Securitized Assets Grounding Real Estate Crowdfunding Deal

The financial market is still a touchy subject for many people. The recent recession and financial crisis are too easily recalled. Many, many investors lost millions of dollars, Euro’s and Yen all around the world. Recovery from the disaster has been slow because of the loss of assets, and also because of the subsequent, heightened sensitivity people have to anything resembling a risky investment. Cash reserves are hoarded; investments (if they are made at all) are made in solidly performing vehicles that have demonstrated reliability over time — usually yielding low single digit returns.

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Is There Such a Thing as a Stable Investment?

Now that there appears to be a stabilization in the markets, what on earth might qualify as a reasonable-risk investment? Fortunately, finance, real estate and technology have merged to offer real estate investors new options they have never had before. Real estate retains investment appeal despite the recession. It offers long-term growth in either (or both) appreciation of value and rental value. In fact, over a 30-year period from 1977 to 2007, real estate rental returns accounted for close to 80% of the total US real estate return. It’s relatively low volatility provides stability, especially when less fixed asset values are fluctuating through market rises and falls.

It’s high tangibility is also a plus. The property itself holds value that can be estimated by someone other than the broker or owner, so there is less chance of inappropriate valuation due to conflicts or other nefarious variables.

Can Real Estate Stabilize my Investment Portfolio?

Real estate can act as a portfolio stabilizer in portfolios that are diversified with assets carrying higher risk values. Its only real challenge is the fact that it can’t be liquidated in a hurry, so cash flow problems won’t be solved in portfolios with high real estate asset percentages. Despite the downturn, real estate values have recovered faster than other market sectors and many communities are experiencing a rebound in their housing and construction industries. Because it retains its’ long-term favorability as an investment vehicle, the recovering real estate market is again attracting investors, only this time around, there’s a new, technologically-driven tool to use.

What Does it Mean to be Securitized?

Securitization offers Investment Security. In the process of “Securitization”, a bank or financial institution pools existing financial assets (often accounts receivable from mortgages, credit cards, etc.) and sells them as a unified product to a separate entity. That entity issues bonds to purchase the securitized asset. The financial institution can now clear the assets off its books, and can use the cash generated by the sale to pursue other transactions. The bonds issued by the purchaser are tradeable in the marketplace as “securitized” products. The products are secured by the underlying financial pool resources.

“Securitized” products offer a variety of benefits to market participants and the broader community:

  1. They free up capital for lending. Selling the financial assets generates cash that is then available for lending to other consumers. More capital means lower interest rates.
  2. They transition non-liquid assets into liquid assets.
  3. They spread the ownership of risk. The pooling and distribution plans for securitized assets can be modified, giving investors options in terms of relative risk.

Products created through securitization can be customized according to the issuer, offering a more diverse range of yield options.

Real Estate Crowdfunding and Securitized Assets

Funding small and medium loans using securitized products has been the foundation of the emerging crowdfunding industry since Lending Club launched in the mid 2000’s. No longer was a bank necessary in the transaction of borrowing money. This concept spread across multiple industries, including private lending in real estate. Real estate crowdfunding is growing in popularity, chiefly because it allows smaller investors to access larger deals. The 2012 JOBS Act opened the door by permitting crowdfunded equity financing for real estate that was overseen by a qualified, licensed intermediary. Investors get a (small) piece of the pie that is secured by the pie itself. AND, they also receive the benefits of real estate investing listed above.

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Technology provides the connections between investors and property sellers through safe, secure digital portals. For investors looking to gain a reasonable return for a relatively small investment that is backed by a piece of real estate, the crowdfunded real estate investment market offers a terrific opportunity.