When discussing why underserved communities tend to stay that way, insufficient access to capital is the elephant in the room. Traditionally, to secure funding for say, a multifamily apartment building, or a new retail shopping center, one would have to go through conventional lenders, private equity firms, venture capital groups, or independent angel investors.
What all of these groups have in common is their desire to maximize profits, and the fact that they have little to no market incentives to fund sustainable, community-oriented development projects. To get a project off the ground, you need to find a well-moneyed backer to believe in your vision.
This system works well for raising capital for tech firms like Uber and Doordash, but not so well for independent investors who want to help build neighborhoods and communities. Luckily, there is a solution for every problem, and one way that investors and community groups are changing the game is through the use of community capital.
The rich get richer?
When you look at finance as a whole, the best investment opportunities are always available to people who are already wealthy. People who already have the “luxury” of being wealthy can leverage their connections and resources to grow wealth rapidly, while people on the lower end of the totem pole are stuck investing in publicly traded stocks, where companies have already gone through their meteoric growth periods.
Essentially you have a dichotomy where wealthy investors get the best, high-margin/high-return investment opportunities, and the rest of us are left with the scraps- low-return investment opportunities. And so the rich get richer, and the rest of us can barely beat inflation. This isn’t just a theory- the wealth gap in the United States is the highest it’s been since the Roaring ’20s.
Unless we collectively take steps to restore the balance between the wealthy and the rest of us, our cities and communities will continue to suffer from underfunding, crumbling infrastructure, and all of the other social blights that accompany a profoundly unequal system.
Crowdfunding and community capital as a solution
Wealth inequality and neighborhood decay are complex problems and will require a basket of solutions to solve. To create a path towards a more equitable society we need to ensure that everyone can invest. Instead of allowing the upper crust to dominate the investing landscape, lucrative investment opportunities should be opened to those who have been traditionally underserved by capital markets.
So what alternative strategies can we, as investors, use to raise “community capital?” One option is to educate and encourage a broader swath of people to look into real estate crowdfunding as a way to benefit from the economic expansion and to invest directly in their communities. Crowdfunding platforms and direct public offerings can help community leaders and other interested parties to raise development capital without having to go to traditional lenders or venture capitalists.
Crowdfunding + impact investing
Raising money is the hardest part of most projects; doubly so if that project is in an area that traditional investors have overlooked, possibly due to uncertain risk profiles, questions about returns, and all of the other reasons big finance has found to not invest in these areas.
With crowdfunding, we can go “straight to the people” to raise capital, and we have the freedom to develop projects that work best for the community, whether that is a mixed residential/commercial development, micro-homes, low rise apartments, or whatever the community in question needs to get ahead.
There is no silver bullet for the multitude of challenges sustainable, community-oriented developers face. With that being said, crowdfunding solves the most significant problem: finding financing. As crowdfunding platforms rise in popularity, it is likely we will continue to see more and more projects that aim to develop a community, instead of just a structure.