Why Real Estate Crowdfunding May Fit Your Portfolio

*(Todays guest post if from Soren Godbersen a sponsor of Diversefi.com.) * Real estate crowdfunding has been around since the JOBS Act of 2012, but the new investing paradigm – and value to individual investors – is still poorly understood. This is partly because the term “crowdfunding” is inextricably linked with Kickstarter and IndieGoGo; you may associate it with a couple kids raising money for a t-shirt company when in reality most “real estate crowdfunding” platforms (like EQUITYMULTIPLE) only offer investments to accredited individuals, and source investments from experienced real estate firms.

Nevertheless, “real estate crowdfunding” (usually shorthand for online platforms offering placement in private commercial real estate investments at relatively low minimums) is a gamechanger for investors, allowing individuals to play in a space that’s historically been the province of institutional investors. Let’s take a look at some of the major benefits of this new mode of real estate investing.

Lower Correlation to Public Markets (These Are Not REITs)

Real estate crowdfunding (or online private real estate investing, or whatever you want to call it) is often confused with REIT investing. REITs and real estate crowdfunding are different – shares of a real estate investment trust (REIT) provide built-in diversification, liquidity, and low minimums, but they are publicly traded, and so exhibit much greater correlation with public equity markets than do private-market investments made through platforms like EQUITYMULTIPLE.

Despite the solid overall returns, public REITs are characterized by sometimes extreme market volatility. In 2010, as public REITs shook off the effects the recession, annual returns ranged as high as 27.5% but in 2013, with the U.S. real estate market booming, returns sagged to 3.2%. Rather than being strongly correlated with the value of the underlying real estate, the recession revealed that REITs are, in fact, strongly correlated with the public markets. This correlation undercuts the diversification and inflation-hedging benefits of other forms of real estate investing. Private real estate investments show a low correlation to the public debt and equity markets (between -0.03 and +0.25) and thus have strong diversification benefits in portfolios that also feature stocks and bonds.

Furthermore, REITs offer no opportunity to direct one’s own asset allocation. Real estate crowdfunding allows individual investors to participate in discrete projects and project types that align with their strategy and complement assets already held in a portfolio.

Real Estate Provides Downside Protection

Public markets fluctuate – sometimes wildly – based on perception and anticipation: stock prices may dip in response to expectations of inflation, economic policy that hasn’t been signed into law yet, or perception of overvalue. Conversely, real estate markets are driven by demand and demographic trends. Since real estate is a tangible, essential good, the asset tends to weather economic downturns better than equities. This is particularly true of multifamily properties: above all else, people still need a place to live.

Holding 20% or more of a portfolio in private real estate can protect your portfolio against systemic risk and yield better performance through market cycles. With relatively low minimums, and the opportunity to invest in specific properties within markets exhibiting strong fundamentals, real estate crowdfunding platforms can help reduce your portfolio’s overall exposure to risk.

Access to Private, Alternative Investments

Related to the first two points: real estate crowdfunding platforms provide access to private-market real estate, an alternative asset class that individuals are typically underallocated to. Unlike public-market investments, which are highly liquid and characterized by volatility, private real estate markets are typically less efficient, with opportunities for yield where skilled real estate firms identify opportunities to acquire properties at a favorable basis, add value, and improve operations.

In other words, while public-market investing affords exposure to “beta” – tapping into the broad performance of the economy or sectors of the economy – private real estate investments afford access to “alpha”, or yield driven by skill of management and exploitation of slower-moving, less-efficient markets. Indeed, pensions and other institutional investors have long devoted a sizable share of their portfolios to private-market investments, with individual investors severely underallocated. Real estate crowdfunding platforms present an opportunity to close this gap.

(for further reading on the topic, check out Blackstone’s great report on allocating to alternative investments.)

Fewer Headaches, Lower Barrier to Entry

So why not just buy an apartment building? Indeed some investors do, and with the right skillset and ample time to devote, direct ownership of property can yield outsized returns. However, most of us aren’t lucky enough to have the time to manage commercial property, and the capital to acquire, improve, and maintain a property through tenancy cycles.

Alternatively, online platforms allow for investing $10k or less in an institutional-grade property, alongside a real estate firm that typically has an extensive track record and operational experience. What’s more, online platforms allow for much more rapid diversification of a commercial real estate portfolio: instead of deploying $500k to take part in a multifamily acquisition directly, you could invest $10k in 50 different commercial real estate projects across the country, avoid putting all eggs in one basket, and reduce exposure to risk.

Conclusion

Real estate crowdfunding provides individual investors a nice middle ground between REITs and direct ownership of property, and allows for participation in the kinds of institutional commercial real estate projects that were inaccessible prior to the JOBS Act.

Not every online investing platform may be a fit for your investing strategy, however. Fortunately, the online platform mode of investing allows for full transparency: any platform worth its salt should make the investment thesis and underwriting assumptions clear, and be willing to answer questions from investors (unwillingness or inability to do so should raise a big red flag). And, low minimums allow you to get comfortable with one or several platforms without a large capital commitment.

Some info about our sponsor: Private commercial real estate investing used to be available only to institutional investors and the ultra-wealthy. Not anymore. EQUITYMULTIPLE connects accredited individuals with exclusive, pre-vetted commercial real estate investment opportunities. Co-invest alongside experienced real estate firms across markets, property types, and risk/return profiles starting with as little as $5k, and build a more diversified portfolio. * * EQUITYMULTIPLE provides in-house diligence; a streamlined, secure investing platform; asset management and reporting throughout the term of each investment; and a dedicated customer service team.)