As states begin to open their economies in an effort to recover from the COVID-19 pandemic, new opportunities will arise in real estate as others start to close. From the looks of it right now, commercial real estate is going to have a slow recovery. That will likely include multifamily, though retail and office space is likely to have a slower recovery. But there is one area of real estate that could see a new surge coming out of the crisis: Fix and Flip property investing.
There are two primary reasons, and heads and tails of the same coin if you will, that will likely drive this surge.
- First, as landlords will likely raise rents to make up for lost revenues in the last three months
- New construction will slow down as new home sales fall
6 Economic Indicators Coming Out of the COVID-19 Crisis
There are several economic drivers impacting real estate during the COVID-19 pandemic crisis, and these drivers are likely to continue impacting real estate for the next few months. The most obvious of these drivers is the high unemployment rate, but it’s not the only driver. Let’s look at five of the biggest economic indicators for the COVID-19 recovery.
- There have been 36.5 million unemployment claims since the coronavirus crisis kicked off in March. Most of those happened in April when there was a sharp uptick in claims due to states shutting down non-essential businesses. Even as states begin to open up their economies, even though unemployment claims are tapering off, many workers are opting to stay on unemployment because they can make more than they can on their jobs. That means fewer new home sales as unemployed persons are not likely to qualify for home loans.
- New residential sales in March 2020 fell 15.4 percent from the revised February 2020 estimate of 741,000. With unemployment reaching a staggering rate, I would expect sales in April to have hit the floor. We won’t know for sure until next week, but a decline in new residential sales would mean that rentals and existing residential homes likely were in demand in places where such transactions could take place. With unemployment as high as it is, it’s likely that fewer people are moving. Those who do move are likely moving in with family or downsizing to rental properties.
- New residential construction fell 22.3 percent below the revised February 2020 estimate of 1.5 million. This will impact new residential sales going forward. Coming out of the COVID-19 crisis, fewer people will be in the market for a new home. They will either have to purchase older homes of lesser value, rehabilitated homes, or rent.
- Total U.S. business sales were down 5.2 percent in March 2020 compared to February 2020. Considering the shutdown of nonessential businesses did not take place for most states until late March and early April, it’s a sure bet that April’s figures are even bleaker. Add to that the total U.S. business inventories for March 2020 were down 0.2 percent, the indication is that the manufacturing and trade sector isn’t looking so good. When manufacture and trade falls, it impacts real estate sales.
- Retail and foodservice sales in the U.S. for April 2020 decreased 16.4 percent from March 2020. Since restaurants and foodservice businesses are some of the largest real estate investors, this will have a major impact on commercial real estate for the new few months or years.
- March 2020 sales of merchant wholesalers were down 5.2 percent from February 2020. Again, this will have a major impact on commercial real estate going forward.
These figures are taken from the U.S. Census Bureau.
Current sales impact future investment. If businesses, retailers, and commercial construction enterprises are losing sales today, or have seen a significant drop in sales and inventory recently, they will be reluctant to invest large amounts of capital in real estate projects until they can see an increase in these numbers. That increase will not come until several months after full recovery from COVID-19.
While commercial real estate and residential real estate sales may be suffering, people are still going to need a place to live. For that reason, I suspect renting and fix and flip investing to pick up in the near future.
Why Fix and Flip Investing Will Carry Real Estate for the Rest of 2020
When it comes to shelter, people have three options. They can rent, they can buy new, or they can buy an existing home. With new construction and new home sales in decline as a result of high unemployment and mandatory nonessential business shutdowns, that leaves the inventory for single-family homes to remain in the existing home market.
Landlords haven’t fared too well in the current market either. In some states, like Pennsylvania, landlords are prevented from evicting tenants if they are unable to pay the rent. That means when the COVID-19 crisis is over, it is likely they will raise the rent. This could drive some tenants to the single-family ownership market where renovated homes can attract their attention.
Another consideration is the mortgage market.
According to Bankrate, the 30-year fixed-mortgage rate fell 3 basis points at the beginning of the month. That puts it at 3.52 percent. The 15-year fixed-mortgage rate is down 15 basis points to 3.03 percent.
With unemployment high, fewer people will be in the mortgage market. Those who are will be looking for smaller and more affordable homes, not new construction in the best neighborhoods. Also, new construction and new home sales being in decline mean less inventory, which will drive more home buyers to the rehab market. And it’s likely that mortgage rates will fall some more before they go up again. These are prime conditions for a new surge in fix and flip properties where private investors can take an older home in need of repairs, give it the attention it needs then put it back on the market in time for newly re-employed workers to recover from the financial setback caused by COVID-19.
