Real estate crowdfunding has been a popular option for people who want to add stakes in property investment to their portfolios since 2012, when the Jumpstart Our Business Startups Act was passed.
It’s only increased as an investment method since then, but before you jump in, we want to make sure you’ve got the facts about the two basic types of crowdfunding investment for real estate offerings: debt investments and equity investments.
- Debt investments are exactly what they sound like, on the surface — when an investor buys into a debt investment, he or she is loaning money to the crowdfunding company, and receives a fixed rate of return based on the interest on that loan.
- Debt investments can be an attractive option for people looking to keep risks as low as possible, and hold their investments for short periods of time.
- Debt investments offer more surety — since the collateral on the loan is the property itself, investors can recoup a loss of their investment through foreclosure, ensuring they’ll get at least something back for their time and commitment.
- Since debt investments are frequently associated with development projects, holding times are shorter, freeing up investors’ funds for the next thing going.
- Debt investments also provide a steady income, since dividends are paid through the interest on the investment as a loan.
While debt investments offer a steadier income, that income is also capped, since the interest rate on the loan isn’t going to skyrocket. That means debt investments can usually be counted upon to generate between 8 and 12 percent return — and that’s it, for as long as the investor holds the asset.
Meanwhile, since equity investments cast the investor as a shareholder in the property, his or her stake is proportionate to the amount he or she put in.
Income isn’t capped with equity investments. It’s paid out through a share of the rental income, which can increase if properties are improved or if the rental market means more competitive rates.
Additionally, since the investor is a shareholder, if the property is sold, he or she is entitled to appreciation value, meaning fortunes can be made — or lost — with equity investments.
Equity investments do mean more risk, especially since investors are typically expected to keep their money in the property for a longer period of time — potentially up to 10 years.
RE/DEV turns that longer holding time into a boon for investors, since new Opportunity Zone tax codes mean deferred advantages — investors who hold their shares for up to 10 years could potentially face no taxes on their returns at all.
On the topic of tax benefits, equity investments offer more opportunities to deduct expenses associated with ownership, such as improvement and maintenance. Equity investments are a good way to reap the tax benefits of property ownership without directly owning and managing real estate.
If the social and political atmosphere toward real estate ownership is ripe where an equity investment property is located, investors can turn green with profit.
Here in Massachusetts, one of our Funds concentrates on affluent markets where affordable housing is in high demand, and low supply, to minimize our investors’ risk. The other Fund focuses on helping build emerging communities decimated by lack of investment.
Finally, private equity investments mean more insulation from market volatility, since their frequently locked-in, longer holding times mean they’re more immune to outflow from investor panic during bad real-estate market times.
Ten-year holding periods also mean investors and managers have more time to wait for the right time to buy, and decide what to do with the fund.
Lastly, fund managers, such as RE/DEV, have skin in the game, too — we want our funds to succeed just as much as our investors do, and so we’re equally motivated to find the right project for your money.