A question has kept rolling around in my brain ever since I heard about crowdfunding real estate investing. Is it possible to invest a bit of money while at the same time saving for a house each month? If this is possible, it could mean freedom from a 30 year mortgage, or more likely, a quicker path to saving for a down payment. This article explores crowdfunding real estate investment opportunities and I will tell you if it is actually a game changer or not.
Ok, first things first, what is real estate crowdfunding and investing? Real estate crowdfunding and investing is the ability to invest a relatively small amount of money into a property or collection of properties. The investment is open to everyone so the cost of the property is divided between all parties and the rental income is collected and dispersed back to the investor. This became legal just last year under the Jobs Act. This new option is available to the general public, so let’s explore the possibilities and see who this type of investment is right for.
This type of investment was born off the back of the real estate Investment Trust (REIT). A REIT is a collection of real estate that an investor can put his money into. Each investor owns shares, which represent a portion of the holdings of the fund. If you know what a mutual fund is then you can think of a REIT as a real estate centric mutual fund. REITs are popular because they diversify risk and they are mandated by law to pay out 90% of profits to shareholders each year. REITs are only accessible to accredited investors who make over $200,000 per year or who have at least $1,000,000 in assets minus their private homes.
When the SEC, Securities & Exchange Commission, adopted Title III of the Jobs Act, it opened the door for any investor to buy a REIT share even if they are unaccredited. Through licensed exchanges anyone can put money into a share of a piece of real estate or a portfolio of real estate. An investor can own a piece of a real estate deal for as little as $5,000.
We talked with Royce Running, a Financial Advisor with Newport Harbor Wealth Management, to find out what he thinks of the crowdfunded REIT.
What do you think about the idea of young adults investing in a crowdfunded REIT every month as a way to start saving for a house?
“Not the best idea. REITs aren't very liquid so you may finally save enough, find your dream home, start the qualification process, then find out you can't get your money out of the REIT. The investor will not get their money back for 6-10 years.”
Where would you recommend someone to put their money if they have $100 per month to invest and want to save for a house?
“Low volatility liquid investments, such as fixed income/bond ETFs or high interest savings accounts. You want something that doesn't cost a lot and doesn't fluctuate too much, but also a vehicle where you can pull your money out when you reach the end of your time horizon.”
Given the opportunities and the current laws, who is this investment right for?
“Crowdfunded REITs are excellent investments for the long-term investor who wants to get their feet wet in real estate without having to deal with managing tenants and all of the headaches that go along with being a landlord.”
James Sprow, Director of Research with Blue Vault Partners, says: "We...do not recommend crowd funding of real estate as an avenue for individual investors to save or invest. It is especially inappropriate for individuals who wish to accumulate a nest egg or a down payment for a home.
The concept of crowdfunding is interesting but any investor who participates should be advised to do considerable due diligence prior to committing funds. The skills and experience necessary for such research and analysis is going to be well beyond most investors. Again, individuals who are simply trying to save for a home purchase should be unequivocally warned to stay away from such programs and be advised to use conventional, low-risk, liquid methods for accumulating savings: Bank Savings Accounts, CDs (Certificates of Deposit) and Money Market Funds."
The amount of money needed to invest is low, sometimes as low as $5,000. Crowdfunding may be enticing to beginning or novice investors because it is a relatively small amount of money to invest, and it seems like less risk, but this is not the case. The more knowledge of real estate you have the better your chance of substantial returns. Each deal will take extreme vetting on the part of the investor.
Unfortunately, my original hope is not feasible. Crowdfunded REIT’s are a very bad investment for a first time home buyer looking to save for a house or down payment. They do not allow you to get all of your money back easily, so it means that when you are ready to buy a home you won’t be able to count on that little nest egg.
The crowdfunded REIT is the wild wild west right now. It is inevitable that first time investors will lose their money or get it stuck without understanding the terms of their investment. Hopefully this article will dissuade some of you from making this mistake. The idea is still being defined and it is yet to be seen if the successful practices of the REIT will transfer over to the crowdfunded REITs. Right now, the space is mainly for investors looking to experiment.
“It’s predicted that commercial real estate crowdfunding in the U.S. will grow potentially to $10 billion in five years.”
- Jilliene Helman, CEO & Co-Founder, RealtyMogul.com