This is the short-term outlook. Assuming a vaccine is discovered by mid-2021, we should start to be a recovery in the commercial real estate market, including retail and multifamily, and see a rise in new home construction by the end of next year.
To fund this surge in fix and flips, I see marketplace lending continuing to be an option for most investors as the economy recovers. Do your due diligence and go with those platforms with a proven track record.
This time last year, a survey of chief financial officers (CFOs) by the Duke University Fuqua School of Business showed that 67 percent of CFOs believed the U.S. would see a recession by the second half of 2020. That was long before anyone thought about COVID-19 or a coronavirus pandemic. Eighty-four percent of them believed the recession would start by the first quarter of 2021. One month ago, CNN declared the coronavirus recession has begun. When the financial crisis of 2008 hit, I lost half my business because it was tied to real estate. That recession was caused by widespread deregulation and a housing bubble burst. Today’s recession has nothing to do with real estate investing.
That doesn’t mean there won’t be implications for the real estate sector.
What Has Coronavirus Done to The Economy?
More than 17 million Americans filed for unemployment in March. That represents a 13 percent unemployment rate. Several states have ordered “nonessential” business closures, and some industries have completely shutdown.
While the federal government has taken measures to mitigate the impact of these discomforts, many Americans will feel the repercussions for months. The $2 trillion stimulus package passed in late March will help some Americans struggling to pay rent and put food on the table, but it might not be enough for some who could see their jobs completely disappear if their employers can’t recover. The Paycheck Protection Program was designed to encourage employers to continue paying their employees despite business shutdowns, but, again, if economic conditions worsen or continue for a long stretch, it may not be enough.
In real estate, sellers are taking their homes off the market as prices decline. Not only are sellers reluctant to sell, but buyers are also reluctant to buy. On the other hand, there has been a surge of 3-D video home tours online even as new home listings dropped by 27%.
Commercial real estate is seeing its own problems. Retail stores that have been closed or affected by social distancing are struggling to pay their rent. Multi-family residential is experiencing the same tug of war between tenants and landlords, and new construction has been hit as some contractors are out of work.
Nevertheless, we could be turning a corner. President Donald Trump has signaled he’s ready to open the economy on May 1 while several state governors are following suit. Pennsylvania Governor Tom Wolf, who has had the strictest shutdown policy in the country, has targeted May 8 as the day of gradual re-opening.
The question on the table is, what will do this for real estate investing in 2020.
Will 2020 Be a Good Year for Real Estate Investing?
I’m optimistic, and I’m not the only one. One real estate investor is suggesting “Subject To” is the way to go in the current market.
Rather than suggest a single strategy that is best for the current market, I’d like to point out that there is always some kind of deal that is worth considering in any type of investing market. There are always boom and bust cycles, and that includes recessionary environments. Savvy investors learn to make money in all of them.
Real estate cycles typically swing from favoring buyers to favoring sellers, then back again. You also see swings from residential to commercial, and from rental properties to home buying. What’s interesting about the current real estate environment is that it was strong up until the coronavirus pandemic shut the economy down. Since then, it has reached a moment of stasis. We are not dealing with normal market forces.
On the surface, it might seem that the real estate markets are hurting, but I don’t see it that way. I see a strong market waiting for the tide to go out.
3 Potential Scenarios for Real Estate Investing in H2 2020
Looking ahead, I see three possible scenarios for real estate investing in the second half of 2020, but it all really depends on what happens in May.
- Full Recovery – The first scenario is a full recovery. If the country’s economy reopens in May with little turbulence, the real estate economy could bounce back to its pre-pandemic state. In other words, people will start buying and selling homes again, construction will start up again, and we’ll see a full recovery. If this happens, online real estate investing could see a surge as people staying at home during the crisis discover online investing platforms, and pick up their online investing activity when they go back to work.
- Partial Recovery – If the country’s economy reopens and a spike in COVID-19 cases occurs as a result, we could see a new ripple of business closures. However, I think it’s likely that state and federal governments, as well as real estate industry professionals, will be better prepared and install control measures that protect people’s health while continuing to do business. This is already beginning to happen as some states are opening up their economies while requiring face masks to be worn in public. Under this scenario, online real estate investing platforms like Sharestates will benefit as more investors respond by taking their investments online.
- Slow Recovery – Under the slow recovery scenario, COVID-19 cases could spike due to a reopening of the economy and recessionary economic conditions have a bigger impact on the economy as CFOs predicted last year. In this case, online real estate investing may not be as popular as it would be in the above scenario, but will still see a boom.
Much of the progress for the rest of the year will be determined by how the coronavirus responds to summer weather conditions, currently an unknown, and how quickly testing can be done and a vaccine created.
