Real estate investing has brought about several emotions ranging from anxiety to excitement. These feelings of apprehension are common, especially when dealing with substantial amounts of capital. They are also about the quality of the neighborhood, as well as issues regarding the property, tenant management and liquidity.
However, these feelings can be balanced by the fact that real estate investing offers higher returns, enables investors to diversify their portfolios, and is potentially poised for long-term appreciation.
In addition, technology has disrupted the industry with regards to where and how people make real estate investments. Retirees, experienced professionals, millennials and foreign investors can now acquire residential and commercial properties the same way they can purchase bonds or stocks.
Remote investing has made single-family rental (SFR) financing a feasible investment option, and a powerful tool for creating wealth. It has become a trend through crowdfunding, which allows investors, of all wealth levels, risk profiles and ages, to invest in real estate. This kind of crowdsourced investing is being supported by over 200 companies, including RealtyShares, Realty Mogul and Fundrise.
Even though crowdfunding provides an easier way for novice investors to start building their real estate investing portfolios, it definitely has its own downsides. One drawback is that investors can only acquire a percentage of the property. This means that investors have restricted control over their capital – where and how it is distributed.
Another downside is that it’s not easy to know whether there is even alignment between the interests of the majority owner and the crowdfunded property percentage. Additionally, there are possible tax liabilities associated with charging the investor’s income, even when they do not receive any cash flow. Some firms do not have a secondary market for easier liquidity, and investors are required to inject in new capital in case a cash deficit occurs. This could lead to the quick loss of an investor’s capital.
Some pioneering property technology disrupters have developed an all-encompassing funding model to solve some of the shortcomings associated with crowdfunding models. The new funding model protects investors and helps them create wealth by combining cash flow with appreciation of property value.
Companies such as HomeUnion and OwnAmerica allow investors to acquire the whole single-family home or build a portfolio of homes. The homes are fully customized to meet the personal investment needs of the investor. For example, an investor’s portfolio of homes may focus on cities with high cash flow, such as Indianapolis and Cleveland, or in areas with balanced cash flow and appreciation, such as Houston and San Antonio.
The main difference with the new funding portals is that they promote actual real estate ownership. Investors also receive significant tax reliefs related to home ownership, and investment guidance is offered throughout the whole holding period. In other words, the entire decision-making process is controlled by the investors.
Individual investors and venture capitalists have shown confidence in these new funding platforms in recent years. The portfolio management category of Venture Scanner shows that the average financing value of real estate startups worldwide is $3 million. HomeUnion has raised about $23 million from venture capital firms, and has closed SFR assets of over $50 million.
Real estate investing companies need to address investors’ concerns. This includes solving the problem of lack of diversification by providing inventory across numerous micro-economies, and in several geographies; ensuring exceptional customer service; and being prepared for catastrophic events.
Generally, the experience of remote real estate investing, property management, as well as the ultimate sale of the property, should be hassle-free.
Improved technology and the new platforms have overturned the traditional notion that real estate investing is a hyper-local business. For example, in the U.S., 40% of rental stock comprises of SFRs, compared to 34% in 2005.
Remote investing, not hindered by geography and other property management hitches, has been, and will continue, disrupting the real estate investment sector.