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.
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.”
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 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.
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.
|Real Estate Crowdfunding||Real Estate Debt Crowdfunding|
|Benefits||Investors receive an ownership stake in a crowdfunded vehicle that pools assets to buy property or fund a development project.||Investors lend money to fund a project. Crowdfunding portals typically first prefund a loan to a developer. Then, individuals invest in a borrower payment dependent note (BPDN) which guarantees a stated interest rate and term.|
|Holding Periods||Holding periods are typically for the long-term; up to 10 years or more in some cases.||Generally, investments are for shorter holding periods; typically, from six to 12 months.|
|Investment Risk||Since there is no guaranteed income stream, and the investment is unsecured, equity crowdfunding has potentially higher risks in pursuit of a higher level of reward. In the event of bankruptcy, debt-holders are paid first. Afterward, equity holders receive any residual value.||Debt crowdfunding is less risky, because the investment is secured, and debt holders are paid first in the event of bankruptcy.|
|Property Focus||These are typically big budget projects like hotels, commercial properties and major multi-family dwellings.||Often these are smaller real estate ventures like single-family homes, flips and multi-family property with relatively fast construction turnaround times.|
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.”
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.”
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:
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.]
As National Education Specialist for Equity Trust Company/Equity Institutional, John Bowens brings nearly 15 years of experience to his role as the company’s national speaker on subjects related to alternative investments, their custody and administration. Mr. Bowens has trained over 50,000 real estate investors and small business entrepreneurs across the USA with a particular focus…
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