Real estate is intrinsically local. That means the recovery from the current economic climate will likely be local, as well. New York and other major metro areas impacted significantly by a high number of cases of COVID-19 could see a slower recovery than other parts of the country where there has been a negligible impact. Since many real estate crowdfunding platforms offer deals based on physical property projects such as new construction and flipping, this new reality could impact online real estate investing. But it shouldn’t be across the board. Again, in local geographic areas where the impact has been insignificant, there will likely be little blowback. I, for one, am not planning to make any changes to my online real estate investing strategy in the short-term.
There are many paths to millionaire status, but one of the more common paths is real estate investing. According to The College Investor, 90 percent of millionaires around the world made their millions investing in property. But even within real estate, there are different ways to invest, such as real estate crowdfunding. Some of the more popular, and profitable, means of obtaining wealth for many real estate investors in the U.S. include:
- Fix-and-flip properties
- Rental properties
- Foreclosure and pre-foreclosure investing
- BRRRR investing
- House hacking
- 1031 exchanges
While these are popular methods of real estate investing that have produced much wealth for investors, there is another type of real estate investing that has emerged in the last decade that is also producing wealth for private investors.
The Rise of the Real Estate Crowdfunding Opportunity
Real estate crowdfunding (RECF), which is also known by other names, such as marketplace lending and private real estate lending, combines the concepts of fractional investing and real estate syndication. The ability to collect funds from multiple investors in different geographical locations and pool them into a single real estate project while allowing those investors to diversify their individual real estate portfolios through a single portal has grown into its own industry. As a result, there are now more than 100 real estate crowdfunding platforms, many of them specializing in a particular type of investment.
The practice of syndication was popular in the 1980s before the internet went commercial. The idea behind syndication was that several real estate investors could pool their money into a syndicate, which would choose the properties these investors funded and earn a percentage of the returns for managing the investments.
Fractional investing has been around even longer. The advent of internet-based funding, however, made fractional investing more popular and available to the average investor.
Today, fractional investing opportunities are available as debt-based instruments and equity-based investments allowing private investors from all walks of life an opportunity to buy a piece of a real estate deal and see returns on their investments based on the structure of the deal. Changes in securities laws in the last decade have allowed real estate crowdfunding and private lending platforms a legal means of making public offerings that just a few years ago couldn’t occur. That means real estate investments have opened up to a whole new class of investors.
3 Ways RECF Will Offer Better Future Investing Opportunities
Forbes Councils Member Carlos Jose Rodriguez Sr points out three trends in real estate crowdfunding going into 2020. Each of these trends offers private real estate investors grand opportunities for building wealth this year and beyond. These trends include:
- Bigger and better deals
- Institutional capital
- Mergers and acquisitions
Let’s take a quick look at each of these trends.
Bigger and Better Investment Deals
Real estate crowdfunding has become a competitive industry. As the industry grows, and as more real estate developers adopt crowdfunding as a means of raising capital for their projects, the deals tend to get bigger. That’s good news for investors. Bigger deals mean more potential returns, but another side of that coin is that RECF platforms hone their underwriting and risk assessment practices so that the deals that are funded are actually better investments overall.
Institutional Capital Makes RECF More Efficient
Another trend in real estate crowdfunding is the growing interest of institutional investors. Institutions want to protect their wealth and investments. They are not prone to taking unnecessary risks. When institutions and high-net-worth individuals, who are more sophisticated investors, see an opportunity, they will use that opportunity to maximize the return on every dollar invested.
The fact that institutions are taking an interest in real estate crowdfunding means that the industry has reached a level of maturity, and it makes RECF investing more efficient for all investors involved.
Mergers and Acquisitions
Rodriquez points out that not all RECF platforms will survive. With more than 100 platforms currently existing, and many of them specializing in a particular type of investment, it’s possible that consolidation is just around the corner. There hasn’t been much of it yet, but larger platforms could begin to swallow up smaller platforms. Increased stock market volatility could have a negative impact on the profitability of smaller and struggling platforms, which could end up in the hands of larger competitors. That would simply serve to make the market more efficient. In the long run, investors will benefit from better deals and fewer platforms to choose from.
2 More Benefits to Real Estate Crowdfunding in 2020
As always, investors benefit if they don’t put all of their eggs in one basket. Instead of looking at one vehicle for your investments, you can protect against downturns in one category by keeping your portfolio diversified. In other words, if you’re heavily invested in stocks and bonds, branch out into real estate and commodities. Even within the broader investment categories, you can spread your investments around to protect your entire portfolio. If you are not currently investing in real estate through crowdfunding portals like Sharestates, adding RECF to your investment portfolio will keep your assets spread out among different types of investments and protect your wealth.
