Why do Commercial Real Estate Investments through crowd funding continue to standout?

As can be seen in the above picture, in the past commercial real estate investments were done in a “clubby manner” and one had to know a “Rich Uncle” to bring an investor into the deal.

But what happens if you do not have a rich uncle?

Welcome to Crowdfunding for Real Estate.

 

Definition: kroudˌfəndiNG/nounnoun: crowdfunding; noun: crowd-funding

  1. the practice of funding a project or venture by raising many small amounts ($10K to $50K) of money from a large number of people, typically via the Internet.
  2. the art of conducting the traditional real estate investment business in a quick, seamless and efficient manner saving money and time for both sponsors and investors.

Now that you know what crowdfunding is…why commercial real estate?

As can be seen from the above chart, over time, commercial real estate has (despite the occurrence of the Great Recession) generally exhibited relatively good stability — more akin to bonds than to stocks or even publicly traded REITs. Rental lease terms, for example, generally help to mitigate economic fluctuations and their impact on income.

One reason for this superior performance is record low interest rates. The hypothesis that low interest rates will be the norm going forward seems increasingly credible.  The Fed’s official median forecast for short-term interest rates over the long term is a mere 3.5 percent.   If anything, financial markets think even this is too optimistic; as of mid-July, thirty-year Treasury bonds were yielding approx. 2.25 percent, implying that markets expect that long-term rate will be even lower than Fed officials expect over the coming decades.

If well located commercial real estate is an attractive alternative for investors seeking yield, then the more prominent crowdfunding platforms may provide an interesting way to invest in the sector. For e.g., R2Crowd allows smaller investors to participate in “value-add” real estate investments – a strategy that is often considered to have medium to high risk, but the returns can be potentially high as well.  These opportunities generally involve renovation or redevelopment projects that aim at repositioning a property to a higher price point but they do not typically carry the same kind of risk as presented by pure ground up construction projects.

At R2Crowd, investors allocate most of their real estate investments into private pass-through entity syndicates, as opposed to less tax-efficient vehicles such as REITs.  These LP (Limited Partnership) structures give investors access to the full benefits of real estate ownership such as fully taking advantage of the depreciation, interest, and other deductions that act to shelter or defer much of the income that is distributed from the investment property.

Commercial real estate is a unique asset class that acts and behaves differently from many other investment classes like stocks or bonds. Some of the key benefits of direct property investments are:

Low Volatility. The income component of commercial real estate generally helps to temper its volatility as compared to asset classes like stocks, where price movements constitute a bigger portion of overall return rates.

Cash Flow. Investments can produce both current income and appreciation (value changes). A key feature of commercial real estate investment is that a significant portion of total investment return is derived from income flows as opposed to price appreciation – nearly 80%, according to some sources. This income component can provide some degree of protection during periods of stress in the financial markets, and real estate is notably different from stocks in this respect.

Real Estate is a Hard Asset. Real estate is a “hard” asset that has meaningful intrinsic value. Not only does the structure have value – so does the land itself. Well-chosen properties can provide some security that some value will be retained even if the property does not reach its full potential.

Hard assets are typically a strong inflation hedge, and are also valued because they can be used to produce other goods or services. In these respects, real estate is generally considered a relatively strong store of value. Banks are more willing to lend against real estate than they are against stock portfolios, for example.

Potential Hedge against Inflation. Commercial real estate has been found to have a high degree of correlation to inflation as compared to other asset classes. As prices of goods and services increase in the broader economy, real estate can benefit, since rising wages and profits generally increase the amount that tenants are willing to pay for space. Those same factors also contribute to rising construction costs, so that replacement values tend to increase – driving existing commercial real estate prices higher as well.

Compared to a few years ago, commercial real estate no longer looks undervalued.  But the prospects of most other asset classes look disappointing by comparison.

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