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Real estate projects are often financed through the deep pockets of wealthy investors. But what if there was a more democratic way, with a range of individual investors contributing small amounts to help get a project off the ground?

This type of investment, known as crowdfunding, has long been used to raise funds in other industries, particularly arts. Film producers, theatre directors, musicians and more have all benefited from this revenue source, in which several small investors pool their funds together to finance a project. Now it seems this democratic form of investment has spread to the real estate sector.

Within the tech industry, startups with a real estate crowdfunding focus are starting to appear on the scene. One of these new businesses, US-based Realty Mogul, recently announced that its 6000 members had invested $14.6 million in real estate projects worth more than $100 million during its first year in operation.

How does it work?

Crowdfunding allows individual investors to buy shares in commercial projects such as apartment buildings or retail complexes. This means investors do not have to deal with the daily management of the property since they are not investing in the entire project.

The process is quite different from investing in a real estate investment trust (REIT). Usually, those investing in trusts cannot allocate their funds to specific developments, as the trust decides how the money is distributed. Crowdfunding also allows individuals to invest in smaller local developments, rather than the large projects common to REITs.

Who can invest?

There are limits to who can invest in this way. With Realty Mogul, for instance, investors must be accredited. This means they need to prove a minimum annual income of $200,000 or a net worth of $1 million. And their investment is only locked in once the project is fully funded.

Regardless, crowdfunding is rapidly spreading through the real estate industry, including the hotel sector. Just last week, the Hard Rock Hotel Palm Springs in California announced it was selling stakes in the 163-room luxury resort to individual investors. The offer comes with some pretty good perks too, such as room upgrades and discounts. Expect to see more crowdfunding investment opportunities pop up in the second half of 2014.

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