NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Editor’s note: The following is part of an ongoing series of posts about U.S. financial innovation enterprises and initiatives. 

Since the market crash of 2008, financial recovery for some major American cities is still an uphill battle. Cities like Detroit and Atlantic City have faced an array of forces stifling positive growth, from crime to unemployment. According to Trulia, from October 2015 to January 2016, the median home sale price within Detroit city limits was $50,760. (That compares to $117,475 in nearby Columbus, Ohio, for instance.) Once considered the gold standard of American life, with the highest per capita income in the country, the economic turmoil in Detroit  – as in other struggling cities – has forced developers to adopt new thinking and new approaches.

One of those approaches involves alternate forms of lending through peer-to-peer platforms, or what we at Patch of Land have called real estate marketplace lending. The process involves connecting borrowers seeking alternative sources of financing for their real estate investment needs with investors seeking passive income opportunities through a tool popularly referred to as crowdfunding. As more Americans embrace these sort of solutions, we believe cities that were once forsaken can be revitalized and brought back to life. In fact, this is already happening: According to Massolution, crowdfunding investors injected $1 billion into the real estate market in 2014. Those numbers likely grew to $2.5 billion in 2015.

The Background: A New Form of Investing

Investing in real estate once felt like a VIP club. Few were allowed entry, and only those “in the know” could find the best deals and make a huge return on their investments, while those who were not as well connected had a much harder time wading through the collection of risky propositions before finding a promising opportunity.

In contrast, real estate marketplace lending allows any accredited investor to invest in their cities and even back into their communities, whether it’s with $5,000 or $1 million. It is enabled by the JOBS Act, or Jumpstart Our Business Startups Act, which gave entrepreneurs and businesses the opportunity to access funds through alternative means.

The JOBS Act marked a historic shift in early-stage finance in the U.S. because, for the first time in nearly 80 years, a private startup or small business could publicly raise funds. This leveled the playing field between large public companies that could afford to be listed on stock exchanges, and startups that could now use the power of the Internet to drive the investment process in a transparent, collaborative and accessible way. Though the JOBS Act initially allowed only accredited (i.e., wealthy) investors to participate in crowdfunded investment opportunities, the Securities and Exchange Commission broadened this authorization to include retail investors late last year.

Why Crowdfunding, and Why Real Estate?

Real estate crowdfunding’s nature of time efficiency, in combination with vast options of where to invest, is at the heart of what could make it a vital part of investing and lending. As the millennial generation slowly matures into homeownership, the more traditional methods of banking, lending and investing will become increasingly outdated and cumbersome.

On the investee side, allowing more people to invest through crowdfunding in real estate rehab projects could provide distressed areas with the first step toward growth, as an investment in real estate changes lives and strengthens communities through a ripple effect. Many of our borrowers at Patch of Land are building their businesses; they are creating jobs, which is the key to economic growth starting at the local community level. They are doing real work with real results that have visible, tangible effects.

One example of the kind of impact this can have is in Chicago, the city that personally inspired me to create Patch of Land, and one of the largest cities experiencing a wealth of crowdfunded development. A simple walk through Logan Square in Northwest Chicago shows a community that once possessed the highest homicide rate in the city being turned around one home at a time, thanks in part to a handful of crowdfunding-enabled borrowers who’ve breathed life back into homes that were left for dead by traditional banks. Today you can see how the community has regained its vibrancy as after a long absence, it has once again begun hosting the Logan Square Arts Festival.

Additionally, from 2009-13, the U.S. Census Bureau reported that 39.8 percent of residents in Camden, N.J., lived below the poverty line. The figure represented more than two times the national average. However, in the past two years, communities within inner-city New Jersey have undergone a renaissance due in part to real estate investors utilizing crowdfunding. The city of Newark is one of the leading hotbeds for this type of investment activity in the United States.

An Impact that Goes Beyond Urban Blight

Keep in mind: A community doesn’t have to fall into dire straits before marketplace lending can make a difference. The heroes of all American cities have always been those whose work gives back to the community – like firemen, nurses, police officers and teachers. But these middle-class individuals are often caught in an unfortunate housing predicament: Many of them cannot afford to live in the communities they so selflessly work to serve.

A creative solution to this dilemma was the development of a 40-unit apartment complex in Santa Clara County, financed through crowdfunding and commissioned by developers Thompson Dorfman Partners. This property was purposed to house 50 teachers, nurses and counselors in the community. With rent priced at an affordable $1,075, well below the $3,000 market rate, the county was able to keep many of its most-needed employees.

Solutions like these illustrate the kind of impact that real estate crowdfunding could make. By breaking down the walls and allowing everyone equal access to a piece of the pie, investment and development within blighted cities could be brought to the hands of the 99 percent, not just the 1 percent. Real estate crowdfunding is still in its infancy, but this creative alternative to traditional lending and investing could soon be at the forefront of the real estate market, allowing more people to build their wealth. If this happens, the effects of these borrowers’ capital will radiate to low-income households and heavily distressed neighborhoods, potentially providing a major boost to urban renewal.

Jason Fritton is the CEO and co-founder of Patch of Land.

Top photo: Detroit as seen through a window. Credit: Rick Harris/Flickr.