Investors who were hopeful that 2021 would be a quieter year than 2020 may be coming to terms with the fact that wishes don't always come true. This year we've already had a Reddit-driven market spike of Gamestop (NYSE: GME) and other stocks as well as a tumultuous stock market. That has many investors looking for other safe havens and finding them in some unusual places, such as cryptocurrency.
Real estate has long been a place investors have turned to for portfolio diversification and to achieve solid returns. For many people, that has meant owning their own home or rental properties. The creation of real estate investment trusts (REITs) in 1960 opened up a whole new way investors could receive the benefits of commercial real estate. Over time, investors have embraced REITs by investing both in publicly traded REITs and public non-listed REITs or in private REITs.
The emergence of crowdfunding in real estate
When the JOBS Act was passed in 2012, it opened up a whole new world for investors with the introduction ofreal estate crowdfunding. Over the past nine years, a variety of crowdfunding platforms have emerged to connect investors with these opportunities. In many ways, crowdfunding is still very new and the regulations are evolving.
Two regulation shifts, in particular, will help contribute to the growth of crowdfunding. A recent expansion of the Reg CF section of the JOBS Act expands the amount of funds that can be raised from $1.07 million within any twelve-month period to $5 million. This will create even more opportunities for non-accredited investors. Last year, the SEC also opened up the rules of becoming an accredited investor beyond net worth. Individuals are now able to qualify based on their professional credentials or certifications, such as Series 7, Series 65, or Series 82 licenses.
All of these changes put together are fueling more and more interest in real estate crowdfunding and expanding the types of investments people can make. Many investors are already familiar with Regulation A offerings through companies like Fundrise and RealtyMogul that offer shares in a REIT. There are also real estate companies that are raising capital on platforms like Republic or SeedInvest. Marketplaces such as Groundfloor pair flippers with individual lenders wishing to take on a little risk for a good return.
An unusual situation creates a perfect storm
This should mean that 2021 is one of the biggest years so far for crowdfunding. Anyone who studies economics on even a casual level is familiar with the dynamics of supply and demand. Right now you have retail investors (defined as investors that aren't institutions such as companies, banks, or pension funds) looking for places outside the stock market for returns. At the same time, you have developers and entrepreneurs seeking funding in places outside of the traditional lending climate. Supply and demand seem to both be high.
However, there are some downsides. As Republic's head of real estate Jamie Yorio noted in an article on the Commercial Observer, these types of offerings are typically far more illiquid than stock market offerings. While their lack of volatility is appealing, it also means you're trading the rapid escalation in value possible with some tech stocks for the comfort of stability. And there are no guarantees, as any real estate investor knows; things can go wrong during the course of a deal and people can lose money.
Right now, institutional investors are heavily investing in distressed asset funds that are looking to buy real estate if prices drop. Commercial real estate deal flow was sluggish in 2020 but is expected to heat up in 2021. All of this is creating an enticing environment for both syndicators and larger crowdfunders as well as opening up more room for smaller retail investors. For those looking to invest, it's very important to conduct due diligence by carefully reviewing the terms of each deal to make sure that the promised returns align with reality.