Over investing in stocks? Why not buy a building instead? It worked for Donald Trump.
Unlike Trump, you might not have a multi-million dollar inheritance with which to buy your building. Because of new legislation, however, you, too, can get in on the game.
Title II of the Jumpstart our Business Startups Act (better known as the JOBS Act), which went into effect in 2013, opened up a new world for early-stage businesses looking to raise capital and investors in search of opportunities. Called “Access to Capital for Job Creators,” the title lifted an 80-year ban on general solicitation among budding businesses, allowing private entities — including those in commercial real estate — to publicly announce their fundraising efforts.
“That really changed the landscape of access,” said Adam Hooper, CEO ofRealCrowd, a San Francisco-based startup that brings equity crowdfunding to the real estate industry.
Though investors still have to be accredited to invest in platforms like RealCrowd and others, the change marks an important stride in a historically highly exclusive investment class.
“It gives people a seat at the table to even have an opportunity to invest in these direct offerings, whether it’s a fund, an individual asset, a loan…. This whole asset class that’s always been available to institutions and ultra-high net worth investors is now available for minimum investments down to $10,000, $15,000, $20,000, and sometimes even less,” he said.
Accredited investors were invited to get a piece of the pie in the development of 3 World Trade Center in New York starting at $5,000 through real estate crowdfunding platform Fundrise, the New York Daily News reported in January. A glance at its Web site today reveals sold-out opportunities in condos in Atlanta, a Starbucks-anchored retail development in Arizona and an apartment building in Seattle, among others, each with minimum investment amounts of $5,000 to $10,000.
“What our platform is doing is investors getting at that real estate investment more efficiently — less middle men, less cost, more transparency, and more direct,” saidFundrise co-founder and CEO Ben Miller in a phone interview with TheStreet. “As a result, it ought to have a higher return than otherwise, because you cut costs out of the system.”
He pointed to data indicating the commercial real estate sector has consistently outperformed stocks and bonds, with the average 20-year returns in commercial real estate slightly outperforming the S&P 500 at about 9.5%. He also noted the successful Yale Endowment Model, employed by Yale University chief investment officer David F. Swensen, that has historically allocated about one-fifth of its holdings to real estate.
“You’re talking about an asset class that outperforms what people normally invest in,” he said.
Real estate generally falls between bonds and stocks in terms of risk and is often considered advantageous as an asset-backed investment, explained Shawn Silk, CEO of California-based online commercial real estate marketplace Realquidity. He added that platforms like his and others are valuable in helping investors wade through what’s out there to cultivate deal flow.
“If you don’t have the platforms, you even just went back two and a half, three years ago, it’s very difficult just to find those deals out in the marketplace. So there’s a real concentration of potential deals,” he said.
How to Invest
Real estate is not a single asset class but a sector that includes many different asset classes, and fashion malls, office buildings, industrial properties and high-end residential properties all respond much differently to economic cycles than working-class residential, self-storage and neighborhood retail properties, noted Ethan Penner, managing partner at Mosaic Real Estate Investors. Geographic location matters as well.
“It’s risky to generalize and lump all commercial real estate investments into one category,” he said. “Investors who understand that distinction will be able to find interesting opportunities in all markets as real estate is a uniquely inefficient market.”
Much of the added value of commercial real estate platforms and firms comes in their ability to comb through offers, curate investments and, perhaps most importantly, identify sound, experienced real estate companies with strong track records to do deals with.
“Real estate is so much dependent on who is actually managing the investment,” Hooper said. “Are you working with a qualified, reputable sponsor that’s going to do with their money what they say they’re going to do?”
Investors will be wise to look out for fees and how deals are structured as well. Before jumping in, it is important to understand what your money is going to — direct ownership, a feeder fund, a synthetic investment — and what the potential outcomes are.
“If or when the markets decide to turn…how is your investment secured? What is that underlying investment actually in?” said Hooper.
Some believe commercial real estate platforms may be too green.
“It’s definitely not for the sophisticated investor, and it’s typically not a vehicle that would work well for those that are competing in major markets,” Edward Mermelstein, real estate attorney and founding partner of Rheem Bell & Mermelstein. “The only advantage that you may have is that you have unsophisticated funds and may be able to pay more than those that are very market savvy and can move quickly.”
The commercial real estate industry may be in for more of a shock in the months and years to come thanks to Regulation A+. The rule, enacted in 2015, opens up funding to virtually all investors, provided the investment destination complies with certain parameters and investors contribute no more than 10% of their annual income or net worth.
Fundrise is one of the first to test the waters on the regulation in the real estate field. It has filed documentation with the SEC to offer up to $50 million in shares of an online real estate investment trust, or e-REIT.
“We are opening up something previously only available to high-net-worth investors to everybody,” Miller said regarding the filing. “This whole idea of direct investing wasn’t feasible under the old regulations.”
He predicted that over time, the combination of new regulation and technological innovation will do to commercial real estate will do what ETFs and mutual funds have done to stocks.