The power of real estate crowdfunding continues to be realized by investors, borrowers and real estate developers across the country. But, as you might have discovered, each platform has its own unique characteristics. Some choose debt-based real estate crowdfunding, while other choose equity-based deals.
Today, we’re going to break down the differences between equity-based and debt-based real estate crowdfunding, and delve a bit deeper into why some of the top real estate crowdfunding platforms are choosing the debt-based avenue.
Equity-Based vs Debt-Based Real Estate Crowdfunding
For a company like Patch of Land, the decision to go the debt-based route started as a personal one. Starting the company, I believed that it was possible to be able to earn a profit while helping to rebuild surrounding neighborhoods that were in dire need of revitalization. I also knew that this project couldn’t be a success alone, and instead we wanted to pool resources together from different colleagues, and investors interested in the Chicago area.
Unfortunately, at the time, general solicitation was illegal. Rather than throw in the towel, I lobbied alongside US Congressmen McHenry and Dold. Ultimately, Title I and Title II of the JOBS Act was passed, and Patch of Land was able to be founded.
In the early stages of development, Patch of Land had to make the decision between equity-based crowdfunding and debt-based crowdfunding. Equity-based crowdfunding allows an investor to own a share of the company they’re investing in. Usually, this was a long-term investment that needed time to mature. Whereas debt-based crowdfunding was essentially a short-term opportunity that could yield returns on average of 10-18%!
Patch of Land’s decision to pick debt-based crowdfunding was based on a few factors. First, for them, debt-based crowdfunding just made more sense for what they wanted to accomplish. Second, they believed that it was the largest, most lucrative and secure market to play in. Third, they preferred the relative security of a fixed term and a fixed return, something only possible through a loan. These factors played a big role, as they created a new and innovative way to bridge traditional lending with new advances in alternative lending.
By choosing this route, Patch of Land was also able to fill a void that construction developers were facing, as new roadblocks continued in the loan approval and funding process. Developers were being turned down for loans, as well as taking longer to get approved, and the process was difficult to complete. Developers were missing opportunities and they began searching for alternative lending solutions to traditional methods of financing.
Patch of Land believes that by granting loans to developers looking to rehab property, they help with growing communities, creating jobs and ultimately stimulating the economy and more particularly the housing market. This is an opportunity to create a platform where accredited investors could invest in real estate projects all across the country, and become national real estate investors.
New investment opportunities are just a few clicks away. Developers are getting their deals funded faster, and investors are earning interest payments almost immediately after their funds clear escrow. Patch of Land has taken many things into consideration as we continue to be a pioneer in peer-to-peer lending and also by being one of the first companies to prefund our own projects.
Jason Fritton, CEO and Co-Founder, Patch of Land
Jason leads operations, ensuring that the Company's due diligence practices and client services are best in class. Jason has been involved with crowdfunding legislation since the beginning and worked with Congressmen to lobby for the crowdfunding exemptions that were written into the 2012 JOBS Act. He is a graduate of Cornell College and studied molecular biology, philosophy, and history.
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