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2 Real Estate Crowdfunding Investment Alternatives | Woodbridge

11 18 2016

Until recently, real estate investing was reserved for the elite. Buy-in requirements began in the six-figure range, and participants were members of exclusive inner circles. That all changed when legislative and regulatory action cut the red tape that previously left many real estate investors in the cold.

The Birth of Real Estate Crowdfunding

In 2012, the Jumpstart Our Business Startups (JOBS) Act and other regulatory mandates slashed barriers that previously prohibited businesses and start-ups from publicly soliciting funding. Sponsors are now able to directly market investment opportunities, and provide access through online platforms.

These rule shifts have created a sea change in the investment landscape and opened the floodgates to the crowdfunding movement. Most of us have already had some level of exposure. Maybe you've pooled capital with friends and neighbors, when tragedy struck somebody you know, or perhaps you have already invested through an online channel.

Federal Regulations Change the Commercial Real Estate Investing Market

Accompanying the crowdfunding wave is a real and measurable need for Commercial Real Estate (CRE) loans. In 2006 and 2015, federal regulators capped the number of CRE loans that were issuable by banks, limiting loan supply. At the same time, sales of commercial properties surged, which drove the demand for CRE loans to record breaking numbers last year. The pace hasn't slowed down, creating a unique opportunity for private investors seeking higher returns.

And now that the online community is part of the investment community, financial and real estate markets have been changed forever.

Risks of Investing in Real Estate Crowdfunding & Alternative Investment Options to Consider

Despite the obvious benefits of real estate crowdfunding: greater access, a myriad of choices, and the potential for healthy returns, it is not without limitations. Crowdfunding real estate projects are not liquid, and cannot freely be traded. They also require longer terms and can lock down your capital for many years at a time. They are typically only available to accredited investors, and they are not freely traded.

The risk of investment default is also historically higher for crowdfunding compared to peer-to-peer and direct real estate investment funding. And at the end of the day, the mechanics of crowdfunding does not insulate investors from the risk of fraud. That's why it's always important to vet both the crowdfunding opportunity and sponsor. Look for transparency, a proven track record, and an opportunity to engage to the investment manager.

Two alternative investment options for those considering crowdfunding real estate:

  1. Real Estate Investment Trusts (REITs): REITs function like mutual funds, and combine the investments of many to purchase housing, commercial projects, and shopping centers. They allow for diversification across a range of properties, sectors, industries, and geographies, which spreads out the risk. REITs typically require longer terms to achieve meaningful returns. They are traded on the major exchanges and can be bought and sold like stocks, which can result in higher expenses. They are legally required to pay out 90 percent of profits in the form of dividends to investors, which puts REITs in the high-yield category.

  2. Debt Real Estate Investment Trusts (REITs): Instead of buying equity in properties directly, debt REITs provide financing to commercial borrowers. These REITs generate yields from fixed interest payments from borrowers, so investors receive the same return regardless of market conditions. Payback of the loan is secured by the property itself, so in the event of default principal may be recovered through foreclosure. Like equity REITs, debt REITS are legally required to pay out 90 percent of profits in the form of returns to investors. Most debt REITS are also traded on the major exchanges and can be bought and sold like stocks.
With demand exceeding supply for commercial real estate loans, investing in real estate is timely. Unlike crowdfunding, equity and debt REITs allow investors to maintain liquidity and capitalize on emerging opportunities.

Like any investment, choosing the right real estate opportunity all depends on your risk profile and portfolio. Protect yourself by working with a financial professional who provides you with the right information, so you can make the right decisions at the right time to grow your hard-earned money.

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