Akhil Saklecha
Real estate investing has long elicited a variety of emotions, running the gamut from excitement to anxiety. When dealing with significant sums of capital, feelings of apprehension tend to creep in, especially regarding neighborhood quality, tenant and property management issues and liquidity.
But those feelings of apprehension should be balanced by the knowledge that real estate as an asset class offers high returns in low-interest-rate environments, provides diversification from traditional stock portfolios and has the potential for long-term appreciation.
Plus, there’s another, more recent benefit to consider for investing in real estate. Technology has enabled radical changes in how and where people invest in real estate. The old adage that real estate investing is a local business no longer holds true.
Millennials, skilled professionals, overseas investors and retirees now have the ability to acquire properties, commercial developments and even homes like they acquire stocks or bonds. Remote investing makes single-family rental (SFR) investing a viable alternative investment option, and with returns that outperformed S&P 500 returns in 2015, it has emerged as a powerful wealth-building tool.
An initial wave of remote real estate investing happened via crowdfunding, which enables investors of all ages, risk profiles and wealth levels to acquire real estate. With as little as $5,000 down, investors across the world can buy a stake in a single-family home, or with a larger investment, they can opt to purchase shares of a 300,000-square foot office tower. Realty Mogul, RealtyShares, Fundrise and more than 200 other firms valued at a combined $2.6 billion worldwide support this type of crowdsourced investing.
While crowdfunding may be a great way for novice investors to get their feet wet, there are some downfalls. Investors can only purchase a portion of a real estate project, which means they own the property along with several other investors — similar to timeshares. In some cases, hundreds of investors might own a stake in a single asset through a limited liability company. Instead of having full ownership of the real estate, the investor possesses limited control over their capital, how it’s distributed and where it’s distributed.
There is no real way of knowing whether the interests of the majority owner are even aligned with the interests of the portion that is crowdfunded. Furthermore, there are potential tax liabilities based upon income charged to the investor without receipt of any cash flow, lack of a secondary market for liquidity and dealing with the requirement of new capital if a cash shortfall should occur. Investor fortunes could be lost, and they could be lost quickly.
As crowdfunding models have become more complicated, a new generation of real estate technology disrupters has addressed some of the shortcomings of crowdfunding with a more holistic funding model, providing protection for investors and helping them build wealth through a combination of cash flow and appreciation.
Firms such as HomeUnion, in which we’ve invested, and OwnAmerica offer investors the ability to buy an entire single-family home or create a portfolio of homes, fully customized to meet their personal investment needs. For instance, my portfolio of homes would focus on cities such as Cleveland and Indianapolis where cash flow is high, whereas another investor may prefer locations like San Antonio and Houston where there is more of a balance between appreciation and cash flow.
The fundamental difference in this next wave of funding platforms is that they support true ownership of real estate. Land is the underlying asset, not a piece of paper endorsing fractional ownership. Additional benefits include receiving significant tax breaks associated with home ownership and investment guidance throughout the entire holding period. In short, investors have complete authority over the decision-making process.
Venture capitalists and individual investors have given this new wave of companies a strong vote of confidence over the past few years. According to Venture Scanner’s portfolio management category, the median funding value of real estate startups globally is $3 million. One of the leading anti-crowdfunding companies, HomeUnion, has raised nearly $23 million in funding from VCs and has closed on the sale of more than $50 million in single-family rental assets since its inception. Similarly, OwnAmerica has traded more than $27 million during the beta phase of its new platform.
As the crowdfunding segment plateaus and the next generation of real estate startups continue to grow rapidly, these companies face a different set of challenges. They will need to manage concerns that investors have about lack of diversification by offering inventory in multiple geographies and across multiple micro-economies, ensure excellent customer service and fail-safe processes for the inevitable eviction of tenants or to prepare for a catastrophic event, such as a fire.
In essence, the experience of buying homes remotely must be entirely hassle-free, as should the ongoing property management and eventual sale of the asset.
As real estate technology continues to improve the benefit for consumers, one thing is crystal clear: The notion of real estate as a hyper-local business has turned upside down since the arrival of these new platforms.
In the U.S., single-family rentals currently comprise 40 percent of the country’s entire rental stock, up from 34 percent in 2005. Individuals own the majority of all single-family rentals — 83 percent — with REITs and other institutions holding the remaining small portion.
Hands-off investing, uninhibited by geography and free of the headaches associated with property management, has completely disrupted real estate investing forever.
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