It may have seemed unremarkable when Beverly Hills real estate company Realty Mogul Co. invested in five Baldwin Hills apartment buildings last month in deals that totaled $15 million.

But it was remarkable because of this: They were financed through crowdfunding.

Realty Mogul gathered the money online from hundreds of investors who each contributed a minimum of $5,000. It is one of several real estate startups that have launched in the last two years – and apparently the first in Los Angeles – whose aim is to offer equity opportunities to small-scale investors through online platforms.

In the last six months alone, at least three West Coast companies have joined Realty Mogul in the space: RealtyShares.com and GroundBreaker Inc. of San Francisco, and CrowdStreet Inc. of Bend, Ore. Asset Avenue, a second Beverly Hills company with a similar business model, is expected to launch by early April.

The advent of crowdfunded real estate investing came when the Jumpstart Our Business Startups Act, commonly referred to as the Jobs Act, was signed into law nearly two years ago. The act contains a provision that became effective late last year allowing investment promoters to advertise and solicit money from accredited investors, those with a net worth of at least $1 million or income of $200,000 or more. Another provision expected to go into effect this year would allow those with lower net worth and income to invest as well.

For the real estate industry, that meant democratizing the investment pools. Institutions and other deep-pocketed investors now can be supplanted by middle-class folks willing to risk a few thousand dollars. It also means real estate firms might be able to attract money for projects that institutions bypass.

Newport Beach developer David Pittman, whose Acacia Real Estate Group Inc. posted a project on GroundBreaker in late December for which it hopes to raise $5 million, said he opted to try crowdfunding after traditional equity sources didn’t pan out. He wants to build a 265,000-square-foot for-sale industrial development in the City of Industry.

“I’ve been sort of frustrated with the current equity market,” he said. “We’ve been working with a number of major real estate investment banking groups, and they just weren’t able to provide an equity source for the kind of speculative product that we envision, even though there’s a huge demand for this type of product. Most of the capital out there has been earmarked for big-box, for-lease industrial.”

Despite being cheered by the opportunity to tap new funding sources, Pittman is only cautiously optimistic about the crowdfunding model.

“I was hesitant at first, and somewhat skeptical that this would work – and quite frankly I’m still not sure that it’s something I’m 100 percent sold on,” he said. “But what I’ve come to realize is it’s an opportunity for me to expand the potential for investors and to accentuate the brand of our company.”

Model investment

The way the crowdfunding companies facilitate investments varies, though many follow a similar model.

Realty Mogul gives investors the option of taking a long-term equity position or a short-term debt position.

With equity investments, which make up the majority of its business, Realty Mogul acts as a digital version of a real estate syndicator with a fat Rolodex. The company connects with and vets real estate entrepreneurs who have a property under contract and need additional equity to close escrow. It then presents the investment opportunity to its pool of smaller investors by posting details online, where anyone who meets Securities and Exchange Commission accreditation standards can browse and invest.

Realty Mogul typically takes three to four weeks to raise the money, which is collected via electronic funds transfer through the website. Once the investment is made and the property purchased, crowdfunding investors are paid preferred returns, which are like dividends, on a quarterly basis. They also share in any appreciation once the property is sold.

Realty Mogul makes money by charging an annual fee of 1 percent to 2 percent of the total money raised.

Jilliene Helman, who along with Justin Hughes co-founded Realty Mogul, said she saw the potential in reaching smaller investors even before the solicitation and crowdfunding provisions of the Jobs Act became effective.

“Investors are looking everywhere for yields,” Helman said. “Banks are paying less than 1 percent and there’s been a lot of volatility in the stock market, so I saw an opportunity to bring real estate investing to a broader scope of investors.”

Helman, 27, who was a vice president at Union Bank, where she worked in real estate finance and wealth management before starting Realty Mogul, said the company focuses on bringing properties to investors that will provide steady income and maximum returns.

“We invest in a variety of property types – apartment buildings, retail shopping centers and self-storage facilities,” she said. “But we’re looking for transactions that can provide a distribution from rental income on a regular basis.”

David Manshoory, who will launch Asset Avenue after 10 years in commercial real estate, said he will take a different approach.

“I’m noticing that a lot of these crowdfunding platforms are focusing on a specific type of asset, some residential, some residential and commercial. I’m focusing on high-quality commercial assets,” he said. “I’m leveraging my deep network of contacts to source a quality of deal that I haven’t seen online yet.”

Manshoory’s preference for high-quality commercial assets hits on a characteristic that has come to define the real estate crowdfunding space thus far: The majority of deals that populate online investment platforms tend to be on the smaller end of the real estate spectrum.

On its website, that’s something Realty Mogul touts as a good thing and one of the biggest differences between investing in a crowdfunded property and investing in a real estate investment trust.

“REITs are such large entities that they can rarely participate in many of the smaller investments Realty Mogul will be including in the marketplace, such as smaller retail centers and multifamily buildings,” the site reads.

Another important difference between a REIT and crowdfunding, said Joey Jelinek, chief executive of GroundBreaker, is control.

“It’s really a question of how active you want to be in managing your money,” he said. “Institutionally managed money is definitely not going away, because there’s always going to be a body of people who want to have other people invest their money for them. But plenty of people want to manage their money themselves.”

But that, of course, can be a risky proposition, even for experienced investors. There are plenty of downsides, of course. Unlike a REIT, where investors’ money is spread around, a crowdfunded project concentrates investors’ cash in one project or several small ones.

David Lari, a partner at Century City real estate law firm Cox Castle & Nicholson, said that while crowdfunding allows more people greater access to real estate deals, there is potential for fraud or abuse of investors who might not know exactly what they’re getting into.

“At the end of the day, they’re really catering to folks – investors – who are not necessarily real estate savvy,” he said. “I would worry that the amount of information that’s disseminated to investors may not give them a full, true picture. It becomes a question of: How well is each property investment disclosed?”