Much of the immediate promise of equity crowdfunding and the JOBS Act has not been much more than a whimper. The industry has been extremely slow to scale to a level that many had anticipated. There have been, however, pockets where the growth has shown larger promise. The niche investors are salivating over has been and continues to be real estate. The crowdfunding portals that are performing the best at the moment, are all focused on the real estate sector. While many others struggle to make headway, real estate equity crowdfunding continues to maintain its lead among accredited investor portals. There are a number of reasons real estate is outperforming its other private equity peers. These features and the penetration crowdfunding has had on the real estate market is fundamentally changing the world of real estate investing and real estate investment banking.
The Reason for Real Estate
The investor appetite for real estate is warranted. Real estate has a few key features that make it more appealing to investors than many other fluffy, blue-sky startups. For starters, real estate is an asset-backed security. Unlike other corporate investments, real estate includes an underlying hard asset that—in the event of default—can be liquidated. Debtholders are obviously first in the capital stack. However, those that have equity in real estate—while still second in line—are still in line if a liquidation event occurs. Unless a significant valuation drop occurs, there is typically a bit more security in real estate.
Both commercial and residential real estate also has a fairly unique feature in that the cash flows can be more consistent than other private equity deals. Predictable, recurring rents can provide a steady coupon-like cash flow to investors. And while real estate can be an illiquid investment, it can act as a hedge against inflation. Finally, real estate can help provide some portfolio diversification, depending on how one’s portfolio is currently structured.
Institutions vs. Individuals
When it comes to investing firepower, we have seen that institutions still beat crowdfunding investors when it comes to speed, quantity and size. This trend is not likely to abate at least in the immediate future. Institutions still maintain larger pools of capital than individuals. The crowd certainly has potential and while we are seeing said potential with the more rapid rise of real estate crowdfunding, institutions still reign supreme in overall deal size and deal number.
One of the big boons touted by the equity crowdfunding peddlers is that “the crowd” will—in some way—unseat traditional private equity and venture capital. Online real estate investing encompasses so much more than simple equity. There industry’s complexity, including the types of funds that are being placed in residential and commercial properties alike is opening up and changing the way both investors and issuers are sourcing and closing deals. As the industry continues to mature, I would imagine the lanes that show the most promise will become like the cream rising to the top.
Nate Nead works for real estate investment bank InvestmentBank.com. Nate and his team help companies buy, sell and raise capital for real estate transactions. He and his team are committed to sourcing appropriately-priced capital through institutional and individual investors using Regulation D 506(b), Regulation D 506(c) and Regulation A+. He resides in Seattle, Washington.