Investors Pool Money Online To Buy Real Estate

The crowdfunding trend — where people donate money through sites like Kickstarter to back projects — has grown quickly. Now investors are pooling their money online to buy real estate.

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And crowdfunding has hit home - literally. Investors are pooling their money together online to buy real estate. And as KERA's Lauren Silverman reports, the first crowdfunded real estate deal in North Texas just closed.

LAUREN SILVERMAN, BYLINE: Since new owners acquired this apartment complex in the Dallas suburb of Mesquite, there have been a lot of changes. Even the ducks living in the pond got a diet upgrade.

LESLIE KUHLMAN: The previous ownership used to feed them three bowls a day of popcorn.

SILVERMAN: These days, it's fresh bread. Leslie Kuhlman, whose company is involved in the deal, says of course the tenants are getting upgrades, too.

KUHLMAN: We've got our playgrounds going in, barbecue grills, exterior kitchens - things like that.

SILVERMAN: This 267-unit complex, known as Trinity Place, will soon be rebranded Park Centre; that's C-E-N-T-R-E. The idea is renovations drive higher rental rates, and that drives higher returns for investors. The new investors, they're not part of your typical private equity group.

BOB GUJAVARTY: I'm Bob Gujavarty, and I live in Austin, Texas.

SILVERMAN: Bob Gujavarty is one of 46 investors who went online to a crowdfunding site called Realty Mogul, to put money into this property. That wouldn't have happened until last year, when the SEC voted to allow companies to use the Internet to sell shares directly to the public. Now, for the first time, real estate developers can market their projects online to so-called accredited investors - people with a net worth of $1 million, or an annual income of at least $200,000.

That means people like Gujavarty can buy into properties for as little as $5,000.

GUJAVARTY: I think it's important to diversify your investments, and I think that's very difficult in real estate.

SILVERMAN: The way the vast majority of small investors use real estate to diversify is through something called a real estate investment trust - a REIT. It's like a mutual fund for real estate. But with those, you choose the fund and pay a management fee. You don't choose the specific housing project. That's where crowdfunding comes in.

JILLIENE HELLMAN: We open up a world that investors historically didn't have access to.

SILVERMAN: Jilliene Hellman is the 27-year-old CEO of Realty Mogul, based in Los Angeles.

HELLMAN: We're allowing them to invest in geographies where they might not have known a real estate company, or might not have known anything about the underlying property. And we're allowing them to invest in different property types as well.

SILVERMAN: Since it started in 2013, Realty Mogul has raised more than $10 million and funded almost 30 properties. More than a dozen online platforms for crowdfunding real estate have launched in the past few years. The thing is, they're a lot riskier than a REIT fund.

PETER CHINLOY: It's a good thing if you know what you're doing, and it's a bad thing if you don't.

SILVERMAN: Peter Chinloy is a professor of real estate and finance at American University.

CHINLOY: Certainly, one of the good things is that some of the transaction costs are removed, but then the bad thing is that you are on your own. So this is really a buyer beware type of investment.

SILVERMAN: Most of the investors in that apartment complex in North Texas have never physically seen it. Bob Gujavarty, in Austin, says he scoured the prospectus online, even called up the founder; but he didn't drive up to inspect the property.

GUJAVARTY: Realty Mogul certainly could have been a scam. I did as much due diligence as I could, but I think all investments entail some risk and hopefully, this turns out well.

SILVERMAN: Jilliene Helman, of Realty Mogul, admits crowdfunding can be a risky game.

HELLMAN: Fundamentally, crowdfunding is a bad idea. And I am the CEO of a crowdfunding company. And that may sound absolutely insane for me to say, but there are going to be thousands of crowdfunding companies that come up, and there's going to be investors who invest with those companies, and they're not all going to survive.

SILVERMAN: Although companies like Realty Mogul are still only allowed to do business with accredited investors, the SEC is considering opening sales up to non-accredited investors - your average Joe on Facebook or Twitter. That could spawn a real-life Monopoly game for the masses.

For NPR News, I'm Lauren Silverman in Dallas.

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