The soaring real estate market has made it tough for many to buy into, either as an aspiring homeowner or as an investor. Well, it turns out there’s an app for that—several, actually. They all use crowdfunding, which taps the Internet to attract large sums of money from many small donors, letting investors get into the real estate market without having to save large down payments or take on huge mortgages.
When most people think of crowdfunding, they picture inventors trying to fund their latest gadget. The classic example is the Pebble smartwatch, whose creators raised an astounding US$10 million from some 69,000 donors back in 2012. (Pebble is considered to have ushered in a new era of smartwatches; however, it was not ultimately successful and was acquired by Fitbit in 2016.)
Since then, many private companies, especially start-ups, have tapped the Internet to raise funds, either by offering stakes in the firm or appealing to investors for loans or even donations.
The key strength of crowdfunding for investors is that it lets them access corners of the market (tech start-ups, for example) that would normally be hard for them to participate in without a lot of capital. And increasingly, many would argue, real estate is becoming one such market—particularly in Vancouver, where the average price for a detached home was $1.8 million in May, up 22.8% from May 2020 (Greater Vancouver Real Estate Board).
This is where crowdfunded real estate comes into play because it lets you buy into properties for a minimal investment, even as little as a loonie.
Crowdfunded real estate to help save for your first home
For anyone saving for a first home, crowdfunded real estate may be an option to help you get into the market. For example, let’s say you don’t plan to buy for a few years and are saving up a down payment. In that case, you could consider investing some of your savings to buy a stake in a crowdfunded property. Then, when it comes time to buy your first place, you could sell your stake and put your gains (provided the value of the crowdfunded property continues to go higher) toward your first home.
That could set up a kind of win-win scenario, where you get to participate in the real estate market now and use your profits to boost your real estate exposure (by owning your own home) down the road.
Crowdfunded real estate for the investor: like a REIT but different
On its surface, crowdfunded real estate is similar to a real estate investment trust (REIT), which holds a portfolio of properties. REITs can be public—in which case they trade on U.S. or Canadian exchanges and are highly liquid—or private, in which case they’re not traded on an exchange and therefore not as easy for investors to move into and out of. Private REITs are also not as closely scrutinized by provincial regulators, such as the BC Securities Commission.
As with a REIT, a crowdfunded real estate platform allows investors to pool their cash with a firm that buys and operates commercial or residential properties.
This, however, is where the similarities largely end. With crowdfunded real estate, you generally set up an account on the firm’s own platform and move funds into it. You then buy into the firm’s real estate portfolio.
That brings us to the first point we need to consider with the crowdfunded option: liquidity. This is the strength of a publicly traded REIT: shares can be converted to cash with the click of a mouse. With crowdfunded real estate, however, you’d sell through the company’s platform, and there are often minimum holding periods and/or penalties for selling early. It’s therefore not the kind of investment you’d necessarily want to move into and out of regularly.
In return for committing your funds, crowdfunded real estate gives you the ability to micro-target your investment in a way that’s simply not possible with a REIT.
“With a crowdfunded real estate platform, you can often target a specific city, neighbourhood within a city, or even a specific building,” says Claudio Chisani, Principal, Chisani Wealth at BlueShore Financial and Portfolio Manager and Investment Advisor with Credential Securities. “That’s different from a publicly traded REIT, which holds a collection of properties that is often national in scope and concentrated on one type—offices, apartments or shopping malls, for example. I believe that crowdfunded real estate could have a viable place within a diversified real estate portfolio.”
Crowdfunded real estate may not provide income—at least at first
Another key reason people invest in real estate is for income. With crowdfunded real estate, you may get an income stream from your investment in addition to growth, but likely not at the start while the firm uses existing capital to buy and develop properties. That’s another difference from publicly traded REITs, which often pay dividends yielding 3% or more, and you’re eligible for those when you buy your shares.
Also, bear in mind also that crowdfunded real estate stakes can’t be held in a registered plan like a TFSA or RRSP, so you will be taxed on any gains and income. REITs, on the other hand, are RRSP and TFSA eligible, freeing your capital gains and dividends from taxation (until you withdraw the money in the case of an RRSP; TFSA withdrawals aren’t taxable since you’ve already paid tax on those funds).
Let liquidity needs help guide your real estate investments
Regardless of whether you decide to participate in crowdfunded real estate, the key to building a successful real estate portfolio is to decide first if you wish to be a lender, an investor or both.
If you’d like to invest in mortgages, rather than physical properties, you could consider a mortgage investment corporation (MIC)—a public or private residential lender that often focuses on shorter-term, higher-interest mortgages that pay higher-than-average dividend yields.
For investment in physical properties, a public or private REIT would be the way to go, and/or the crowdfunded option.
The next thing to consider is liquidity. With private firms, you may need a larger amount of money to buy in, and your investment almost certainly wouldn’t be as liquid as it would be if, say, you bought shares* of a public company.
“An investor with a balanced outlook—who perhaps needs access to cash in the medium term but needs to build their nest egg over the long-term— could consider spreading the real estate portion of their portfolio across various options,” says Chisani. “They could consider, for example, an allotment to very liquid public REITs and another portion in private REITs or MICs, or maybe a crowdfunded platform.”
Inflation and interest rates
Finally, a note on inflation and interest rates, two variables that play a big role in any real estate investment. There’s good news here, as “hard assets”—including property and natural resources such as gold and oil—tend to perform well when inflation ticks up.
In the case of real estate, inflation raises property values, and the quickly growing economy that usually drives rising prices will allow landlords to raise the rent.
“As long as interest rates don’t get too onerous, I see real estate continuing to perform well,” says Chisani.
Your advisor can help you build a balanced portfolio (including real estate)
A key risk many Canadian investors make with real estate as an investment is overexposing themselves to the sector. (Remember to consider your own residence as part of your overall real estate holdings).
Real estate crowdfunding is of course only one way to invest in real estate and may not be for you. Your advisor at BlueShore can help you determine the best way to expand your portfolio to include real estate, ensure this sector makes up an appropriate portion of your portfolio, and diversify your real estate investments if called for. Please call to discuss.
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