Direct Real Estate Investing vs REITs vs Syndication vs Crowdfunding vs Collaborative SMART InvestingTM
In today’s world, within any given industry, there are many investment vehicles available to us and when it comes to real estate investment, it’s no different.
The most conventional way of investing is by directly purchasing a residential investment property, which comes with the added responsibilities of property management and upkeep. This method is becoming increasingly more difficult with some global markets setting unattainably high entry prices like Australia as well as many of the major cities around the world.
For some, this method is still a viable investment option but has proved to only really be affordable for the Ultra High Net Worth Investors (UHNWI), because these options are not always available to all people. It is generally considered that 99% of the world population, just don’t have access to the same options as the top 1%.
With the median house price set at $865,000 in Sydney Australia, a 70% increase on five years ago, many people do not financially qualify for direct residential real estate investing. Commercial real estate is unachievable in that the deposit alone generally equates to millions of dollars. This does not consider having the knowledge or access to the right opportunities in the right markets or right countries.
It is interesting that according to the latest Wealth Report by Credit Suisse, UHNWI with a net worth more than $10m are increasing their exposure to direct real estate investing, specifically commercial, as it is a safe asset class, based on income producing assets and no correlation with corrections of the stock market.
However, now there are more options available to investors who wish to enter the real estate market and benefit the positive returns that these investments can yield.
One investment method that has earned great interest over recent years is Real Estate Investment Trusts (REITs). These are specialised Mutual Funds, focused on investing in real estate. They are a tradeable security usually traded on stock exchanges such as the ASX, NYSE, etc and therefore are quite liquid. However, with liquidity comes greater risk in that REITs are financially correlated by more than 70% with the stock markets so volatility is often dependent on general market sentiment.
REITs invest in many commercial properties and therefore it can be difficult to know exactly which direct stock you are investing in without knowing the constituents of your REIT. Investors own a share of the total fund and not directly in a share of the underlying property. If you don’t know exactly which properties you are investing in, it’s hard to complete a thorough risk assessment to an already established fund for example if a REIT has invested heavily in one market or area, this can create higher risk should that market or area’s property value decline. Due to these factors, diversification isn’t easily obtainable when investing in a REIT.
The fee structure of a REIT is generally based on the AUM (assets under management) and is not generally aligned with the investors long term interests. They carry large overheads and many middlemen who often facilitate the sale and marketing of REITs from financial planners, consultants, bankers and listing services often diluting the net return to the investor.
Research done by Tony Robbins in his 2017 book, Unshakable, confirms that 96% of Mutual Funds do not beat the market average over a 15-year period. However, because people are generally ‘educated’ on investments by the financial industry and the middlemen who service the industry they don’t often understand the impact of fees on their investments and the actual returns of their investments against benchmark market averages.
Our belief is that through education real estate investing can become common knowledge and that everyone can make better-informed decisions, especially if they have the systems to help support them in this decision making.
Finally, this method of investment isn’t suited to those people who enjoy the hands-on approach to managing investments or who like to make a meaningful contribution to the macro trend which is growing globally, which is a cultural disruption (the increasing desire of people to be meaningfully involved with what they buy, the things they do and where they invest).
Besides Public REITs there are also Private REITs which are very similar although they don’t have the transparency, regulation or liquidity of the Public REITs. Their success is based on the ability of the person or company running the Private REIT and is very focused on local knowledge and expertise of a small team or sometimes even one person.
Now, there are other options besides the conventional direct way and REITs.
Since the 1980’s there have been different forms of syndication where ‘experts’ find a property and then invite investors to participate. They generally charge a fee upfront for putting the investment together and then they pay middlemen commissions to fund the deal. In some cases, the fees on the front are as high as 26% of your initial investment, which technically means ‘you out of money’ before the investment even starts. You are also not aligned with the syndicator who only does deals upfront and is not involved in the performance of the investment.
Their track record is generally poor and they have only been able to buy the deals that no one else wants – Direct, REITs or Funds.
Real estate crowdfunding is a type of direct real estate investment that allows multiple people to invest smaller amounts of capital to fund a purchase collectively. Crowdfunding is an up and comer. This investment vehicle can negate a lot of the negatives of the conventional and REITs styles investments.
One note: People get caught up in acronyms. Whether you call it crowdfunding, FinTech or PropTech, in simple terms it is technology coming to the real estate space. Whenever technology has come to any other industry and disrupted that industry it has done 3 things:
- Cut out the middlemen
- Cut the costs
- Increased the trust, transparency, and accessibility
More specifically in real estate, the benefits of technology are numerous:
You can select the exact property or project to invest in
By having this option, you can do your research on the micro and macro economic factors pertinent to that property and the surrounding area. This gives an excellent advantage to the investor. You know exactly what property you have invested in and therefore can determine the risk it brings to your overall investment portfolio.