Another way real estate crowdfunding benefits investors is by allowing individual investors to put up less money for a shorter period of time. Accredited investors can get into most deals with less than $5,000. Depending on the platform, you can get into a lot of deals for less than $1,000. And you can still spread your investments out among several deals on the same platform.
These deals are also for a shorter period of time. Most RECF platforms provide investment opportunities for 12 months or less. These short-term investments allow investors to ride out volatility waves in other markets while maximizing returns on better investments.
RECF Still Requires Due Diligence
While real estate crowdfunding provides individual investors with several opportunities, you should still perform your due diligence. When you check out a RECF platform, you should look at three things:
- What experience and background do the RECF platform operatives have? The founders of some platforms have a strictly technological background. Ideally, you want to invest in a platform where the leadership has real estate experience.
- What are the underwriting practices? Risk assessment is a very important part of any type of investment. How does the platform evaluate the deals it offers to investors?
- Finally, you want to check the platform’s track record. How many deals fall through? How many get funded? How many deals do they fund every year? The quality and the number of deals offered to investors are a testimony to the quality and character of the RECF platform.
If you’ve already made millions on real estate investments through any of the traditional means of private investing, you should consider real estate crowdfunding for the reasons mentioned above.
Private lending as an asset class is in growth mode. In fact, since the 1980s, private lending has been one of the fastest-growing sectors in the lending market as a whole. Since the 2008-09 financial crisis, when banks almost entirely abandoned the real estate lending sector, nonbank lenders have picked up the slack and taken private lending to new heights. Today, some of the fastest segments of real estate lending are in the private money market.
The prospects for future growth in real estate private lending are good and getting better. Certain segments of the market are maturing, which means investors have better opportunities than ever before.
Traditional Lending Opportunities for Private Real Estate Investors
When it comes to lending opportunities for private investors in real estate, nothing beats mortgages. In fact, mortgage lending is the largest private lending category, but that doesn’t mean that all opportunities are for individual investors. Institutional investors make up a large part of the private lending market.
The mortgage lending sector can be split into three distinct markets, and all of them have tremendous opportunities for private money lenders.
- Residential mortgage lending – In December 2018, according to Magnify Money, 51 percent of the $10.3 trillion of mortgage debt was serviced by nonbank lenders. That’s a broad category that includes both individual lenders as well as institutional lenders, as well as direct lenders and marketplace lenders.
- Commercial mortgage lending – Commercial lending is not only about mortgages. It involves any type of commercial real estate development, including ground-up developments such as multifamily residential and office space. It also involves rehabilitation projects. Still, commercial mortgages are an important sector within the real estate lending category, and it’s wide open for private lenders.
- Industrial mortgage lending – The same applies to the industrial sector. It encompasses more than mortgages. Yet, mortgages within the industrial sector can be financed with private money.
Non-Traditional Lending Opportunities for Real Estate Investors
When it comes to private money financing, the opportunities for private real estate investors are growing by the day. Private lenders have plenty of opportunities within the traditional lending sectors due in large part to market growth after the financial crisis. However, more and more, there are non-traditional lending opportunities private investors can pursue.
The following opportunities for private lenders are either in the early stages or entering the mature stage of market growth.
- Marketplace lending – Marketplace lending is a type of platform lending that allows multiple investors the ability to pool their money to invest in different types of real estate projects. Most opportunities in this segment of the market have been for accredited investors, however, in the last couple of years non-accredited investors have seen more opportunities present themselves. Marketplace lending is beginning to mature as its own asset class, and there are opportunities for both debt and equity investors. Types of projects also run the gamut from residential fix-and-flip to commercial and industrial ground-up developments.
- Real estate crowdfunding – Often seen as synonymous with marketplace lending, real estate crowdfunding can also be viewed as a subset of marketplace lending. New and emerging business models are presenting themselves such that opportunities are not so easily categorized as equity- or debt-based nor easily classified as marketplace or direct lending. Hybrid models of lending and investing allow novice debt investors to partner with more experienced investors, private lenders to partner with institutions, direct lenders to partner with marketplace lenders, and lenders and borrowers to partner with each other where the borrower puts “skin in the game” on their own developments.
- HELOC – There aren’t many platforms offering private lenders opportunities to fund home equity lines of credit (HELOC) products, but there are a few that are beginning to rear their heads. There is plenty of room for this segment of real estate lending to grow.
- Fix-and-Flips – The fix-and-flip market is hot for private lenders right now. This is one of the key areas where banks pulled out of the market after the financial crisis. As a result of banks leaving a big gaping hole in the market, crowdfunding, marketplace lending, and private lending opportunities for real estate investors exploded. The opportunities are there, and they’re getting better.
