Guest Post by Nav Athwal
In 2012, billionaire investor Warren Buffet was quoted on CNBC as saying: “If I had a way of buying a couple-hundred-thousand single-family homes, I would load up on them. It’s a very attractive asset class now. I could buy them at distressed prices and find renters.”
Whether spurred by Warren Buffet’s wise words or merely because they saw the potential first-hand, investors piled in by the thousands in 2012 to purchase distressed bank-owned homes, rent them out, and earn high cash yields while simultaneously taking advantage of built-in appreciation and tax benefits. And the biggest player in this feeding frenzy? Not surprisingly, it was mostly Wall Street and other institutional investors that took advantage of this opportunity, crowding out the individual investors that could not compete with these deep-pocketed, all-cash buyers.
What was once a mom-and-pop business quickly became a Wall Street Wonderland. In markets such as Florida and Las Vegas, institutional investors—who are bidding on hundreds of homes a day—account for as much as 70% of home sales. Individual, even high-net-worth investors, are finding it hard to compete with these cash-infused behemoths. Ironically, prior to the housing crash institutional and Wall-Street investors rarely looked twice at single-family homes as an investment option, largely because of the slow returns and fractured and time-consuming management involved. However, with prices distressed, rents stabilizing, and more renters in the market, this asset class has become very attractive. Institutions have lined up in droves.
Many tax-paying citizens are outraged by what they call a “sick irony,” since these institutions now seek to gain by scooping up the spoils of their own misdeeds, which resulted in the housing crash in the first place.
The result of this influx is increasing home prices in the parts of the country most affected by the housing crash. In the last year alone home prices have risen by as much as 23% in Phoenix, 20% in Las Vegas, 17% in Los Angeles, and 11% in San Jose, according to the Case-Shiller home-price indexes. Nationally, prices are up more than 8% year over year. As a result, investors have turned away from markets such as Arizona and California, where prices have been pushed too high to maintain the yields to which investors have become accustomed. Instead investors are increasing their focus on the Southeast and Midwest. With home prices that remain 29% below their 2006 peak, and rising demand for rentals among home buyers who can’t qualify for a mortgage, opportunities in these markets are still abundant.
While there are still opportunities for investors to buy rental homes that generate a healthy return on investment, Wall Street is once again edging out the individual investors that are restricted by location and lack the quick-mover advantage and economies of scale of their institutional counterparts. The Blackstone Group is gobbling up properties by the thousands in places like Florida and Georgia. Los Angeles-based Colony Capital, which has approximately 10,000 single-family rental homes in its portfolio and was previously focused on opportunities in the West, is now shifting its attention to other regions where opportunities are more abundant.
As a founder of RealtyShares (www.realtyshares.com), one of only a few companies currently crowdfunding real-estate investments online, I’m a firm believer that crowdfunding is the individual investor’s answer to Wall Street. Although crowdfunding has been around for almost a decade, until recently most successful crowdfunding campaigns have been donation- and/or reward-based, with sites like Kickstarter leading the way. However, over the past year, not only has crowdfunding emerged as a multi-billion-dollar industry, but investment crowdfunding has begun to revolutionize the way individual investors invest. With platforms like CircleUp, Fundersclub, and Mosaic already gaining traction, investment crowdfunding is expected to drive everything from startups to consumer goods, small businesses, and even alternative energy. But real-estate investing and its potential to shake up Wall Street’s Wonderland will be its most disruptive application.
David Drake, founder and chairman of LDJ Capital and its subsidiary, The Soho Loft, an event-driven financial media company at the forefront of the crowdfunding work in the United States and globally, had insights into this when he wrote in Forbes about “Crowdfunding’s Latest Invasion: Real Estate.” He believes that “an avalanche of investors, big and small, will herald the new financial markets, as broken systems are patched up and revitalized with new innovations spurred by online automation that allows for speedy access to high-quality information and fulfillment of transactions. Real estate is set to benefit from all of these as it spawns global investments and deconstructs international laws and regulations.”
Despite being trillions of dollars in size, real estate is stuck in 1970. That is the very reason that Wall Street can continue to amass portfolios of single-family homes that yield double- digit returns by the tens of thousands, while the individual investor can only stand by and watch. However, by utilizing technology and focusing on transparency and efficiency, investment crowdfunding can connect individual investors almost instantaneously to real-estate investments in geographies and markets that they otherwise could not access.
At RealtyShares, for example, we are currently focused on single-family-home opportunities in Atlanta, Florida, and Jackson, the very same geographic markets on which Wall Street is honed in. We are teaming with seasoned investment managers in these locations, with a first-mover advantage that lets them compete with Wall Street.
We are in the midst of a very powerful transition in the real-estate investment space. Crowdfunding may well emerge as the individual investor’s solution to the faceless private-equity investor.
About The Soho Loft (www.thesoholoft.com)
The Soho Loft Capital Creation Events (”TSL”) is a corporate strategy and advisory services company specializing in financial innovation and economic sustainability. Through its global events and media platform it advances diligent mainstream and alternative investing for start-up entrepreneurs and small and medium-sized enterprises. TSL provides visionary leadership and relevant education in the areas of capital formation, crowdfunding, angel networking, non-conventional funding, eb5 green card programs, micro-finance, venture capital, private equity and hedge funds.
TSL is a subsidiary of LDJ Capital based in New York USA. Its founder and Chairman, David Drake, is a founding member of Crowdfund Intermediary Regulatory Advocates (CFIRA) and of Crowdfunding Professional Association (CFPA). He played a key role in the passing of the JOBS Act (Jumpstart Our Business Startups Act) in the United States. His advocacy for financial innovation has taken him to the global stage when he joined the U.S Commerce Department’s delegation to Brussels and Rome at the Transatlantic Economic Forum for SME Policy last July 2012 where he met with European ministers and national legislators. He is an international speaker and prolific writer on these topics.
Overall, TSL’s mission is to bring global awareness and develop infrastructure to facilitate innovative capital formation and access and spur job creation. As such, The Soho Loft operates as the leading global corporate strategy adviser on financial and economic policy.
About David Drake
David Drake is the founder and Chairman of LDJ Capital in New York City and of The Soho Loft Capital Creation Event Series (“TSL”) covering the Private Company Marketplace and Capital Formation. Mr. Drake is an expert and a thought leader on the USA JOBS Act (Jumpstart Our Business Start-Ups Act) including Reg A+, Reg D 506, Crowdfunding Capital and Onramp IPO. He is a founder and former executive board member of the Crowdfund Intermediary Regulatory Advocates (CFIRA) and of the leading global trade association Crowdfunding Professional Association (CfPA). He was part of the U.S. Commerce department delegation as the JOBS Act expert at the US and European Transatlantic Economic Council (TEC) forum last July 2012 in Rome and Brussels where he met with European Ministers and national legislators. He writes extensively on these topics and his articles and editorials are published by leading industry websites such as forbes.com, pehub.com, equities.com, cfira.org, crowdsourcing.org, sme-world.com and loftfi.com to name a few.