Is not publicly traded
Because your share in a crowdfunded property is not publicly traded on stock exchanges, it means more stability in values. With stocks and other tradeable securities, they are valued on a constant basis and are usually highly volatile. As the research above showed REITs have a correlation of more than 70% to the stock market. Although the underlying asset is real estate, it is far more a financial instrument which is linked to the sentiment of the stock market. This risk is mitigated through crowdfunding.
Low costs, regular returns
Unlike the conventional method, crowdfunding has very low initial and ongoing costs. You don’t have to pay extra for a broker to broker the deal and you don’t pay for management costs. You do however receive a share of the regular rental income and when the property is disposed of, you receive your share of capital gains profit.
Smaller initial investments
With most capital cities in Australia sitting at a median house price over $500,000, it’s becoming more difficult for many people to invest in real estate. This is no longer an issue with crowdfunding options. From as little as $1000, you can secure your very own portion of real estate. This is not only great for broadening the scope of investors, but also provides for the ability to diversify and reduce risk. This is not to mention commercial property which is even less accessible for more people. Through crowdfunding, people can now access this as well now from as little as $1000.
Diversification and minimised risk
If you have $10,000 and want to invest in property, your options have been minimal until the last few years. Now, you can invest 10 lots of $1000 in ten different properties to reap the benefits of diversification. If one market, suburb or state’s property values tank, then you don’t lose all your money because you have invested in many other properties in differing markets.
The are a few problems with crowdfunding to-date:
- All the platforms are local in-country operators and therefore people cannot diversify out of one country or currency. If they do they have to manage their properties on many different platforms, while also having to worry about bank accounts, tax, structuring, money transfers, etc.
- The crowdfunding platform operators are often technical people who have built a great platform but don’t have substantial credibility in verifying good markets, partners or projects. They aim to have a lot of selection, but the quality of the investments and the long-term returns are yet to be verified.
- As the platform merely facilitates the transaction and takes a fee up front (can vary and be quite high), it is hard to determine what will happen when and if one of the projects is not performing, (this ties back to experience above) and what the long term performance will be.
Enter Collaborative SMART InvestingTM
Essentially Collaborative SMART InvestmentTM is uniting the knowledge base of industry experts – practitioners or partners in specific industries, countries, and markets with specific product knowledge, platforms or marketplaces and their systemsand their purpose driven mission. It is based on the principles of Collaborative Investment (click here to see this article), however it is adding social purpose.
To solidify this concept, the practitioner or partner needs to be a co-investor to align the interests to the investor and the platform. This allows for a more in-depth level of due diligence and research which leads to better-informed investment decisions, more thorough product understanding and a significant reduction in risk. There are many aspects with respect to research which needs to be understood and evaluated to make better investment decisions by the Investor.
Two of the most important components are product knowledge and macro and micro market analysis based on the fundamentals of investing. Once this is understood, it is critically important to understand the value proposition and correlated risks. An example from Wealth Migrate is that a property partner would need to understand the medical commercial field and have more than a 10-year track record in delivering and executing on this type of product. Then it would have to be in a country and city where the macro and micro fundamentals are right. Things like currency, rule of law, protection of assets, population growth, affordability, value, taxes, supply, and demand etc. As a further example, one can look at America now because it is safe and has the right fundamentals, but not Russia. Then in America, we would only look at cities like Atlanta or Texas and not Detroit. Wealth Migrate’s GIDDSTM System (Global Investment Due Diligence System) is a globally recognized system to provide investors with a tool, not only to get access to partners in the right markets, but also for them to be able to understand and ascertain the risk/reward correlation and allow investors to make the best investment decisions for themselves.
Collaborative SMART InvestingTM alsoallows the Partners to extend their understanding of the products from an investors point of view. Another major benefit for the partner is providing them with a digital track record of their past performance, something which companies in other industries like hotel groups with Trip Advisor or Retailers with Alibaba have found essential to success in the digital economy.
Collaborative SMART InvestingTM differentiates from “collective investments” and/or “collective investment schemes” (“CIS”) in that it is not investors pooling their investment in a fund and which is administered by a fund manager. Usually CIS attracts high fees and the investment is in a fund that owns different properties. With Collaborative investing, the investor invests in a particular property with a return and/or income relating directly to that particular property.