- Bridge lending – Bridge lending is another ripe opportunity for private money financiers. By taking on higher risk and assuming a position higher up on the capital stack, private investors can get in on bridge loans that allow current or ongoing development projects to be funded mid-stage. They offer higher returns and greater opportunities for private lenders willing to assume the risk.
- Refinancing – Refinancing currently financed real estate projects can run the gamut from fix-and-flip hard money loans to conventional mortgages to high-interest commercial adjusted-rate mortgages refinancing for better terms. Any type of refinancing is available for private funding if the investor knows how to find opportunities.
- Home improvement – Homeowners who want to improve their homes can also take out loans from private lenders. This is another market segment that is in its early stages but that also has plenty of opportunity for growth.
- Blockchain lending – Blockchain is an early-stage technology that is presenting new business models and new takes on old business models. Opportunities for private lenders range from traditional lending products to crypto lending opportunities. One prominent blockchain lender specializes in HELOCs. Others offer real estate crowdfunding opportunities recorded on a distributed ledger, a decentralized technology that offers immutability and transparency for transaction reporting. Some uses of the technology involve funding real estate opportunities with cryptocurrencies such as bitcoin while others allow real estate investors, including lenders, a way to tokenize real estate assets.
The Ever-Changing Private Real Estate Lending Landscape
Real estate lending is constantly changing. The rapid advancement of technology ensures that private lending models and real estate lending will continue to evolve well into the distant future. We are seeing these changes taking place before our very eyes every day.
The JOBS Act of 2012, for instance, opened up new business model opportunities and created more opportunities for more investors and lenders than any other legal, regulatory, or technological advancement since the Securities Act of 1933. Another piece of legislation has recently been introduced that promises to make a few significant changes on the back of the JOBS Act.
Last month, the Securities and Exchange Commission (SEC) proposed an update to the accredited investor definition. Currently in the public comment period, if the legislation passes, it will expand the definition of accredited investor to include persons and institutions that historically have not been considered accredited investors. The practical implication is that more lenders will enter the market, which will lead to more opportunities for lenders and the creation of new lending products to meet the demand.
The above list of lending opportunities for private real estate investors is not exhaustive, but it’s a good start for investors looking for the best opportunities.
According to a Freddie Mac sponsored article at National Real Estate Investor online, small apartment communities consisting of five to 50 units house up to 70 percent renters. Still, the majority of multifamily financing goes to larger multifamily projects. Thanks to private lending, this can change.
7 Ways Private Lending Can Help Small Multifamily Projects
It’s difficult for small multifamily projects to receive funding because banks are not financing as many projects as they used to. They have implemented stricter risk management controls, and prefer to finance larger projects where income earned from interest is more justifiable based on the cost of capital. Still, that does not leave developers of small multifamily projects in the lurch. Here are seven ways small multifamily projects can benefit from private lending.
- Access to capital – The most obvious benefit is access to capital that might not otherwise be available to small project developers. Since bank lending has practically dried up, unless you personally know the lender, small developers must seek capital elsewhere. Private lending is an open door.
- More diversified lending base – Through marketplace lending platforms, small multifamily project developers have access to a more diversified lending base. Instead of seeking capital from one source, the borrower can receive capital from multiple sources even while proving their risk worthiness to only one source. Due to this nature of private lending, these loans are often easier to obtain.
- Better terms – Borrowers often get better terms from private lenders. That’s partly because private lenders often don’t have the huge overhead and underwriting expenses that banks and institutional lenders have. There is also a lot of competition among private lenders now to fill the gap in lending for small developer projects. That competition means better terms for the borrowers.
- Faster access to capital – Whether seeking capital for a ground-up development, a mezzanine loan to keep a project afloat, or seeking capital for another level within the capital stack, real estate developers can gain access to much needed capital faster from private lenders. This capital is typically taken from stocks, mutual funds, certificates of deposit, and similar investment vehicles. Therefore, it’s more accessible. When acquired through a marketplace lending platform, many private lenders keep a minimum amount of money in their account on such platforms in order to fund projects quickly.
- Lenders are able to finance smaller amounts – Institutional lenders usually have minimums. Borrowers seeking capital below a lender’s minimum requirement will be denied outright. Your chances of obtaining a loan are nil before you apply. Private lenders, on the other hand, typically will lend smaller amounts. That makes it easy, and a perfect match, for small multifamily development projects.
- Private lenders will often take a personal guarantee – If your risk profile is bad, or you have bad credit, private lenders will often loan on the basis of a personal guarantee. If a developer can back their loan by proving they have cash to cover the loan amount in the event of default, obtaining a loan from the private lender is fast, easy, and comes with no strings.
- Private lenders are more flexible – Many private lenders are also more flexible in their terms and repayment options.
