Real estate crowdfunding is picking up steam due to the desire for more investors to diversify into specific regions and types of property, and the waning desire to actually own physical real estate due to the ongoing maintenance costs and tenant hassles. By 2025, the crowdfunding industry as a whole is anticipated to be valued at more than $300 billion and online real estate marketplaces are primed to capitalize on that explosive growth.
As I look ahead to 2019 and beyond, it’s an appropriate time to consider which trends will play a part in shaping and refining this investment sector.
Trend #1: The Rise Of Institutional Capital
Accredited investors have so far been the target audience, accounting for roughly 8.5% of all households and 70% of all private wealth. They are considered part of the valuable mass affluent class that every single financial institution wants to attract.
When comparing an individual investor, who may have $50,000 or $100,000 to invest to an institutional investor that may be bringing $50 or $100 million to the table, the institutional investor is definitely going to be the next type of investor to
That being said, the move towards institutional capital is one that must be approached carefully. Take Prosper, for instance. Ninety percent of Prosper’s capital came from institutions. When those institutions began pulling back on their investments mid-way through 2016, loan volumes dropped dramatically.
The company was then forced to pivot, launching a renewed effort to attract retail investors to the platform. The same thing happened with LendingClub, a publicly traded company that has seen its shares decline by over 60% since its IPO in August, 2014.
Trend #2: eREITs Grow For Non-Accredited Investors
The SEC’s finalization of Title III of the JOBS Act opened the doors of real estate crowdfunding to non-accredited investors but online marketplaces have thus far been slow to utilize this new regulation. Instead, Title IV of the JOBS Act has been the more widely used regulation and in real estate, that has resulted in the creation of Reg A+ eREITs from some of the more well-known platforms.
Fundrise, based in Washington DC, has been the leader in the eREIT movement so far. They’ve created five eREITs characterized by region (West, East, Heartland), and style (Growth, Income). While individual non-accredited investors may have a lower degree of liquidity compared to their accredited counterparts, they greatly outnumber accredited investors so there’s a vast swath of opportunity that online marketplaces are positioned to tap into.
The one interesting fact about eREITs is that the total size of each eREIT is capped at $50 million according to government regulation. Therefore, if a particular eREIT is very attractive due to various assets or special returns, the eREIT could sell out quickly. The non-accredited investor must be more aware as a result.
Trend #3: Mergers And Acquisitions
There are over 100 real estate crowdfunding platforms, and it’s unlikely that more than 10 of them in the United States will survive over the next 5-10 years. The business is operationally intensive as it requires many people to build partnerships, market deals, close deals, and run the day-to-day operations.
The technology for automation is not quite there yet, as a result, it’s a race to see which company can survive the longest with the largest amount of funding to become operating profit positive.
RealtyShares, based in SF, closed a $30 million series C round in 2017. Unfortunately, as of Nov 8, 2018, they are no longer accepting new investors and will just be managing their existing ~$400M in assets.
Fundrise, raised over $20M from its actual investors in what it called, “Institutional Private Offering.” It was a smart move that has the company cashed up as well. As of 2019, they are doing very well and are expanding into Opportunity Zones. They are my favorite crowdfunding platform for non-accredited investors.
My favorite real estate crowdfunding platform for accredited investors is Realty Mogul. They were founded in 2012 as well, and have the highest quality deals on the platform because their CEO is focused on quality, over quantity. The CEO is focused on building “a multi-decade” company.
By the end of 2019, there will be no more than three companies in the top tier, each transacting over a billion in transaction volume. That’s still only a fraction of the U.S. real estate market, which is valued in the trillions, giving the top platforms a lot of room to grow.
If you’re looking for a more surgical way to invest in real estate, real estate crowdfunding is an attractive platform. REITs are fantastic, but they don’t have the granularity as real estate crowdfunding platforms. If you are bullish on the heartland of America, like I am, you can find specific multi-family and commercial real estate properties through a company like Fundrise. Many will offer target returns of 9% – 16%, as well. They even have a Heartland eREIT as well.
Real estate crowdfunding is here to stay. The movement of capital towards expensive coastal city real estate to cheaper midland and southern real estate will only continue with the growth of these platforms.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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