Real Estate Investment For The Masses: Crowdfunding Or Real Estate Investment Trusts (REIT)?

 @natrudy on September 20 2013 3:56 PM
Commercial Real Estate
Commercial Real Estate REUTERS

As interest mounts in the public offering of an investment trust featuring the Empire State Building, people may wonder how they can best invest in real estate, generally.

You could invest in real estate investment trusts (REITs) on public exchanges, but for now at least crowdfunding offers a new alternative for prospective real estate investors, albeit those earning more than $200,000 annually.

Realty Mogul, for example, is a crowdfunding portal where investors pool money and buy shares in vetted real estate properties, and expect returns over time.

Investors have already spent $3 million in the past four months on the site, choosing from a curated portfolio of properties, wrote Realty Mogul CEO Jilliene Helman in an email to International Business Times.

Investors can start with a $5,000 slice, compared to the $50,000 or more usually required for traditional direct real estate investments, according to Realty Mogul’s website.

Large institutional investors direct only 5 percent of their investments into REITs, with 95 percent funneled to direct real estate investments, according to a paper from the Massachusetts Institute of Technology.

“New laws open up direct participation to millions of accredited investors who historically did not have access, potentially allowing for higher returns realized by institutional capital providers,” wrote Helman.

Directly investing in private real estate placements used to be difficult, because news of such investments was spread by word of mouth, thanks to regulations which banned advertising these placements, Realty Mogul co-founder Justin Hughes told IBTimes.

Investing directly also offers more transparency and customization, since investors can see exactly where their money goes, unlike in an REIT, he said.

“You get to see exactly which properties, and exactly which ones you want to be a part of,” said Hughes. “With an REIT, you’re pooling your money with a larger fund, and the fund managers are the ones making the decisions.”

Real estate crowdfunding may be an especially apt niche for crowdfunding, which can be easily overburdened by regulations, according to securities lawyer Brian Korn, from Pepper Hamilton LLP.

“Real estate is a tangible entity where somebody can actually verify that it exists. It’s a lot easier to do due diligence,” Korn told IBTimes. “That sort of discrete entity is tailor-made for crowdfunding, because people want to focus on the project, and not worry about the overall credit quality of the parent company, or their other investments.”

Hughes estimates that there are 7 million accredited investors in the United States, who could participate in a private real estate investment market worth $150 billion.

Realty Mogul seeks to raise $10 million in its first twelve months, and is targeting exponential growth in following years. It has courted investors in China, India and Turkey, among other countries.

The U.S. residential housing market has rebounded in 2013, but sentiment is more downbeat about the commercial real estate sector, which may only recover in 2014, according to bank analysts.

Realty Mogul is a player in a crowded market for real estate crowdfunding, however. It competes with the likes of Fundrise and Fquare, a crowdfunding platform for farmland.

Starting next week, Realty Mogul plans a heavy advertising campaign, now that bans on advertising private placements have been lifted by the Securities and Exchanges Commission.

Billboard ads in the Bay Area are planned. Sky writing above select real estate properties was even mulled, said Hughes.

It’s unclear if Realty Mogul will allow investors who earn less than $200,000 to participate, when crowdfunding regulations are eventually clarified by the SEC, said Hughes. That depends on whether regulatory burdens are made lighter. 

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