I have written extensively about the merits of passive real estate investing including how to review an opportunity and warning signs to be aware of as well as esoteric aspects of real estate investing such as the importance of risk-adjusted returns and the impact of fees on returns. However, my content has been directed largely toward accredited and sophisticated investors and left out the other ~90% of potential real estate investors. Investment real estate should be part of any well-diversified portfolio and is a great investment for young professionals because it’s a tangible asset, simple to understand, and long-term in nature. In this post I’m going to outline the passive real estate investment opportunities available to non-accredited investors today. This post is intended to be overly simplified to help investors with no prior exposure to the real estate business understand the opportunities available to them.
Publicly-Traded Real Estate Investment Trusts (REITs)
Non-accredited investors have always been able to buy individual REIT stocks. REITs are simply companies that are in the business of owning and operating real estate and in order to maintain their REIT status (to avoid double-taxation), they must distribute at least 90% of its taxable incomes in dividends. Shareholders are taxed on this dividend income.
On September 1st, 2016 equity REITs will change their location in the U.S. stock market from the financial sector to a new, separate real estate sector. The new real estate sector will contain only equity REITs that own physical property. This change has significant implications for investors. I’m a big proponent of buying low-cost ETF’s instead of individual equities (I use Wealthfront for my personal investing). If I was seeking bank exposure, I’d buy a Financials ETF (which today includes Equity REITs). As such, REITs performance were in part tied to Financials.
The creation of a new sector will bring greater attention to REITs and a broader understanding of REIT accounting and dispel conceptions that REITs are a proxy for single-family housing. There is already an ETF tracking the new real estate sector – Real Estate Sector SPDR Fund (XLRE).
While REITs can be a great investment and the new REIT sector will separate REITs from financials, equities tend to trade in line with the market and investors don’t benefit from the tax-sheltered income of direct real estate investments.
Minimum Investment: None
Real Estate Crowdfunding Utilizing Regulation A+
In 2015 the SEC approved the Regulation A+ rules under Title IV of the JOBS Act that opened the door for non-accredited investors. The majority of real estate crowdfunding marketplaces such as RealtyShares, CrowdStreet, RealCrowd, and RealtyMogul have been using the Reg D 506(c) structure, which allows companies to generally solicit, however offerings are limited to accredited investors only.
Reg A+ allows crowdfunding companies to market to both accredited and non-accredited investors. Real estate sponsors utilizing Reg A+ are able to raise up to $50M from non-accredited investors. For Tier II, non-accredited investors can invest no more than 10% of the greater of their annual income or net worth. There are no investment limits for Tier 1 offerings.
Many of the real estate crowdfunding platforms are planning to list one-off Reg A+ offerings this fall including CrowdStreet and RealCrowd.
RealCrowd: RealCrowd provides its users the ability to invest in quality commercial real estate direct with expert real estate sponsors, fee free, and with full transparency. RealCrowd is one of the few companies that views itself as a technology platform, focused on connecting quality real estate operators with investors. The sponsors are typically more institutional in nature.
CrowdStreet: Like RealCrowd, CrowdStreet also views itself as a technology platform, focused on connecting quality real estate operators with investors. Their sponsors also tend to be more institutional, with a focus on larger deals and longer hold periods.
Minimum Investments: TBD
Non-Traded Online REITs
Unlike publicly-traded REITs, non-traded REITs (sometimes referred to as non-listed REITs) are not sold openly on a public exchange. The non-traded REIT sector has been marred by accounting scandals, high fee loads, and regulatory challenges in recent years, however online crowdfunding platforms are bringing transparency and efficiency to the space, offering non-accredited investors access to a pool of deals at a relatively low cost.
Crowdfunding platforms such as Fundrise and Realty Mogul are utilizing Reg A+ to offer both accredited and non-accredited investors access to newly formed non-traded REITs, which provide a steady yield with a perceived lack of volatility.
The Fundrise Income eREIT is a portfolio of debt investments and offers investors a fixed rate of return, low fees, quarterly distributions, and quarterly liquidity. The Income eREIT targets a 15% annualized return.
The Fundrise Growth eREIT is a portfolio of equity investments and also offers investors a fixed rate, low fees, quarterly distributions, and quarterly liquidity. The Growth eREIT targets a 20% annualized return.
While the eREITs are similar in structure, the Income eREIT has a lower risk profile by nature of investing in debt (secured by the properties) versus equity (first loss position).
Minimum Investment: $1,000
Realty Mogul – MogulREIT
Following Fundrise’s lead, Realty Mogul has launched their own REIT known as MogulREIT. MogulREIT will invest in both debt and equity investments, target 7% annual returns, and offer quarterly liquidity.
RealtyMogul was an early entrant to the crowdfunding space and is one of the largest players, originating $200M in real estate debt and equity since inception.
Minimum Investment: $2,500
Institutional asset managers such as Blackstone have recently entered the non-traded REIT space, which allows them to access the retail investor, thus diversifying their capital sources. Institutional asset managers such as Blackstone and bringing much-needed credibility to the space.
Real Estate Marketplace Lending – Groundfloor
Non-accredited investors also have access to real estate debt investments through Reg A+. Groundfloor is the first company to achieve SEC qualification for real estate peer-to-peer lending. Groundfloor allows non-accredited investors access to real estate debt investments on a loan-by-loan basis in select states.
I had the opportunity to catch up with Groundfloor founder, Brian Dally, to discuss his vision for the company and experience working with non-accredited investors.
There are limited real estate investment options for non-accredited investors; what can non-accredited investors expect from GroundFloor?
Groundfloor is the first and only real estate lending marketplace publicly available to all investors, regardless of wealth or income. Starting with a minimum investment of just $10, we open the door to short-term, high-yield returns backed by real estate. Typical loans have returned 12% annually on a 6- to 12-month term. Non-accredited and accredited investors can create their own individual REIT and without any fees.
How does Groundfloor educate investors on the complexities/risks of real estate investment?
We share this information on our blog and investors can also look at individual loans and see what has funded and repaid to date. Most importantly, with minimum investments of $10, we have made it easy for investors to test the platform.
What’s the biggest challenge of working with non-accredited investors?
There isn’t a challenge. When small businesses and entrepreneurs are funded by a broader base of capital, it creates a more stable and reliable environment where everybody wins. It’s less expensive for borrowers and the rewards are greater for investors.
What has you/your team most excited about the real estate investing landscape today?
When you join thousands of investors funding loans on Groundfloor, you’re using the wisdom of the crowd to make investment decisions aligned with your investment strategy and risk tolerance. It’s a new way of finance – transparent and efficient – contrary to archaic traditions that preclude most of us from earning more with our money.
What’s one piece of advice or words of wisdom you’d recommend?
“Things may come to those who wait, but only the things left by those who hustle.”
Minimum Investment: $10
Summary / Where we’re Headed
Financial inequality is one of the biggest problems in the world today and it’s in part driven by the fact that most attractive investment opportunities are only open to wealthy investors. However, with the introduction of Reg A+, private real estate investing is opening up to the masses. Over time, we’ll continue to see new products targeting non-accredited investors and with mass adoption, investors will see the merits of real estate investing.
Here is a summary of the real estate investing options for non-accredited investors today:
- Publicly-Traded REITs – No Minimum
- Reg A+ Real Estate Crowdfunding (RealCrowd / CrowdStreet)
- Fundrise eREIT – $1,000 Minimum
- MogulREIT – $2,500 Minimum
- Groundfloor – $10 Minimum
While real estate investment is an important component of a diversified portfolio, investors must understand the intricacies and risks associated with real estate as an asset class. If you have any questions, please leave them in the comment section.