Passive Investment Opportunities Through Real Estate Crowdfunding

Allen Shayanfekr  |

“Location. Location. Location.” That real estate adage underscores the value of where you are in relation to what you value. For city dwellers, “close” means in the heart of the urban center – close to shops, restaurants, etc. For suburbanites, “views” might mean vast expanses of open range. Still other real estate adages reference the land itself, not just as a place to live, but as a place to invest financial resources with an expectation of appreciation and a high percentage of “return on investment." The real estate world is ever changing, and technology has opened up some innovative investment options in commercial and residential real estate purchasing opportunities.

Real Estate Is a Promising Investment Option

The burst of the housing bubble that caused the Recession of 2008 left millions of real estate investors with a decidedly sour taste in their mouths. After a few years of remarkable returns, with a corresponding rise in market values, the collapse of that market revealed a system that had gone terribly wrong. Real estate-backed loans defaulted as over-extended borrowers were unable to adjust to revised mortgage terms. Investment banks that had purchased those loans were unable to prove they had the capital to support their investor portfolios. The consequential foreclosures left millions of homes and commercial buildings unfinished, closed or boarded up.

In the aftermath, the real estate industry was compelled to review its internal processes, to both prevent a disastrous repeat of 2007, and to also encourage investment again. All that unused property had value that was going to waste. The American federal government helped by keeping interest rates low. And the explosion in Internet-based investment opportunities is virtually limitless, including investments in real estate. For even the most cautious investors, there are now opportunities for passive investment in real estate that are well worth investigating.

Passive Investment in Real Estate

The ongoing investment argument is whether to seek active or passive portfolio managers. The case against active managers is that their (frequently high) fees absorb a chunk of the profits made in each transaction. On the other hand, in acknowledgement of the fact that humans are not rational and, therefore, leave value on the table when investing, active managers have the opportunity to exploit those irrational decisions to the tune of big returns for their clients.

Passive investors (those who prefer a more methodical process in selecting portfolio assets) are instead looking for assets that bring balance to their overall holdings. Some of their selections may carry higher risks and the promise of high returns. Wise investors will populate their portfolios with both high and low risk ventures, to capitalize on potential opportunities while maintaining a fairly reliable overall value of return over time. One vehicle offering relatively low risk assets with a fairly certain return of investment: real estate crowdfunding ventures. Crowdfunding is the latest real estate investment vehicle. Crowdfunding is achieved through collaboration by many people online; “investment crowdfunding” occurs when businesses seeking capital sell ownership stakes online, in the form of debt or equity. These investments usually offer the potential for a financial return.

Real Estate Crowdfunding Deals

In 2015, more than $484M had been invested in real estate projects through crowdfunding opportunities in the United States alone. This figure triples the US investments into real estate crowdfunding platforms in 2014. In Bogota, Colombia, crowdfunding has financed the development of the “BD Bacata,” the tallest building to be built in Colombia. More than 3,800 Colombian investors contributed more than $170M in cash to the project. In Hamburg, Germany, the five-star resort, Weissenhaus Grand Village Resort and Spa, raised more than €4.2M from more than 800 investors to fund its expansion project. Two Manhattan projects, 17 John Street and 84 William Street, each raised $25M of their total budgets through crowdfunding from American and international investors. These are some of the biggest deals that have been crowdfunded, but they are also outliers in this space.

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