Keeping It Real: A Baby Boomer’s Guide to Real Estate Crowdfunding

An Alternative Vehicle for Real Estate Investors

Search the subject of real estate in a retirement vehicle and real estate crowdfunding is bound to pop up. Alongside REITs (Real Estate Investment Trusts) and rental properties, real estate crowdfunding is emerging as another diversification alternative to traditional equities for stock market-wary investors drawing closer to retirement.

Alternatives to an Aging Bull

Lengthy bull markets in the latter part of an economic cycle can create a longing for some in the tangibility of real assets – real assets like real estate.

“Relative to stocks, real estate is undervalued,” Gray Cardiff, editor of the Sound Advice newsletter, said last year. “In fact, based on data back to 1896, when compared with stocks, real estate has rarely been cheaper.”

“Real estate can be a great asset class and diversification tool,” said Jeffrey Feinstein, a vice president with Lenox Advisors in New York City. “It’s typically not directly correlated to the markets and can provide income from rentals or refinancing. It can be looked at as a long-term, retirement-friendly strategy.”

New Platforms, New Real Estate Opportunities

Ralph DiBugnara, president of Home Qualified, a website for real estate investors, said recently that “Investors can earn money first through rental income and then ultimately when the property sells. Unlike REITS, which leave property selection to fund managers, crowdfunding lets investors make their own choices.” DiBugnara added that investors should be generally prepared to commit their money for five years or longer.

Real Estate Crowdfunding Defined

Real estate crowdfunding enables a large number of individuals to pool small amounts of capital to finance new real estate ventures.

Such ventures can include financial professionals and smaller investors, as well as networks of friends, family and colleagues.

Just as most prudent individuals would not put all of their money in a single stock, individuals who deploy assets to crowdfunding opportunities may also consider diversifying their approach in anticipation that while some ventures might succeed, others might not.

Two Routes to Real Estate Crowdfunding

Investors can choose between real estate equity and real estate debt crowdfunding opportunities. While the former may require longer holding periods for projects to develop, the latter has the potential to deliver monthly cash flow. And, if assets are invested through a Roth IRA, income would grow tax-free.

There are also hybrid real estate crowdfunding opportunities that combine elements of both approaches, according to Charles Clinton, CEO of real estate investment platform Equity Multiple who said, “Investors need to consider what their investment goals are and what their risk appetite is and start building a diversified real estate portfolio that best aligns with their strategy.”

Baby Boomers and the Attractions of Real Estate

Timing is especially critical to baby boomers aged 54 to 72, who are looking for new, reasonably dependable sources of income to replace yesterday’s paychecks. For boomers facing an income shortfall, real estate crowdfunding has the potential to help beef up a lackluster portfolio before retirement.

From a retirement planning perspective, this cohort can be viewed as a single generation with three broad objectives. Born between 1946 and 1964, boomers represent the 18-year span between the ages of 55 and 73.

“From homeownership to understanding the role real estate might play in a retirement strategy is not a long reach for most boomers,” said Patrick W. McKeon CFP, a consultant to independent financial executives and wealth advisors.

“Generally,” Mr. McKeon continued, “investors between 54 and 60 tend to be at their career peak and are primarily focused on long-term growth. Those aged 66 to 72 are mostly retired and spending their income, while boomers between 61 and 65 often combine growth and income objectives as they transition to retirement.”

Retiring Baby Boomers Enjoy Vast Liquidity

Boomers hold the lion’s share of investable wealth. The “me” generation closed out 2017 with $26.2 trillion in investable assets, dwarfing the $1.67 trillion of millennials and Gen Y combined.

Real estate’s long-standing appeal as an income-generator, a prime concern of aging baby boomers, may be one good reason to consider diversifying a portfolio with this alternative asset class. Other good reasons may include:

• General Affordability – Many real estate crowdfunding opportunities are available for as little as $1,000; an attractive price level that’s easy to accommodate in an IRA.
• Simplicity – Crowdfunding can be especially convenient for investors looking to avoid property ownership complications. It may also be suitable for retirees who have less time to track the details of direct real estate involvements.
• May Help Offset Equity Market Downturns – Diversifying with one or more real estate crowdfunds could temper the impact of a bear market on a portfolio.

It Takes a Specialist: Custody and Real Estate Crowdfunding

Similar to real estate, REITs and other alternative investments, the administration and custody of real estate crowdfunding assets require a specialist who is familiar with the operational requirements of this emerging asset class.

“Like any investment,” Mr. McKeon concluded, “real estate offers the potential for gains as well as losses—and real estate crowdfunding has its own unique risks. Crowdfund-minded investors might want to check with a financial professional before making a selection.”

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Investing in Real Estate Through Equity Crowdfunding and Crowdfunding from the Investor’s Perspective.]