NEW YORK CITY—As the nascent “real estate crowdfunding” industry picked up steam after the JOBS Act of 2012 was signed into law, the concept of owning distinct, tangible real estate assets was harped on by early-stage luminaries. This new platform economy represented the opportunity for individual investors to own a share of something real; to participate in the growth of the neighborhoods and cities they loved. While this kind of messaging permeated the marketing pages of the early players in the space, it was—then, as now—primarily about returns, portfolio strength and offering an alternative to stocks and bonds. Above all, real estate crowdfunding was presented as an exciting new way for individual investors to access an asset class previously available to only ultra-high-net-worth and institutional investors.
It's curious, then, to see Fundrise and RealtyMogul—two of the earliest and most prominent companies in the space—explicitly pivot to a REIT model, seemingly de-prioritizing direct investments in distinct projects. Although rebranded with the new “eREIT” moniker, these investment vehicles are strikingly similar to the non-traded REITs that were raising billions of dollars annually long before anyone had ever heard of crowdfunding. Why did this happen, and what does it augur for the industry going forward?
Harnessing New Regulations
While the real estate crowdfunding industry has been big on the “democratization” language since inception, investments offered through platforms like Fundrise, RealtyMogul and EquityMultiple were only legally available to accredited investors—some 5% to 8% of the US population—until Regulation A+ and Title III of the JOBS Act went into effect in 2015. While Title III theoretically opened the door for non-accredited investors to invest in individual deals, the regulations have proved onerous and have not been widely adopted. This left Regulation A+, which allows companies to raise up to $50 million in a single investment vehicle such as an eREIT, as the most viable path for reaching non-accredited investors.
The eREIT model, which aggregates multiple real estate properties into a semi-blind fund, offers built-in diversification and very low investment minimums, both of which may be a better fit for retail investors who are inexperienced in real estate. Rather than making their own decisions on a project-by-project basis, investors in these eREITs are putting full faith in the underwriting of the platforms, certainly a sign of the strides the industry has made in a few years' time.
Fundrise and RealtyMogul are betting that their eREIT products can serve this broader market and deliver compelling returns, while protecting against losses through market cycles. In other words, these eREIT products may best serve non-accredited investors looking to contribute only $1,000 or $2,000 of real estate to their portfolios.
These new products create a nice opportunity for those retail investors who are looking for an entry point into real estate, but wish to avoid publicly traded REITs, which come with market volatility, or the traditional world of non-traded REITs, which have frequently been criticized (by FINRA and others) for their high fees and lack of transparency .
Opportunities to Invest Directly Remain
On the other hand, platforms like EquityMultiple remain focused on providing accredited investors direct access to exclusive real estate projects. Rather than investing in a blind or semi-blind fund, this offers high-net-worth investors the opportunity to construct their own personalized real estate portfolio based on their investment goals. Individuals benefit from access to a range of deal types and return profiles and can tap into the unique upside of deal-by-deal investing.
The move toward eREITs by two of the industry's most established platforms shows a clear bifurcation between investment vehicles tailored to accredited and non-accredited investors. In the near term, accredited investors looking for maximum diversification may find room in their portfolios for both kinds of investments. In the long run, the success of platforms like Fundrise, RealtyMogul and EquityMultiple will depend on selecting good projects that deliver strong returns to investors, regardless of whether investors participate project-by-project or through an eREIT.
Charles Clinton is CEO of EquityMultiple, headquartered in New York City. He may be contacted at Charles@equitymultiple.com. The views expressed here are the author's own.
More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.
It's curious, then, to see Fundrise and RealtyMogul—two of the earliest and most prominent companies in the space—explicitly pivot to a REIT model, seemingly de-prioritizing direct investments in distinct projects. Although rebranded with the new “eREIT” moniker, these investment vehicles are strikingly similar to the non-traded REITs that were raising billions of dollars annually long before anyone had ever heard of crowdfunding. Why did this happen, and what does it augur for the industry going forward?
Harnessing New Regulations
While the real estate crowdfunding industry has been big on the “democratization” language since inception, investments offered through platforms like Fundrise, RealtyMogul and EquityMultiple were only legally available to accredited investors—some 5% to 8% of the US population—until Regulation A+ and Title III of the JOBS Act went into effect in 2015. While Title III theoretically opened the door for non-accredited investors to invest in individual deals, the regulations have proved onerous and have not been widely adopted. This left Regulation A+, which allows companies to raise up to $50 million in a single investment vehicle such as an eREIT, as the most viable path for reaching non-accredited investors.
The eREIT model, which aggregates multiple real estate properties into a semi-blind fund, offers built-in diversification and very low investment minimums, both of which may be a better fit for retail investors who are inexperienced in real estate. Rather than making their own decisions on a project-by-project basis, investors in these eREITs are putting full faith in the underwriting of the platforms, certainly a sign of the strides the industry has made in a few years' time.
Fundrise and RealtyMogul are betting that their eREIT products can serve this broader market and deliver compelling returns, while protecting against losses through market cycles. In other words, these eREIT products may best serve non-accredited investors looking to contribute only $1,000 or $2,000 of real estate to their portfolios.
These new products create a nice opportunity for those retail investors who are looking for an entry point into real estate, but wish to avoid publicly traded REITs, which come with market volatility, or the traditional world of non-traded REITs, which have frequently been criticized (by FINRA and others) for their high fees and lack of transparency .
Opportunities to Invest Directly Remain
On the other hand, platforms like EquityMultiple remain focused on providing accredited investors direct access to exclusive real estate projects. Rather than investing in a blind or semi-blind fund, this offers high-net-worth investors the opportunity to construct their own personalized real estate portfolio based on their investment goals. Individuals benefit from access to a range of deal types and return profiles and can tap into the unique upside of deal-by-deal investing.
The move toward eREITs by two of the industry's most established platforms shows a clear bifurcation between investment vehicles tailored to accredited and non-accredited investors. In the near term, accredited investors looking for maximum diversification may find room in their portfolios for both kinds of investments. In the long run, the success of platforms like Fundrise, RealtyMogul and EquityMultiple will depend on selecting good projects that deliver strong returns to investors, regardless of whether investors participate project-by-project or through an eREIT.
Charles Clinton is CEO of EquityMultiple, headquartered in
More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in
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