Capital Markets Insights

The well-kept secret of high returns in real estate investment

Until not so long ago, commercial real estate investment in the U.S. belonged to the limited class of accredited investors. Institutions and wealthy families were the only groups authorized to preserve wealth or speculate with real estate. Now, with the explosion of online crowdfunding and the slow but relentless legal opening of the market to smaller investors by the SEC, every person can join the wealthy and participate in what’s expected to become one, if not the biggest, of financial investment opportunities.

A real estate crowdfunding online platform matches investors with sponsors of real estate projects, whether single family homes, apartments, retail, hotels, office buildings, or else. It operates under two different models: the debt crowdfunding, which lends money to a company to buy the property and the equity crowdfunding, purchasing shares in the company that buys the property.

Benefits may come then from returns based on a traditional model of debt and interest, or from equity.

Through a crowdfunding platform, an investor can lend money to a sponsor and recover, after a specified term, capital plus interests, mimicking at a smaller scale the very well-known banking procedure to financing real estate projects. While this represents an interesting investment, as lending usually is, greater returns can be achieved through equity crowdfunding, which makes investors owners or shareholders of the property.

There are other differences by which investors may prefer one model to the other. Lenders typically operate on a shorter schedule of six to 18 months; equity owners instead can hold their asset as much time as they need to take advantage of the peaks in the market to make profits.

A debt investor will receive a fixed income and have their loan secured against the property. An equity investor, while not secured, will instead receive a share of the profit. The debt return is fixed; the equity return has no limit, it depends on the market and can yield high returns.

When an investor comes to realize that online crowdfunding equity is a global business covering real estate markets in every country, the potential opportunities for high returns becomes exponential: while some markets are slow others soar. Equity investors can then play globally against the market or ride trends since there’s always at least one market if not more to serve each purpose.

The debt investor misses this opportunity since he only holds debt; the equity investor, instead, has no debt and holds pure equity to be sold in the market at the most convenient moment.

Like any financial investment, equity crowdfunding poses risks.

These, mostly coming from delayed or unfinished projects that were not well-funded in the beginning or incurred rising material/labor costs. As the risk profile increases through equity, its important that investors are able to screen real estate operators and commit capital to those experienced with a longtime presence in the market, and proven track record of consistent investment returns.


Article also appeared on BanklessTimes: