The explosive growth occurring in the real estate crowdfunding industry validates why investors are being increasingly drawn to the space. Title II of the Jumpstart our Business Startups or “JOBS” Act, passed in September of 2013, provided the catalyst for the emergence of online marketplaces dedicated to direct real estate investing. Two and a half years later and with the tremendous efforts of numerous online platforms, online real estate investing is now a reality that is rapidly approaching mainstream status. In this article, we will delve into the top ten reasons that we see as to why investors are getting involved.
1. Online convenience
The rapid rise of e-commerce shows how people utilize the Internet to buy everything from automobiles to groceries. People like the speed and convenience of being able to access information, compare and contrast choices, form a conclusion, and complete a transaction whether they are at home, in an office, or poolside at their favorite beach destination. Investors now have that same type of access to commercial real estate crowdfunding offerings literally at their fingertips and in real-time.
2. National Access
Investors no longer have to focus on real estate deals that they stumble across in their own backyard. In addition, the old-school method of real estate investing often relied upon finding out about a potential investment opportunity by word-of-mouth. This method, which is commonly referred to as the “country club model” made access to real estate investments difficult to identify and highly inefficient. Online real estate investing shatters this paradigm by revolutionizing access and delivering transparency to private real estate offerings.
Platforms such as CrowdStreet provide a gateway to access offering information on a wide variety of live deals across the U.S. An investor can access investment opportunities across the country just as easily as in his or her own home city. Investors can now invest in any market of their choice, not just the narrow choice that was previously available to them. At the same time, sponsors can now just as easily accept an investor from across the country as from across town, which has spurred sponsor interest in developing a national, rather than regional, investor base. Access to deals that they, otherwise, would have no knowledge of is a frequent number one reason investors cite as motivation for joining online platforms such as CrowdStreet.
3. Compare and contrast multiple competing investments
Now that investors have broad reaching access to private real estate investment opportunities across the country, the next step is to evaluate them. Quality online real estate investing platforms provide comprehensive offering information in an easy to decipher and consistent format. The result is that investors can now quickly compare and contrast competing offerings and filter through them to find a project that fits his or her investment criteria, as well as register to receive notifications when new offerings that match the investor’s criteria become available.
CrowdStreet makes a point to put all of its offering information and documents into the same format. To learn more about how to review an investment offering on the CrowdStreet Marketplace, you can view our video, “How to Review an Investment Offering”. Also, keep in mind that in any market, when efficiency, scalability and choice arrives, consumers (or in this case investors) typically win. As the online real estate investing market continues to grow, the quality of investment choices and terms offered to investors will inevitably continue to improve as more investors enter online marketplaces and more sponsors enter and compete to attract them.
4. Directly invest in commercial real estate
Online real estate investing allows investors to directly invest in real estate crowdfunding, meaning they are not buying into a publicly-traded real estate company that owns dozens of properties, or a mutual fund that includes an assortment of different real estate companies. Rather, direct real estate investment gives investors a stake in one specific property, or a fund with a specific investment focus. Direct investment allows investors to select the specific property type, the location and the operator that best suits their investment strategy and objectives. For more information on this topic, please check out our article, “What are the Differences Between Direct and Indirect (REIT) Real Estate Investments?”
5. Cash flow
Most private real estate offerings offer the prospect of sustainable investor cash flow distributions that are targeted to grow over the asset holding period. Often times, these distributions commence at 6% – 9% annualized rates of return, typically paid quarterly, that can hit double digit yields within three years and sometimes even achieve such yields out of the gate. In a yield-starved world, investors are increasingly discovering that cash-flowing commercial real estate investments provide an attractive option to earn a strong yield as well as equity appreciation upon sale.
6. Lower minimum investment amounts
Online real estate investment platforms put direct real estate investment more easily in reach for individual investors. In the past, the ability to invest in a real estate private offering usually came with a minimum investment amount of $100,000 or greater. Now investors can access institutional quality real estate offerings for as little as $25,000.
7. Diversification
Modern Portfolio Theory posits that diversification is key to achieving optimal returns, while also providing some protection against exposure to market risks (for more information on this topic, please see our article “Invest like Harvard: How to Profit from Direct Real Estate Investing”). The relatively low minimum investment amounts made possible by online real estate investing platforms, allow individual investors, for the first time, to mimic the endowment model of investing and quickly build a diversified real estate investment portfolio. Rather than sinking $100,000 into a single property and waiting for it to reach maturity, investors can now choose to invest $10,000 or $20,000 into five to 10 different deals that vary by geographic regions, sponsors, investment structures, asset classes, risk profiles and holding periods. To learn more about the rapid diversification now available through real estate investing online, please read our article,” How to Build a Diversified Real Estate Portfolio Using CrowdFunded Real Estate”.
8. Robust reporting platforms
Online real estate investing platforms offer online dashboards that help investors to manage their investments, regardless of whether it is a single property or a larger portfolio of real estate assets. Investors can use their dashboard for a variety of functions, such as to access quarterly reports, store all investor documents, receive and store K-1s and view distributions. CrowdStreet, for example, is continually adding new tools to our investor dashboard to that, in its next iteration, will now include robust portfolio analytics.
The explosive growth occurring in the real estate crowdfunding industry validates why investors are being increasingly drawn to the space. Title II of the Jumpstart our Business Startups or “JOBS” Act, passed in September of 2013, provided the catalyst for the emergence of online marketplaces dedicated to direct real estate investing. Two and a half years later and with the tremendous efforts of numerous online platforms, online real estate investing is now a reality that is rapidly approaching mainstream status. In this article, we will delve into the top ten reasons that we see as to why investors are getting involved.
9. Dissatisfaction with equity markets
Another factor that is enticing investors to move into direct real estate investing, particularly in the turbulent 2016 financial markets, is a growing dissatisfaction and concern over exposure to equity markets. From international distress over uncertainty in China, to negative interest rates, investors have been exiting the U.S. equity markets and redeploying capital into direct real estate investments. In a climate of major international uncertainty, a well-leased commercial real estate asset with a durable rent roll increasingly looks like an attractive alternative.
10. It’s the same as it has always been; just better
Finally, and perhaps most important, is that the advent of online real estate investing is a story of modality and not one of a fundamental change in action or structure. Once investors understand this story, skepticism subsides and the virtues of online investing platforms begin to shine.
For example, a common myth that is debunked as soon as investors better understand online real estate investing is that it is different or riskier than offline real estate investing. Online real estate investing is syndication. Syndication, in its purest form, is a pooling of individuals to invest jointly into something that no individual could afford to invest in alone.
Real estate syndication has existed offline for centuries if not millennia. As mentioned above, prior to passage of Title II of the JOBS Act in September of 2013, U.S. security regulations mandated that syndication be conducted privately pursuant to Section 506(b) of Regulation D. Since the passage of Title II, syndication can be conducted publicly pursuant to Section 506(c) of Regulation D. Now that syndication can be conducted publicly it can occur online. Now that it can occur online, it can allow technology companies to emerge (such as CrowdStreet) to make it more efficient, scalable and transparent.
Every investment opportunity applying for inclusion to the CrowdStreet Marketplace is subjected to a rigorous, objective vetting process. Only 2% of all applicants successfully pass this process and appear on CrowdStreet’s marketplace. For an in-depth description of the CrowdStreet vetting process please view our CrowdStreet Marketplace Screening Process video.
Putting it all together
Investors who study the space of online real estate investing are beginning to recognize the power it possesses to revolutionize their portfolio strategy. Tapping into the true power of direct real estate investing requires leveraging the tools, resources and efficiencies of the online real estate marketplace. The more investors who enter the marketplace, the better the marketplace becomes.
Commercial real estate investment has historically been limited to deep-pocketed investors, typically those with a minimum of $250,000 to invest in each deal. Thanks to the JOBS Act and new software which enables real estate syndication at scale and real estate crowdfunding opportunities, CrowdStreet is now able to provide access to nationwide commercial real estate investment offerings with minimums as low as $25,000 for investors interested in creating passive income in commercial real estate.
