• Aug. 16, 2017, 6:36 pm

Bringing commercial real estate to the crowd

taxesMutual funds, commodities, individual stocks and bonds – all of these have for years been the object of investments by ordinary individuals. One asset class, though — commercial real estate — has continued to primarily use larger investors as a financing source.

Sponsors of specific real estate projects usually seek money from groups or entities able to invest significant amounts — in part, so that those promoters don’t have spend time on numerous individual investor reports and inquiries. Until 50 years ago, most large properties continued to be owned by financial institutions, pension funds, life insurance companies, and a few very wealthy individuals.

After the development of real estate investment trusts (“REITs”) in 1960, broader individual participation in commercial real estate became better available – yet even then, most REITs are holders of “pools” of assets, and it‘s still not easy for smaller investors to play a part in individual project syndications.

Only recently has communications technology and its facilitation of “crowdfunding” enabled smaller investors to participate more broadly in specific real estate investments. The internet has made possible wide access to news, information, products –- and real estate investments.

Through an online platform like the one provided by Realty Mogul, people can now review real estate investment projects at their convenience – say, sitting with their laptop or tablet at the kitchen table at 10pm, after the kids have been put to bed.

Previously, introductions to these opportunities might have required specially arranged meetings with attorneys, bankers or financial advisers – that is, if the person had such connections at all. The ability of smaller investors to conveniently access “deal flow” directly has enabled vast numbers of “run-of-the-mill” investors to invest in larger or higher-level real estate projects than ever before.

Just as such opportunities had been generally more difficult to access, they were also often still limited to institutions or persons of very substantial wealth. A project syndicator seeking $2 million in equity wouldn’t typically concern himself with contributions of $10,000 or $20,000; rather, he would search for investors able to contribute ten times those amounts, in order to simplify his task of managing investor updates and distributions during the life of the project.

Technology, however, has enabled large numbers of unrelated investors to pool their contributions and make a significant investment through a single legal entity – keeping things easy for syndicators while broadening the source of potential investors.

The illiquidity of most real estate investments has also contributed to investors often receiving only infrequent reports on a project’s status.

The internet, though, makes it easy to access centralized information, and crowdfunding sites like Realty Mogul allow investors to do status checks and review project updates on a 24/7 basis. This in turn permits the investment to be more transparent, enhancing investor trust and thus creating a virtuous circle whereby the investor base is increasingly broadened.

An investment offering recurring, passive cash flow is often an attractive one, and commercial real estate can frequently offer a good source of such returns. Average investors, though, have not always been able to participate in such opportunities other than through a REIT holding a pool of many different properties.

Crowdfunding sites aimed at the real estate sector, such as Realty Mogul, can now permit smaller investors with no previous industry connections to play a part in specific real estate opportunities — and at smaller contribution amounts than were formerly practicable. Technology can be a wonderful thing.

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