Many factors have been driving the evolution of the world’s financial infrastructure since the economic debacle of 2007-2009. Traditional investment vehicles have been demonstrably unstable. Some of the financial giants that managed (and mismanaged) billions of dollars of investments were deemed “too big to fail”; they required U.S. federal government bailout money to maintain their businesses.
The idea that a business has become “too big to fail”—so large and ingrained in the economy that a government will provide assistance to prevent its failure—accepts the notion that tolerance for corruption and even criminal activity is preferable to suffering through the consequences of actually righting the wrongs that caused the failures in the first place. No wonder investors are moving away from “traditional” investment ideology.
Investing in alternative financial opportunities has been made infinitely simpler because of the internet and its capacity to connect all levels of investors with all levels of opportunity. According to a McKinsey report, financial institutions with assets of more than $10 billion have extended their portfolio by as much as 30 percent into “alternative investments.”
There are three possible reasons for this:
1. The public equity market has been having a great run, but there are rumors that a correction is expected in the not-too-distant future.
2. The fixed income market has been suffering from a low yield for quite a while.
3. Another possible factor: corporate management fees sometimes erode ROI to a nominal amount. Investors are seeking alternative assets that offer stability, a high yield and low—if any—fees.
Intriguing Options for Alternative Investment Vehicles
So how to decide what to do? Asking the right questions is key. Alternative investments are typically newer on the market and don’t have extensive public recognition. Investors investigating these options should forgo the “How’s it doing this year?” question, and instead ask, “Why is it where it is today, as compared to last year? The year before that?” Another helpful note might be inquiring about the potential for liquidity of the asset. Many investors have suffered losses because they couldn’t access resources held in nonliquid financial tools.
Before, entrepreneurs would approach personal resources or banks to secure capitalization for new ideas and businesses. With real estate crowdfunding, entrepreneurs can raise capital from a group of investors online. When the funding goal is reached, the funding is released and commencement of the project can begin. Crowdfunding can raise money more quickly in many cases because the project need only appeal to the individual investors, and not be required to go through the rigors of a financial institution feasibility study. Another reason these projects commence and fund so quickly is because the entire process is automated using the platform’s online software.
Real estate crowdfunding (RECF) has been gaining worldwide attention due to its ability to connect both serious investors and real estate developers on one online platform, excluding the middleman. Real estate crowdfunding has brought investors online using the latest automation technology to diversify investment portfolios of accredited investors worldwide.
Lower Investment Thresholds
Real estate lends itself especially well to this alternative style of investment. Traditionally, real estate investments required great sums of money and a significant period of time for the project to develop a revenue stream. Each of these aspects kept smaller investors out of the market because they could not afford to put that much capital and time into one asset.
With RECF, online platforms can post numerous real estate projects, with a set funding goal stated. Investors can contribute as little as $1,000 and can track the progress of the funding—and later the project—on their laptops or mobile devices. The process doesn’t require the intense oversight typical to most real estate investments, and investors generally receive monthly distributions based on their percentage of ownership.
Crowdfunding is on the desk of the U.S. Securities and Exchange Commission (SEC) as well. The 2012 Jumpstart Our Business Startups Act (JOBS) established the foundation for a regulatory structure for small businesses and startups to access capital through a crowdfunding source. The rules also eliminate the necessity for internet-based investment platforms that sell these securities to register with the SEC as brokers.
One Platform With Multiple Benefits
The facts are undeniable—real estate crowdfunding is here to stay. Venture capitalist Charles Moldow predicts that marketplace lending platforms will generate $1 trillion in loans by 2025. Now that real estate has gained its own Global Industry Classification Standard (GICS) sector, investors are again looking toward real estate as a serious way to diversify their portfolios.
RECF platforms typically vet and approve real estate loans for ground-up construction, value-add and stabilized properties. Once those projects are approved, they are placed on the platform for investors to view and invest in. This use of transparency and technology completely reinvents the way that investors invest in real estate. At the touch of a fingertip, investors can view properties, public loan documents, appraisals and renovation plans to perform their own due diligence prior to investing. The software behind RECF platforms is also responsible for distributing returns to investors.
Considering the concerns with traditional investments, RECF is now recognized as a legitimate portal for millions of investors to harness the power of their discretionary income.
Real estate has always offered reliable investment stability. Together, online crowdfunding and real estate offer incredible investment potential.