Younger investors have much to gain from the rise of equity crowdfunding.
Obviously, we’re big fans of real estate crowdfunding here at PeerRealty. We truly believe that crowdfunding has the ability to revolutionize real estate, capital raising, and investing in general. While still young, real estate crowdfunding is already set to become a $2.5 billion industry in 2015.
There is one group, though, that I believe stands to benefit from real estate crowdfunding more than anyone else – young professionals. Older investors get much of the attention, and that’s understandable given that they generally have more investable assets. Younger investors, though, do not necessarily have the same investment needs as older ones, and have much to gain from the rise of equity crowdfunding.
Let me be clear – if you’re an active investor under the age of 40, you should be maxing out your 401(k) and/or your IRA before thinking about anything else. If you still have significant non-subsidized student loan debt, you need to address that before considering alternative investments. If these responsibilities are covered, real estate crowdfunding is most likely a great investment option for you. Here are a few reasons why you should consider real estate crowdfunding.
- Diversification. Industry experts generally recommend that anywhere from 5-10% of the average portfolio should be allocated to real estate. However, the average 401(k) size is only $100,000. Even assuming that younger accredited investors have larger alternative asset allocations, that still doesn’t leave a lot of room for real estate investing. At best, younger investors may be able to purchase a primary residence, but they will likely be shut out of larger commercial transactions.
Real estate crowdfunding bridges this gap. Crowdfunding allows investors to invest in varying types of real estate deals (from multi-family to commercial to industrial) for as little as $5,000. Young investors can use crowdfunding to access real estate deals that they otherwise might not have the financial resources to participate. The commercial real estate market is very different than the residential market, so crowdfunding gives investors an additional measure of portfolio diversification.
- Transparency. Yes, REITs are another option for people interested in investing in commercial real estate. They certainly have their place, and the liquidity of publicly traded REITs can be valuable. (don’t forget, though, that their price reflects a premium for that liquidity – there is no free lunch). Some investors might prefer owning a portfolio of commercial properties.
However, the biggest flaw that REITs have is their lack of transparency. The largest publicly traded REIT in the U.S., Simon Property Group, owns more than 225 retail properties across 35 states. It is simply impossible for REITs like this to provide investors with detailed information about each specific property in the portfolio. Some investors may be perfectly fine with this, but younger investors who want to know what they are investing in may prefer investing in specific properties via real estate crowdfunding.
- Control. With REITs, investors are letting a massive real estate company decide where their money goes. This has its positive aspects, and investors with little knowledge of real estate might prefer this approach. For younger investors with knowledge of their local real estate markets, though, this essentially nullifies any advantage they might hope to gain from their knowledge. In larger cities especially, the real estate market can be hyper-local, so being on the ground in a neighborhood can give investors a unique perspective on the opportunity. Real estate crowdfunding allows investors to determine which types of properties and in which neighborhoods to invest.
- Access. Crowdfunding is one real estate investing method that doesn’t require dealing with open houses, realtors or negotiating. Investors can select properties with a few clicks of a mouse, and invest in real estate halfway across the country. Young investors can participate in large-scale commercial real estate deals without knowing any insiders.
- Supporting the Local Community. Younger accredited investors can use real estate crowdfunding to give back to their local communities while still making sound investments. According to a study performed by social networking site iCrowd, more than 25% of young accredited investors consider investing in a business that supports the local community as a top factor when making investment decisions, as opposed to 11% of all accredited investors.
While the equity crowdfunding and real estate crowdfunding industries are still young, there are signs that younger investors are already accepting the concept. The same iCrowd study mentioned above also found that investors aged 18-29 have an average of 30% of their investment portfolio in equities as compared to 48% for baby boomers, and nearly half of young accredited investors already invest in private company securities (private placements and angel investments). As more investors gain the ability to participate in equity crowdfunding offerings and knowledge of the industry grows, it is likely that that trend will continue. Don’t be surprised if many of these young investors turn to real estate crowdfunding to diversify their portfolios.