Why Real Estate Crowdfunding May Make Sense for Your Portfolio (Free Money Finance)

The following is a sponsored post from EquityMultiple.

Maybe you’ve heard of “real estate crowdfunding” and associate the term with Kickstarter and GoFundMe (and investments that don’t inspire much confidence). Perhaps you’re unclear on how the concept differs from REITs. Or, perhaps, you haven’t heard of real estate crowdfunding at all.

Real estate crowdfunding - an evolving set of online platforms for direct, private real estate investment - has emerged as a new alternative asset class, and viable means for individual investors to access private real estate on a level that was unavailable even 5 years ago.

Let’s take a step back and review why real estate is an appealing asset class, and worth taking a look at for all individual investors already exposed to the stock market and bonds:

Strong Historical Returns: In the years between 2000 and 2015, real estate as a whole beat the S&P 500 by 200 basis points, and well-managed assets in burgeoning markets can consistently generate attractive yield.
Less Volatility: Because real estate values are driven less by investor sentiment and the news cycle, the asset class tends to exhibit fewer dramatic swings than the stock market. Particularly in times when geopolitical factors or other exogenous variables may influence public equities markets, private real estate can provide downside protection and reduce overall exposure to risk
Uncorrelated Returns: Real estate, like other asset classes, is impacted by macroeconomic factors. However, because real estate markets are driven by demographic trends, and real estate asset performance is driven by inherent value and management quality, real estate returns do not move in lock-step with public equities markets
Tangibility: Related to the first two points – real estate assets are essential to society in a way that other assets are not: humans will always need places to live, work, and congregate.

Why Real Estate Crowdfunding

Unlike REITs, which have been around since the late ‘60s and are publicly traded, ‘real estate crowdfunding’ offers private-market investments in distinct properties. Because these investments are illiquid, with yield derived from the quality of the underlying asset and management, they tend to correlate far less with the stock market as compared with REITs. It’s been shown that portfolios substantially allocated to private-market alternatives (like real estate crowdfunding) tend to perform better over time.

Ownership of property - the other traditional means of investing in real estate - does offer de-correlation from public markets, and the opportunity to realize sizable yield through shrewd management. However, owning your own rental property is far from passive - indeed, managing real estate can quickly become a full-time job, especially as you consider multi-tenant commercial property.

Real estate crowdfunding, conversely, allows you to passively invest alongside established real estate firms, benefiting from the experience and scale of the firms you co-invest with. And, because investment-level minimums are typically as low as $5k, you can assume less risk and diversify across markets, property types and risk/return profiles.

Put it this way: if you have $100k to invest, you could put it entirely into a downpayment on a rental home, and deal with management of the property and tenants over time. With real estate crowdfunding, you could instead invest passively in 10 different commercial real estate projects across the country, and save yourself a ton of time and many headaches.

Keep in mind, however, that not all real estate crowdfunding platforms are created equal...

What EquityMultiple Offers

As the name implies, EquityMultiple does offer common equity investments, in the realm of ‘equity real estate crowdfunding platforms’. However, EquityMultiple provides a few unique features:

Commercial Debt & Preferred Equity: In addition to equity investments, EquityMultiple offers senior debt investments (similar to the first model, as described above, but secured by first lien on a commercial property) that target a 7-12% annual rate to investors over a 6-24 month term. Preferred equity offers a hybrid between debt and common equity: pref. equity investors are entitled to repayment before the equity holders and Sponsor are paid, but can participate in the deal’s target upside. EquityMultiple’s preferred equity investments target a 7-12% current and 10-14% total preferred return.
Institutional Commercial Focus: EquityMultiple enables individual investors to access professionally-managed properties across markets and asset classes, with minimums as low as $5k per deal.
In-House Diligence: While some platforms operate as laissez-faire posting marketplaces - allowing Sponsors to post deals and attract investors with little in between - EquityMultiple practices rigorous in-house vetting of deals and deal originators, ultimately selecting fewer than 8% of the potential investments we see.
Transparency & Customer Service: Online platforms create new efficiencies and improve access, but can’t change the fact that investing remains a fundamentally human and trust-centric process. To that end, we provide robust reporting, frequent asset management updates, transparent and thorough offering prospectuses, and we’re always available to pick up the phone. In the long run, the platforms that win high marks from investors won’t be those that hit home runs 100% of the time (over a long enough time frame, no platform will pull that off).