In real estate, there are two kinds of buyers.
The first group is made up of investors, or people who buy properties with the intention of either leasing them out to generate income and a return, as well as those who buy, fix, and flip to other buyers.
The other group is made up of people who are simply looking for a place to live or do business. They buy a property and use it, and this group makes up the vast majority of the market. For instance, in the home market, the one place where the average American will likely invest in property, nearly half of all real estate buyers are buying their first home during any given year, according to Zillow.
Part of this is due to the fact that real estate investing, particularly on the commercial side, has traditionally been reserved for high-net-worth individuals, institutional investors and others with the wherewithal — connections, financing means and know-how — to get involved. It was an asset class that everyday retail investors simply did not have access to and weren’t able to leverage, except indirectly through publicly traded real estate investment trusts.
But that has started to change. Thanks to technology and new regulation around crowdfunding, investors can now invest directly in commercial real estate deals, cutting out the middleman, and even with a small investment diversify their portfolio across a number of different assets. What used to require a portfolio worth tens of millions of dollars can now be accomplished with a few thousand at a time.
Crowdfunding platforms such as Fundrise, RealCrowd, Crowdstreet and others are proliferating, allowing accredited individual investors to get into large, high-return commercial real estate transactions with investments as small as $500.
That looks to me, as an industry insider, like a real seachange.
If you look at most wealth that’s been built over the centuries, both in America and globally, real estate is usually a big component of that. Some think of it as a fourth asset class after bonds, stocks and cash. Commercial real estate constitutes 13 percent of GDP, and in recent years was elevated by S&P Dow Jones indices from being a subsector of “financials” to its own place as one of 11 industries in its global classifications.
Given the position of commercial real estate in the economy, it has always felt strange to me that the average investor cannot access these investments. Even amid changing technologies, new industries and new innovations, there is nothing like owning a physical asset and having a piece of an apartment building or industrial building that can generate income for you.
I’ve tested out the concept of these crowdfunded platforms to raise an investment, and it does seem to work. (I have no personal or firm investment in the platforms themselves). Our firm put a deal out on one of the larger commercial real estate crowdfunding platforms to fund an asset we are buying in Phoenix, Arizona. Over the course of about two weeks, nearly $1.5 million came in from smaller investors on that platform. It allowed them entry to a deal they would never before been able to access via small investments. It worked for us because it allowed us to access investors and capital that we never would have been able to reach before.
In 20 years in commercial real estate, for me it has always been about building personal, individual relationships with each of our investors. Now we can put a deal out on a crowdfunding platform and create a whole host of new relationships, with diverse investors, on a national basis almost overnight.
It’s a democratization of commercial real estate, but it does carry with it some substantial risks. These services are being marketed to individual investors directly and through partnerships with personal finance portals. You may find these platforms being pitched to you in email or in your social media feed. But real estate investment isn’t like investing in stocks, bonds and mutual funds. These are illiquid assets that can be difficult to value, so crowdfunding investors who are new to the commercial real estate space would do well to follow some best practices that those of us in the industry have been following for decades.
1. Do your research: Always do your homework and look at each of the deals available to you in-depth. Is it the right fit for your personal investment philosophy? How does it fit within your overall investment portfolio? Real estate investing is like any other investment that has risk associated with it, so diversification is key. Don’t bet it all on one horse, and focus on deals that make good common sense.
2. Understand what you’re buying: A real estate investment isn’t a share of stock. It is a physical asset that can’t be solely summarized in numbers on a chart. Is that apartment or office building located in a desirable area? Is it in a growing city? Are local renters increasingly moving to another part of town, driving down rents where you are looking to invest? People will always need to sleep in a bed and have a physical location where they live, but what makes one particular apartment building more desirable than another? Don’t overlook those details when investing. And remember, this kind of investing does not have the liquidity of a stock. You may need to stay in for a while.
3. Think big: For us as real estate investors, everything comes down to job growth and a positive outlook for the future. For that reason, it pays to look beyond one single asset when considering investments. Think about industrial space as an example. Regardless of where technology is going, we will always need physical places to put goods that can be shipped out and delivered to people on a local level. Even if the products are coming in globally, they have to be brought into the country, broken down into their component parts and shipped around to customers. So industrial real estate has good strong fundamentals just because of that. It’s the same with demographics. For instance, Baby Boomers are now starting to move into senior care facilities in greater numbers as they age, meaning there is a greater need for more senior care space.
You don’t have to go too far out on the risk curve to do well in commercial real estate. Yes, there is always a chance that the market could go down, and can even go way down and stay there for years. But at the end of the day, real estate investors still always have a physical asset that they own.
If you are willing to take the time to learn the game, it could be one more tool in your investor toolbox.