What to consider with real estate crowdfunding

The purpose of real estate crowdfunding is to make it as easy to invest in buildings as it is to invest in stocks or bonds.

And a lot easier than it would be to buy and manage an investment property.

That headache is not necessary now that technology and new federal rules have pulled down barriers to investing in real estate online. Further, companies like ours now offer online access to big pieces of real estate, such as apartment and office buildings, that reap strong returns with no hassle and lower minimums.

And if you're selective about the platform you choose, behind that investment will be a team of experts who do nothing but scour the country for great real estate at great prices - and handle the roof repairs and window replacements.

Most investors probably are not familiar with new real estate crowdfunding sites, but they have heard of Kickstarter, a site that uses the Internet to solicit millions of small donations for projects and products. What project backers get on that site is essentially the right to pre-order the product plus the satisfaction of supporting a small business or artistic endeavor.

What Kickstarter backers don't get is an ownership stake in the small business itself.

That's because selling a stake in a business online wasn't legal until very recently. The federal law that enabled it, a post-recession economic development effort known as the JOBS Act, was passed in 2012 and went into effect in 2013. Final rules weren't adopted until October, but that didn't stop the industry from taking off.

Real estate crowdfunding brought in more than $1 billion in 2014 and is expected to bring in more than $2.5 billion this year, according to industry research firm Massolution.

It's going to grow faster in the next few years for three reasons.

First, those rules adopted in October allow anyone to participate, not just people who meet certain income or wealth requirements.

Second, the alternatives to investing in privately held real estate are really poor. The most popular way to access privately owned commercial property is called a non-traded REIT (real estate investment trust); they come with high upfront fees and little transparency. Try finding out how an individual property in a non-traded REIT portfolio is performing. Just try.

Third, the crowdfunding industry is offering access to investment opportunities that were roped off to everyone but the ultra-wealthy, pension funds and endowments.

That doesn't mean this is for everyone. On our platform, origincapitalpartners.com, we are maintaining income requirements: $1 million net worth apart from the primary residence or $200,000 in annual income for the past two years. For couples, it's a combined annual income of $300,000 for the past two years. Why are we keeping such high barriers?

Consider our first crowdfunding opportunity, the 264-unit Iroquois Club apartment complex in Naperville, which is available online now. The anticipated hold period for the Iroquois Club is five years. Along the way we will return any cash generated by the property to investors, but they won't get their full investment plus profit back for approximately five years.

Generally, wealthier individuals can afford to have a portion of their portfolios in an illiquid asset. We want to make sure our investors understand this and can afford the advertised time horizon.

Other sites have lowered these barriers and also offer smaller opportunities with much lower minimums. Origin's minimum investment is $25,000, down from $500,000. That's because we, in conjunction with a partner, bought the Iroquois Club for $38 million.

So as this type of crowdfunding gains steam, here are some questions to ask.

How long has the firm been in business? What is its track record? How much of the crowdfunding platform's return is performance-based vs. fee-based? In other words, do they make money when you invest in the property, regardless of the property's performance, or only when the property makes money?

Does the site simply market other developers' or real estate firms' deals? Or do they manage the real estate themselves?

Do they tell you you're going to get your money back fast? And what are the fees?

Most importantly, ask the CEO of the company marketing the investment, how much he or she is investing in the property? Is a number such as 3 percent truly meaningful?

We know this still may sound risky, but we believe crowdfunding is the future of investing. Just like many of us never imagined buying shoes online - how would we know if they'd fit? - or using an app to hitch a ride in a stranger's car, people are beginning to invest large sums in real estate directly online.

If you're still skeptical, wait, watch and research. Or pick a property in your backyard that you can monitor, say, in Naperville. We just happen to have one available.

• Michael Episcope is the cofounder of Origin Capital Partners.