If you are a developer working on a small multifamily project and are seeking financing for that project, your best bet is to seek a loan from a private lender or marketplace lending platform.
Landlords, multifamily developers, and investors in rental properties would do themselves a favor to take a look at what apartment renters actually want in a property. After all, your profits are directly tied to your ability to deliver on those expectations. An annual survey by NMHC and Kingsley Associates, and reported by National Real Estate Investor Online, has the answer for you.
For starters, the number one feature renters want is central air conditioning. That might not be a huge surprise, but did you know they’d rather have on-site child care than a fitness center?
There are other interesting results, as well.
What Renters Are Willing To Pay for Creature Comforts
While knowing what apartment renters want is one thing, knowing how much they’ll pay is quite another. According to the survey, 95 percent want air conditioning and are willing to pay a $40.98 per-month premium for it. The 94 percent who want soundproof walls are willing to pay $37.94 per month. The will rate for a garbage disposal is $27.09 per month. Ninety-two percent of respondents said they want a garbage disposal.
Ninety-one percent of apartment renters want reliable cell reception, but only 85 percent want a swimming pool and controlled access. They’ll pay $44.78 more in rent per month for on-site child care, $38.86 more for valet parking, and $30 more for reliable cell service.
What Apartment Renters Are Not Interested In
What they don’t want is just as interesting as what they do. Sixty-nine percent are definitely not interested in co-living spaces. Sixteen percent said they
“probably” would not be interested. Twelve percent said it depends on price, and four percent are definitely interested.
For voice-activated technology, 66 percent are not interested versus 34 percent that are.
What Apartment Renters Wanted in 2018
The same survey was conducted in 2017, asking what apartment renters wanted for 2018. The results may surprise you.
Eighty-two percent wanted fitness centers if they don’t use them. In fact, 41 percent said they rarely use them. Nevertheless, renters were willing to pay $31.75 per month for the opportunity to stay in shape.
Two years ago, renters wanted package lockers. Fifty-seven percent were interested or highly interested. Forty-seven percent reported receiving at least three packages per month.
Outdoors, four out of five apartment renters wanted a patio or a balcony in 2018. Two-thirds were interested in shared outdoor spaces and common barbeque grills. Almost half noted a playground or community dog park on their list of desired amenities.
One area renters two years ago had in common with those today was the lack of interest in smart technology. Only 14 to 17 percent said they wouldn’t rent an apartment if it didn’t have a smart thermostat, smart lighting, or smart locks. They were willing to pay $30 per month extra for them, however, if an apartment had those features.
What Does This Mean For Rental Investors Today?
It’s one thing to know what renters want, and don’t want, but it’s another thing entirely to deliver on it. When it comes to changing apartment amenities to meet the demands of renters, investors should consider a few things first:
- What are the local desires of renters in your area? This is important because geographical differences can play a part in renter expectations.
- Will the cost of changing amenities result in a return on investment enough to make it worth your while. This is where you’ll have to do that math.
- This information illustrates that renter desires change rapidly. Two years is not a long time. Do you really want to convert that fitness center into a child care center only to find out two years from now that renters want a fitness center? What will you do with all that equipment in the meantime?
The bottom line is, you’re in business to make money. If you’re developing from the ground up, it makes sense to build for today’s expectations. If you’re buying an apartment built with amenities from two-year-old expectation, it might not be worth the expense to convert your amenities. Do your own due diligence and do what is best for your pocketbook. That goes for investors in marketplace properties, too.
There is a lot of hype around blockchain technology, so it’s nothing new to see an article that plays on that hype. What is interesting, however, is when you see decentralized real estate predictions like the one made by Garratt Hasenstab, a real estate developer, in a recent Forbes article.
Hasenstab made this prediction in 2018, but he still stands by it. In his words, “by 2025, the majority of global real estate investments will be issued as tokenized asset offerings (TAOs) and held as cryptoassets, specifically security tokens, just like traditional securities but traded peer-to-peer without financial intermediaries.”
That’s a pretty bold statement. But could that happen?
Introduction to Decentralized Finance
There’s no doubt that blockchain technology, and distributed ledger technology, is changing the world of finance. Some big companies are investing billions of dollars into development in this nascent new field. According to PwC, blockchain technology is only of moderate importance to the real estate industry in 2019. Of 13 technologies identified as disruptors this year, it’s ranked 12th in terms of importance.
Still, six years is a long time. A lot can happen between now and 2025. And new technologies have a way of advancing rapidly once they catch on. For that reason, I’d say real estate investors and real estate developers alike should start performing some due diligence today on how blockchain technology can change the way they do business.
One area where there is huge potential is in what they call decentralized finance. It’s the buzzword of the year and simply refers to using blockchain technology to deliver peer-to-peer transactions more efficiently.
State of the Dapps (decentralized applications) lists more than 50 dapps in the property category. DeFi Rate states that the total locked value of assets in decentralized finance has gone from $0 to $513 million in the last year. That’s some stellar growth.
Decentralized Real Estate Investing
While there is good evidence to believe that the future of real estate investing will involve decentralized finance and blockchain technology, the future hasn’t arrived yet. At the heart of decentralized real estate investing is the peer-to-peer business model, or what has come to be called marketplace lending. It’s taken a decade to solidify the business model and maintain the respectability of the traditional investment sector, but online real estate investing has become its own asset class. If blockchain technology is the future, it will be because platforms like Sharestates formed the backbone that made it possible.
For developers, the benefit to marketplace lending is you can get access to much-needed capital from funding sources not traditionally available to you. When you can’t get a bank loan, equity or debt financing is available from accredited investors willing and able to move your project forward.
For investors, marketplace lending offers higher returns on short-term investments that have been fully vetted by the platform. You spend less time on due diligence and more time managing your investments.
Marketplace lending isn’t going anywhere any time soon. Blockchain technology may improve the efficiency of the markets, but until it fully takes root, you might as well spend your time pursuing the deals where the deals are being made. And right now, that’s on marketplace lending platforms like Sharestates.
Million Acres recently ran an article discussing the pros and cons of P2P lending in real estate investing. The advantages listed include easy borrowing, low-interest rates, and low origination and closing fees. These are certainly advantages to investing in real estate through P2P lending platforms, but the article fell short of listing some of the best benefits. One reason may be that it targeted borrowers and left the benefits to lenders untouched.
Let’s discuss a few more benefits to real estate investing through P2P lending, those for borrowers and lenders:
Pros to P2P Lending for Borrowers, Developers, and Real Estate Deal Sponsors
While deal sponsors, borrowers, and real estate developers can often get better deals through real estate P2P lending platforms, not to mention the convenience of applying for loans more easily, there are other benefits to using a P2P lending platform to obtain a loan or to finance a deal. Here are three more benefits:
- Financing a real estate project can be structured as either debt or equity, so flexibility is key. Instead of taking out a loan, which you have to pay back, you can offer equity to your funders in exchange for their capital. In this case, it isn’t P2P lending so much as equity crowdfunding;
- Whether your financing is structured as a loan or debt, you are not tied to a single entity as your funding source. These platforms exist to allow multiple parties, individuals and institutions, finance real estate projects they believe in;
- Another benefit of using a P2P lending platform, or marketplace lending platform, is the speed of delivery for the capital you seek. If you apply for a loan through a bank or traditional lender, the application process could take a couple of weeks, and it could be several more before you see your money. With platforms like Sharestates, you can get access to financing in days.
The Benefits to P2P Lending for Real Estate Investing
Developers and deal sponsors are not the only ones who benefit from P2P lending. Project funders also benefit. Here are three ways investors benefit from using real estate lending platforms:
- Portfolio diversification. If you’re a serious investor, you’re likely invested in several different asset classes. P2P lending can be another asset class to help you diversify your portfolio.
- Multiple deals to choose from. With P2P lending platforms, you can spread your investment across multiple properties on the same platform. You are also not limited to debt or equity capital structures. You can invest in both, further diversifying your portfolio.
- It saves you time. With P2P lending and real estate investing platforms, there’s no need to drive neighborhoods to find properties to invest in. You can find suitable properties at your fingertips already vetted by real estate investing experts. Sharestates’ 34-point underwriting process ensures that deals you are presented with meet the strictest standards including LTV, potential ROI, and deal sponsor experience and track record. That means you can fund more deals in a shorter period of time while increasing your return on investment.
P2P lending, marketplace lending, and real estate equity crowdfunding have been around long enough to have a track record. Investors are earning respectable returns on good properties across a spectrum of choices including deal structure, type of property, and geographical location. We have officially entered a new age of real estate investing.
Last month, a historic home in Ponte Vedra Beach, California went up for sale. The Milam Residence, designed by architect Paul Rudolph and built-in 1961, is a beautiful real estate work of art. The asking price is $4.445 million.
The list price is the least of the problems for the seller. There are people who can afford it. The issue is the home design.
Featuring four bedrooms and four baths, it also has a guest house and a very spacious courtyard, a useful feature for entertaining. The building encompasses more than 10,000 square feet on a 2.11-acre lot and includes an in-ground swimming pool as well as a three-car garage.
While these are all great features, the problem with unique real estate designs like this is that such properties are difficult to sell. Just ask any real estate agent.
