The recent crowdfunding trend has made some private real estate investment opportunities more accessible to investors and, as we discussed in an earlier article, this new investment approach can provide diversification in ways that can sometimes be more advantageous than with real estate investment trusts (REITs). A related advantage, which we’ll elaborate on here, is the increased transparency that some crowdfunding sites can provide into property investments.
REITS and some other real estate syndicates generally raise capital for blind pools, where the properties to be acquired have not yet been identified and the investor must trust the management team to invest his money wisely. The primary advantage of blind pools is the promised built-in diversification across multiple properties. As the name implies, though, these purchases are done “blind” to the individual investors in the syndicate, who know only the general property type, investment style and “rule-of-thumb” guidelines for which the REIT or other blind pool sponsor proposes to use their funds.
This lack of transparency is understandably troubling to some investors who may not feel comfortable relying solely on the syndicate sponsor’s judgment. Blind pools offer no opportunity to examine the market characteristics and investment fundamentals of individual properties. By design, those analyses are entrusted to the sponsor, who may (for example) feel compelled to act quickly to find projects to invest in so as to promptly gain needed cash flow or to realize promised tax deductions. Sophisticated investors may well want to themselves evaluate the particulars of the properties toward which their money is being used. While a “hands-off” approach to money management may work for some investors, others would prefer to be better informed about the fundamentals of their portfolio.
Real estate crowdfunding sites not only make commercial real estate opportunities available to a much wider investor population, they also allow for greatly increased investment transparency. They do this on three fundamental levels:
- Full transparency on individual investment opportunities
- Ability to build a customized portfolio of properties
- Ongoing, detailed monitoring of the property portfolio
Real estate crowdfunding sites generally provide access to private syndications of specified properties, and provide the detailed information necessary to make an informed decision about that particular property (similar to traditional private placement memoranda). The real estate crowdfunding company that I run, for example, features several different web pages for each aspect of a particular investment opportunity. There is a discussion of the property itself, including an overview of the market area and relevant demographics; a review of the investment details, including the investment’s expected hold period and projected return rates; a discussion of the sponsoring company of the individual project, including a summary of its track record and biographies of the company’s principals; and detailed financial projections itemizing the anticipated rent rolls, operating expenses, and property debt service. Technology has also allowed investors to participate in webinars, where they can hear the sponsoring companies present the opportunities directly and thus gain some level of comfort with that project manager.
The better crowdfunding sites also allow investors to consider many different property types, along many stages of the risk/return spectrum. While most REITs or other blind pool syndicates typically focus on one property type or market area, crowdfunding can allow investors to diversify in three major ways -- in multiple property types, across different geographical areas, and in both debt and equity investments. Investors are thus in a position to control their own portfolio diversification, in a way that permits them to be sure of each component’s fundamentals.
Such customization is only useful if investors can easily track the various properties in their portfolios, and again, the top crowdfunding companies do this quite well. Our own investment “dashboard” allows investors to stay abreast of their account value (divided between debt and equity investments), cumulative earnings, and cash and earnings activity. Individual property investments can be tracked by start date, expected distribution date, maturity date, and earnings to date (or interest or principal paid). Earnings or interest payment histories are further broken down to show the date and amount of each such distribution. Investments can be tracked chronologically with a clear, straightforward summary of all investments made and all earnings or interest amounts paid.
Transparency is always key to gaining market confidence. Diversification requirements have heretofore required some investors to put their trust in sponsors of blind pools, but crowdfunding sites make unnecessary that delegation of responsibility. These sites provide investors with increased power on three fronts – the ability to themselves thoroughly analyze individual investment opportunities, the capability to customize their own diversified portfolios, and a platform with which to monitor those investments on an ongoing basis -- all at the convenience of their laptop or tablet computer. The increased control and transparency that crowdfunding sites provide to investors should provide a solid foundation for the further growth of the real estate investment industry.