Over the last five years, as federal rules have changed, a rising interest in alternative investments and the creation of online real estate marketplaces through a direct-to-investor sales model have helped real estate crowdfunding grow into a billion-dollar industry, according to the American Association of Private Lenders.
It was only after the JOBS Act became law in 2012 that investment firms were permitted to use crowdfunding to sell securities. The next year, a new 506(c) rule allowed investment firms to market those offerings to accredited investors, typically those with $1 million in net worth.
“If you asked anybody 20 years ago if they would have done banking on their phone or traded stocks on E-Trade in a mobile environment, they would have said that’s crazy,” said Shoshana Winter, managing director for U.S. operations for iintoo, a global online real estate investment network.
iintoo hopes crowdfunded commercial real estate investing will reach the same ubiquity online as E-Trade. iintoo aims to make it as easy and efficient for individuals to invest in commercial real estate as it is to make an online mortgage payment or stock purchase.
Analysts see potential for growth in the direct-to-investor model, which includes online commercial real estate investing. By 2022, assets in direct-to-investor platforms are expected to top $9 trillion, up from about $7 trillion today, according to global consulting firm Cerulli Associates.
Opening New Doors
Amid a growing interest in alternative investments, commercial real estate crowdfunding creates a new asset class for individual investors by letting them participate in commercial real estate opportunities previously available only to more affluent investors.
The internet-driven direct-to-consumer revolution has already disrupted how Americans buy eyeglasses, mattresses and cookware from companies like Warby Parker, Casper and Great Jones by removing the party in the middle and creating an elevated user experience that caters to shoppers, Winter said.
“They have changed the very notion of how Americans shop, curate and buy,” she said. “Today’s consumers who have a credit card and an internet connection are being habituated to expect that they can have almost anything delivered to them.”
The growing direct-to-investor market could similarly disrupt the financial services industry by eliminating broker fees and creating a catered consumer experience, Winter said. iintoo, for example, provides individual investors with direct access to pre-vetted commercial real estate opportunities for a minimum investment of $25,000.
Creating An Experience
William Raff, a retired bank executive and an early adopter of iintoo, said the company’s real estate knowledge is a draw and adds to the site’s experience.
“When you go to Carnegie Hall, it’s a beautiful place, but it’s really about the music,” said Raff, who lives in New York. “If you invest with iintoo, it’s not about the technology—it’s about the real estate.”
While some crowdfunding platforms focus on providing the technology to connect real estate developers with investors, Winter said iintoo specializes in offering real estate expertise through its online network.
To create a more catered user experience, iintoo removes the guesswork for investors by displaying about 1% of its real estate offerings on its network at a time. The scaled-back approach improves transparency by making room for more details about each investment.
iintoo provides an exit-oriented strategy by offering opportunities to invest in commercial real estate renovations and upgrades that aim to increase the value of income-generating buildings, such as rental properties. These short-term projects typically allow investors to cash out in 18 to 36 months and provide quarterly distributions in addition to an exit yield, Winter adds.
iintoo’s commercial real estate investment opportunities include multifamily, student and retirement housing as well as other commercial offerings in a range of smaller U.S. cities near employment hubs.
Raff says the shorter 18- to 36-month investment term provides a way to increase the liquidity of capital in his investments so that they can be bought and sold more quickly.
“What iintoo provided for someone in my situation is a liquidity event within the foreseeable future,” said Raff.
To further elevate the user experience, iintoo also offers an opportunity to join a social network of investors.
“There is something really valuable about the notion of leveraging the wisdom of the crowd, being able to transact and interact as part of a group and creating connections with people that can enhance your experience,” Winter said.
To encourage new investors to try the network, iintoo offers two-tiered risk mitigation. If an investment doesn’t perform well, a protection fund that is funded by a portion of investment dollars can help an investor recoup lost funds.
If the protection fund is exhausted, the company has an equity protection* policy with insurance company Everest Re Group for up to $150 million, she said. So far, the network’s offerings have yielded an average 16.63% on exited investments. The exit annual yield is equal to the ratio between the total profits from the equity investment before tax and the total raise (amount invested by iintoo’s equity investors in the project) divided by the investment term.
iintoo also offers the option for investors to use their existing 401(k) and individual retirement account (IRA) funds to invest in commercial real estate projects by offering self-directed custodian services through a partnership with Meridian Capital Group, a commercial real estate finance and advisory firm.
“If you have a 401(k) or an IRA, there’s a limited range of mutual funds that you can invest in,” said Raff, one of the first iintoo investors to take advantage of the option.
Raff said he can additionally invest his 401(k) and IRA funds into commercial real estate, which he’s done to diversify his portfolio.
Looking ahead, iintoo is exploring new types of asset classes, such as infrastructure projects, and ways to offer opportunities to nonaccredited investors, Winter said.
“I don’t think the company sees itself as limited to just the kinds of deals that we’re doing today,” she said. “There is still so much room for growth.”