There are literally over 200 real estate crowdfunding platforms today due to the passage of the 2012 Jumpstart Our Business Starts Up Act (“JOBS Act”). Let's review the major real estate crowdfunding trends for savvy real estate investors.
Personally, I've invested $810,000 in 18 commercial real estate opportunities across America. My goal is to diversify my real estate holdings away from expensive San Francisco. I also want to earn income 100% passively as a dad of two.
Retail investors can now invest in larger commercial real estate details that were once reserved for only institutions and the wealthiest of individuals. Real estate crowdfunding is an exciting space and it's my favorite investment category over the next 5 – 10 years.
Major Real Estate Crowdfunding Trends
1) Heavy Courting Of Institutional Investors
The typical real estate crowdfunding investor is accredited and invests between $10,000 – $100,000 per deal. An institutional investor, on the other hand, can easily invest millions of dollars per deal. Institutional investors haven't rushed into real estate crowdfunding yet because they are waiting to see if the space can get enough critical mass first. They need to see at least three years worth of returns before making a move.
Fundrise, a real estate crowdfunding leader, received $31M in Series A funding from Renren in May, 2014. Since 2014, Fundrise has consistently raised capital through their Internet Public Offerings. The capital is raised directly from its 150,000+ users who have invested over $1 billion on their platform so far. iPOs is one of the real estate crowdfunding trends that only Fundrise seems to have pulled off.
The problem with institutional investors is not so much the amount of money they are investing in the platform. The problem lies when the real estate crowdfunding platform has too high a percentage of institutional investors supplying capital. P2P lenders saw a quick and rapid pullback of institutional capital that crushed momentum back in 2015 and early 2016 because they were the dominant supplier of capital.
By having tens of thousands of individual investors instead, the real estate crowdfunding platforms are less susceptible to a large reversal in momentum. It's my opinion that institutional capital should take up no more than 50% of total capital. But the temptation to take on more is often too hard to reject.
2) Large Consolidation Of Real Estate Platforms
No real estate crowdfunding startup is profitable in their very first years of operation. The business is relatively capital intensive due to the sourcing of deals, the vetting of deals, and the sourcing of capital. There is not real automated way to create a marketplace, at least not in the beginning.
I estimated that only until over $1 billion is raised on any real estate crowdfunding platform will a REC company be operating profit positive based on fees of 1% – 2% ($10M – $20M in annual revenue). Currently, the largest operators such Fundrise and CrowdStreet are the most well-capitalized.
In the meantime, there are 200+ other real estate crowdfunding platforms that haven't raised even $100 million for deals on their platform. It's an inevitability that 90%+ of them will go out of business or get acquired.
As an investors, it would be wise to focus your time on the largest real estate crowdfunding platforms with the most amount of deals and the most amount of funding. RealtyShares sadly closed their door to new investors in 2018. Be aware of real estate mistakes some people make.
3) More Accessibility To All
One of the best real estate crowdfunding trends is increased accessible to more investors. Not only accredited investors ($200K+ income, $1M+ net worth excluding primary residence) are allowed to invest in specific real estate crowdfunding deals. However, with the passage of Title IV of the JOBS Act, there's been creation of Reg A+ eREITs from some of the more well-known platforms.
Fundrise, for example, is reportedly on track to raise $250 million with its five eREIT options. If these, and other eREIT offerings continue to generate that kind of volume, other platforms will follow suit and taking advantage of Reg A+ availability to attract non-accredited investors to real estate. 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.
There's also discussions of loosening the definition of accredited investor as well. Making over $200,000 a year or having over a $1M net worth seems somewhat arbitrary now that information is readily available for investors to research. The internet has allowed for more transparency, lower fees, and lower minimums. Therefore, why shouldn't the income and net worth figures for being an accredited investor be lowered as well?
4) More investment flowing into the heartland of America.
Coastal city real estate has always been more expensive than heartland real estate. But the spread has reached its highest level since the recent boom began in 2009. Now, coastal city real estate prices are now softening as prices got ahead of job and wage growth.
With the proliferation of real estate crowdfunding platforms, it's now much easier to invest in middle America. As a result, middle America real estate should rise in value and narrow valuation differences between coastal city real estate.
This investment into the heartland is the most exciting of real estate crowdfunding trends. Work from home is becoming accepted and permanent. Therefore, there is a huge opportunity to make money from cheaper areas of the country.
5) More due diligence on all deals to account for the coronavirus.
After the coronavirus pandemic hit, hospitality and leisure industries shut down. As a result, there is going to be a repricing lower of hotels the most. Office buildings may get repriced lower, or higher as more space is required for the same amount of people. Data centers are getting repriced higher. Here's a good deep-dive on how the coronavirus is affecting commercial real estate.
Real Estate Crowdfunding Trends Continue
As an owner of four physical rental estate properties in San Francisco, Lake Tahoe, and Honolulu, I believe in the power of real estate to help boost one's net worth and provide for a health investment income stream. But at the age of 40, I no longer want to own more physical real estate due to the maintenance and tenant hassles. As such, real estate crowdfunding is the place where I'm investing my money for 2017-2022.
Since the start of real estate crowdfunding in 2012, investors have seen returns of between 10% – 16%. Who knows what the returns will be in the future, but with the 10-year Treasury yield still well below 3%, any risk adjusted return over 8% looks very enticing.
US real estate is cheap compared to the rest of the world. I think we'll look back 20 years from now and be glad we road the inflation wave.
Related: Main Risks In Real Estate Investing To Be Aware Of
Real Estate Investment Opportunities
In addition to looking for real estate investment opportunities in your own city, look to diversify your real estate investments across the country where valuations are lower, net rental yields are higher, and growth rates may be higher.
Check out Fundrise and their eREITs. eREITs give investors a way to diversify their real estate exposure with lower volatility compared to stocks. Income is completely passive and there is much less concentration risk.
If you are bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities. Both platforms are free to sign up and explore.
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.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.
Real Estate Crowdfunding trends is a FS original post.