Commercial real estate has perhaps been slower than other asset classes to embrace financing through smaller individual investors. Until the development of real estate investment trusts (“REITs”), most large properties had generally been owned by financial institutions, pension funds, life insurance companies, and a few very wealthy individuals. After REITs were introduced in 1960, broader individual participation in commercial real estate became somewhat more accessible; but most REITs operate as holders of “pools” of assets, and it has remained difficult for smaller investors to participate in syndications of individual projects. Sponsors of specific real estate projects have continued to seek financing from larger investment groups – partly to avoid having to deal with individualized reports and inquiries from large numbers of investors.
Only recently has communications technology and its facilitation of “crowdfunding” enabled smaller investors to participate more broadly in specific real estate investments. The internet has made possible wide access to news, information, products –- and real estate investments.
Through online platforms like Realty Mogul, people can now review real estate investment projects at their convenience – say, sitting with their laptop or tablet at the kitchen table at 10pm, after the kids have been put to bed. Previously, introductions to these opportunities might have required specially arranged meetings with attorneys, bankers or financial advisers – that is, if the person had such connections at all. The ability of smaller investors to conveniently access “deal flow” directly has enabled vast numbers of “run-of-the-mill” investors to invest in larger or higher-level real estate projects than ever before.
Just as such opportunities had been generally more difficult to access, they were also often still limited to institutions or persons of very substantial wealth. A project syndicator seeking $2 million in equity wouldn’t typically concern himself with contributions of $10,000 or $20,000; rather, he would search for investors able to contribute ten times those amounts, in order to simplify his task of managing investor updates and distributions during the life of the project. Technology, however, has enabled large numbers of unrelated investors to pool their contributions and make a significant investment through a single legal entity – keeping things easy for syndicators while broadening the source of potential investors.
The illiquidity of most real estate investments has also contributed to investors often receiving only infrequent reports on a project’s status. The internet, though, makes it easy to access centralized information, and crowdfunding sites allow investors to do status checks and review project updates on a 24/7 basis. This in turn permits the investment to be more transparent, enhancing investor trust and thus creating a virtuous circle whereby the investor base is increasingly broadened.
Real estate has proven to be one of the most effective investment vehicles for generating recurring, passive cash flow. Until recently though, other than through a REIT holding a pool of numerous properties, an average investor had little prospect of participating in commercial real estate investments. The advent of real estate crowdfunding has allowed people without pre-existing industry connections to participate in specific real estate projects, and with smaller individual investment amounts, than ever before. Vive la revolution!