Real Estate Crowdfunding Shows Signs of Maturation
Last month, crowdfunding giant RealtyShares bought smaller rival Acquire Real Estate. This news was a significant in the multibillion-dollar sector, which is not even five years old. It begged the question as to whether this deal was a product of synergies between two platforms or a case of a larger player protecting its turf by taking a smaller rival off the board?
Whatever the answer, one thing is clear: We are likely looking at the start of a push toward consolidation in real estate crowdfunding. While there are hundreds of platforms now vying for a capital pool that is almost halfway to 12 figures, some clear-cut market leaders have emerged, and a movement toward economies of scale would signal continued maturation. Over the next year or so, it would not be surprising to see companies like Fundrise, CrowdStreet and Patch of Land join the market for acquisitions, especially as the space continues to establish mainstream legitimacy.
What are some other stories to watch as we reach the halfway mark of 2017?
1. Fundrise muscles into the "for sale" home market. Using its eREIT model in order to open its investing platform to non-accredited investors, Fundrise recently launched a funding arm that offers investors shares in professionally "for sale" residential properties. Fundrise is hardly the first player to go after this slice of the pie. Sharestates and Patch of Land have been in the single-family residential game for three years. But they are restricted to accredited investors. It will be hard to overestimate how much potential success there is for a platform like Fundrise, where anybody with $1,000 to put up can play ball.
Now, millennials who can't invest through other platforms, can put their money to work in properly underwritten “single home” investment opportunities. And with the housing squeeze not showing any signs of easing, especially in urban areas, the opportunity to invest in the expansion of supply should be an easy sell.
2. More eREITS? Fundrise and RealtyMogul charted new ground a couple years ago when they reclassified their offerings as eREITs in order to go after the massive market of potential investors with less than $1 million in net worth. While the JOBS Act, signed by President Obama in 2015, has technically allowed crowdfunding platforms to grant access to non-accredited investors, there are still some cumbersome and costly red-tape hurdles that platforms not structured as eREITs need to clear before they can accept cash from the masses. Make no mistake, the major non-eREIT players are still bringing in serious amounts of capital, but it’s largely institutional money. How much can they continue to grow via this model? Will the pressure to convert into eREITs become too much to bear?
3. Tax uncertainty. The stock market has been on an L.A. Dodger-like tear since the start of the year. Many believe this is a product of confidence that both corporate taxes and capital gains taxes will take haircuts. However, if Washington can’t figure out a way to slash these taxes without causing the deficit to skyrocket, the anticipated tax-cut package could be a non-starter. This would spell huge trouble for Republicans, who have been promising business and capital gains taxes for years.
So what’s a “populist” like Donald Trump to do? Close the carried interest loophole, for starters. Such a move would be popular on main street and a perfect talking point for midterm congressional elections. Afterall, private equity firms, their partners, and their executives make astronomical sums of money off carried interest (money made from investment profits rather than fees). For the rest of us, April 15 is like staring at a solar eclipse without protective eyewear. Close this loophole, which allows private equity profits to be taxed at a much lower rate than normal income, and what happens next? Will private equity continue to plow money into high-risk crowdfunding deals if tax-adjusted returns decrease? It’s an open question.
These trends could take months, or even a few years, to play out. But the reality in capitalism is that strong businesses and useful industries always adjust to changing circumstances. Crowdfunding’s true value lies in its ability to offer new investment pathways to the masses, not just the top one percent. As we watch the next economic chapter unfold, the biggest question -- at least in real estate -- will continue to be how, when or if this promise will be realized. It’s the key to everything.