Article: What is a REIT?
The First ‘Mini IPO’ and Regulation A+ Origins
It was from a background of being a real estate sponsor, being an operator and having to raise money that the idea of Fundrise was born. Prior to the 2007/2008 downturn, Miller was raising capital from private equity and insurance fund partners, and in 2008 one of his big financial partners, with some $250 billion in assets, went bankrupt.   Coming out of the 2008 recession feeling like there had to be a better way, Miller founded Fundrise with the idea that utilizing JOBS Act Regulations he could raise capital online and not be dependent on the institutional players.
Miller’s work and insights as to why this methodology could be effective predates the JOBS Act by two years.  Together with his partners, he conceived of the idea of raising equity capital online as early as September 2010 and first approached the SEC in 2011 to propose that they permit it.
It was a painfully slow process and essentially the deal was like a mini-IPO . They raised $320,000 at $100 a share a year and it took them almost two years to put all the components together.  In the beginning it was very intensive and slow going but in time they were able to spin it off and scale it, and eventually it became Fundrise – the first company in the industry to be a real estate Crowdfunding platform.
Leaders of The Crowd
Conversations with Crowdfunding Visionaries and How Real Estate Stole the Show
Discover how laws that gave us crowdfunding were solely meant to finance small companies and yet inadvertently opened the doors to allow you to invest in real estate like never before.
Read the book and listen to the actual conversations.
JOBS Act Geared to Tech Companies
Miller’s team concluded just one deal in two years working with the SEC – and this was after they had already bought the real estate. But the deal they worked on was just five six blocks from the SEC's headquarters. The helped, not only the process in some way, but by making it easy for SEC staff to actually see the deal first hand, they became intimately familiar with the concept as a tangible case study. Consequently, the issues were real and immediately apparent to all and this helped to illustrate the concept and flesh out the solutions.
While the first deal took nearly two years to complete, now Fundrise is trying to close a real estate deal a week.  Scaling became possible because Congress and the SEC and the President [Obama] recognized this as an opportunity to innovate. And they did. That said, the JOBS Act was oriented primarily to tech companies and the benefits that have accrued to real estate have been, in a way, accidental yet becoming increasingly influential.
How to Fund Your Deals
7 Steps to Raising Equity Online
Why CrowdFunding Real Estate Works
It is similar to the way that people thought about e-commerce in 2001 when the bubble burst. The market predicted that Amazon could not have that big an impact and their shares dropped 94 percent to around $7 a share – trading today at over $1,000 a share. What makes the impact of crowdfunding so difficult to contemplate, is that lots of things, especially in the modern era where you have technology in particular, are non-linear. That is the nature of a lot of technology.  People tend to underestimate growth rates and the growth in crowdfunding will likely surprise everybody.  Looking out 20 years, it is not inconceivable that all fund raising, all investing, will be, in a way, a form of crowdfunding.
Deal Aggregation
Fundrise has taken to aggregating deals and offering different return profiles and different risk profiles to investors through debt platforms with different characteristics, rather than offering individual equity deals, one by one. In Miller’s eyes, equity investments do not make sense unless you are in a pool vehicle.   Investing in a single deal, say an office building, and crowdfunding it is a disaster waiting to happen. In every deal Miller has been involved in – and this is commonplace across the real estate industry – there is always the need for more capital than originally budgeted. In each case, Miller has made zero percent loans personally. Once you pool these kinds of deals, there are more sources of capital, more diversification, and better cash flow streams.  In short, in a pool there are more ways that you know you can borrow against it if need be.
The Liquidity Premium
Eliminating the Liquidity Premium on Fundrise
Quicker to Raise Capital
At Fundrise they do it in days.
Fundrise is Not Institutional
That is not the culture of tech where there is a relentless drive for change. They are not motivated to because their institutional clients don't necessarily find it attractive.
The Fundrise Model
Carried interest, Miller says, is an incentive for developers to invest recklessly. The ‘natural’ rate of return on real estate is around 12%, but carried interest structures typically require far higher returns for everyone to be incentivized through their carried interests.  In these structures, developers are like a car with only an accelerator because they have such an asymmetric reward system. You have to recognize that even the best of developers will behave in ways that they really should not if it were not for the incentives. And that is why this system blows up.
Fundrise as a Technology Solution
Fundrise basically functions as a marketplace where investors and developers come together to transact. The platform maintains a minimum level of quality where they do not pick winners or losers. That said, unlike the straight venture capital approach which is solely looking for patterns to disrupt, Fundrise has to blend these ideas, as a tech company, with expertise in real estate. In Miller’s words, Fundrise is both a tech company and a real estate company, it has ‘to have a spliced DNA.’
The Next Real Estate Downturn.
Most platforms will blow up unfortunately and Miller worries about how to protect his platform and their investors every day.  During the next recession there will be a wave of opinion that the real estate crowdfunding idea categorically did not work.  And then there will be a few models, a few companies, that will emerge from it proving that it did work. And by that point the industry will probably be 10 years old, with a billion of equity and three billion in real estate or more and will, basically, be institutional.
RELATED PODCASTS
367 Carlos Vigon, CEO and Founder of PaxCap Investors, LLC
Carlos Vigon, PaxCap Investors Identifying and Investing in Distressed Real Estate The Investor Acquisition System: Find More Investors Raise Money Online Finance Your Projects WHITE BOARD WORKSHOP LEARN MORE Carlos…
READ MORE >374 Jay Olshonsky, CEO & President of NAI Global
Last Updated on September 15, 2021 by Dr. Adam Gower Jay Olshonsky, President and CEO of NAI Global Real Estate Distress and Investment Outlook in 2020 and Beyond The Investor…
READ MORE >386 Andrew S. Kane OBE PhD, Chairman of Citizen FBC
Last Updated on December 1, 2020 by Dr. Adam Gower Andrew S. Kane OBE PhD, Chairman of Citizen FBC The Secret Story of the Rich: Raising Money from Wealthy Families…
READ MORE >