The reason this home may not sell quickly is that most home buyers want to be able to design their homes to suit themselves. If a house design is already so unique that adding a homeowner’s personality doesn’t make it any more unique or personable, then it’s likely to attract a lot of eyeballs but not as many wallets. Even architectural beauty is in the eye of the beholder.
Mesa Vista Ranch: $250 Million Worth of Beauty
If you’ve been keeping up with the news, you may have heard that legendary Texas oil tycoon T. Boones Pickens passed away last week, at 91. Pickens was known for his flare. He left behind a beautiful ranch in Pampa, Texas, on the block for $250 million. It’s been listed for almost two years.
The ranch sits on 100 miles of land and features an airport with a 25,000-square-foot hangar, a wedding chapel, 20 lakes, four houses, a 400-square-foot building just for guns, a tennis court, a golf course, and an 11,000-square-foot dog kennel. It’s an amazing piece of property, but will it ever sell?
The jury is still out on the Texas panhandle property, but I suspect it will remain listed for a few more years. There are only a handful of people who can afford a $250 million piece of real estate, to begin with. And, as stated before, the uniqueness of the property itself leaves little room for the next landowner to make it their own.
The Property Listing Reality: What’s Good for Traditional Real Estate is Good for RECF
Selling real estate follows the same general principles whether we’re talking about listing on the MLS or listing through a real estate crowdfunding portal. If a property is going to sell, it’s got to sell on the merits of what is in demand. For that reason, real estate developers should pay attention to the trends in real estate, what home buyers are interested in, and what the market will bear.
By the same token, investors looking for a good deal would do their portfolios a favor by studying the market. What are homebuyers buying? What are developers building? Where is the market headed? These are the questions you should be asking.
A real estate crowdfunding platform that isn’t asking the same questions of the market is probably one that you should steer yourself away from. It’s important that the platform offer deals that are in concert with the supply and demand wave of the market. A home may be beautiful by aesthetic standards, but if it’s too impractical for the average homeowner, it likely isn’t a good investment.
Sam Dogen is a millionaire. What makes him different than other millionaires is the age at which he retired–34. Even more startling than that, he now regrets retiring at such an early age.
One of the reasons he regrets retiring so early is that he could have researched career opportunities in other sectors. As a finance professional, he could have written his ticket anywhere. He could have taken a risk on a new startup or continued climbing the career ladder at Fortune 500 companies. Instead, he retired.
To put things into perspective, Benjamin Franklin retired at age 42. Franklin’s second career was largely public. He parlayed his experience as a publisher into stints as a political mover, diplomat, inventor, scientist, postmaster, and writer. Had real estate crowdfunding existed in colonial America at the time, he might have tried his hand at that too. His interests were quite varied.
As speculative as that is, that’s precisely what Dogen said he should have done instead of retiring. Specifically, he stated, “I could have leveraged my interests in real estate and technology to start a real estate crowdfunding company–or, at the very least, join one.”
Joining one would have been less expensive in the long run and more lucrative in the short term.
Why Real Estate Crowdfunding Makes For Great Passive Income
Real estate crowdfunding has been around for about a decade now. Returns on investments average between 8.5 percent and 19.1 percent. Equity investments tend to offer higher returns, but they’re also riskier. These results are dependent, however, on the types of real estate investments, one puts one’s money into and the platforms where investments are held. While no platform can guarantee results, real estate crowdfunding has proven itself to be a solid asset class.
One of the key benefits to real estate crowdfunding is diversification. If you’re a serious investor, you likely already have capital tied up in certain assets. You might have investments in stocks and bonds, commodities such as gold and silver, and maybe even physical real estate. Among some investors, cryptocurrencies are popular. Real estate crowdfunding offers another asset class to help investors diversify their portfolios, and it can act as a hedge against downturns in the stock and commodities markets. These are some of the reasons investors seek passive income through real estate crowdfunding.
Of course, passive income works for anyone who is currently retired, planning retirement, or simply trying to supplement their income. As passive income, it offers serious private investors solid returns and awesome deal opportunities.
Don’t Retire Yet: There’s Money To Be Made
Just as Benjamin Franklin didn’t put all of his eggs in one basket, I wouldn’t recommend you do that either (and there were fewer baskets for eggs in the 1750s).
When it comes to retirement, it doesn’t happen on its own. Planning is required. Putting one’s money to work in any investment means spending time to perform some due diligence on that investment. In the case of real estate crowdfunding, it also means performing due diligence on the platform. Investors should be prepared to judge each platform by its management team, its underwriting practices, and the quality of its deals. When you decide to invest in real estate through any crowdfunding portal, that money becomes a part of your retirement portfolio, and when it comes time to retire–at whatever age you happen to be at the time–you’ll have one more passive income account to draw upon to live your life of Riley.