A critical question all investors ask is how reliable is the information from the partner. Is it accurate and objective? Wealth Migrate’s belief is that if the partner’s assets/money are invested alongside the investors, chances are they will work hard to be accurate, timely as possible with the information they provide and execute effectively on the opportunity. This is not to mention that their digital reputation will also be on the line.
In the traditional Funds, REITs & Syndication they hire many consultants into their companies, who are experts in their respected fields, to analysis the risk and make investment decisions. However, because the consultant does not have any risk involved it is easier to postulate information under pressure, which can lead to misguided investment decisions. This is important when also taking into account the alignment issues we have spoken about above with the fee structure.
For Collaborative SMART InvestingTM to truly fulfill its potential all experts/partners feedback, including the marketplace, must be collated in a balanced manner, without regional bias and be presented clearly for investors to make the right decisions for themselves. At Wealth Migrate we are always looking for ways to improve the customer experience (CX) and tools to make investment decisions as simple, safe and personalized as possible for our investors.
The components which make this type of philosophy work are: first you must find the right local partners on the ground in the markets where you want to invest, second you must get them to invest, third you need them to believe in the model, fourth you must conduct regular meetings, fifth and most important of all, you must create two-way communication between the partners and the investors, using the platform as the medium.
Building a network of local partners and global investors takes time; however, if applied properly the benefits can be very rewarding. Most people understand this, however, to execute is far more challenging.
In the past, this was virtually impossible for people to do on their own, REITs are generally in one country and even one sector and even for the over 250 local real estate crowdfunding platforms which are based in-country around the world, this has proven to be a bridge too far. Now with Wealth Migrate, global investors can tap into our Trusted Global Real Estate Marketplace which we have been building for more than two decades and it is all based on partnerships, relationships, the platforms and the principles of Collaborative SMART InvestingTM.
Therefore, we believe that crowdfunding is merely a stepping stone to a far bigger purpose and it is only one of the pieces which have been adopted to provide a service which is 10x’s the original concepts of crowdfunding.
Using Collaborative SMARTl InvestingTM, Wealth Migrate has been able to surpass normal investment results, generating higher returns, with fewer costs and lower risks in a compliant and safe way. This is to the benefit of the investors, the partners, and the platform, with all interests aligned.
Investors have the option to invest in multiple countries, and different real estate asset classes i.e. residential, commercial and multifamily and currencies and therefore diversify like the most sophisticated investors, in a simple and safe way.
The investor benefits throughout the process and ‘learns while doing’ and because they understand that Collaborative SMART InvestingTM does cost them it allows the freedom to contribute to the process replicating the social laws of nature and why it is so sustainable, effective and efficient.
Finally, it has to be about purpose. Here is how we will use Collaborative SMART InvestingTM to not only enhance the lives of every customer we touch but also be purposeful and solve one of the greatest challenges on the planet – The Wealth Gap.
Wealth Migrate has pioneered the Wealth Movement, whose mission is to empower a billion people by 2020 and create a better and more sustainable planet for all. Go to www.wealthmovement.com for more information.
Join us, let us help empower you to create the economic freedom you want in your life for you and your family, while also having a purposeful impact on the planet.
While the conventional Direct method, REITs, Syndication, and Crowdfunding are both common and viable investment options, Collaborative SMART InvestmentTM offers a hybrid investment option taking the best bits of all worlds opening the door to a larger scope of investors globally.
Investing in real estate is generally accepted as a good decision. 49% of the world’s wealth is held in real estate and there is a reason that there are sayings like, “He who owns the land is King,” or why most middle-class people endeavor to buy a house.
Because of technology, there’s never been a better time to begin investing in real estate with so many options available to you. It all comes down to your risk tolerance and much capital you want to invest. When conducting your risk analysis, consider Collaborative Investment Platforms and all they must offer. As stated above technology is disrupting the real estate and investing space and it is only a matter of time that more people will realise it is simpler, safer, easier, quicker, personalised and can provide above average returns for investors.
Scott Picken, Founder & CEO of Wealth Migrate, the Trusted Global Real Estate Marketplace said, “I get asked all the time what is the difference between these options. My simple answer is that when I used to catch a yellow taxi there were four wheels, a driver and an engine and it took me from A to B. When I catch my Uber it has four wheels, a driver, and an engine and it took me from A to B, both are cars. So, what is the difference? In my opinion, Uber is much more trustworthy, transparent, cost effective, simple and safe and technology has made the process much more efficient. REIT’s, direct investing, syndication, crowdfunding and Collaborative SMART InvestingTM are all about the real estate investment but technology is making the investment process much more efficient and Collaborative SMART InvestingTM is making it sustainable, trustworthy, transparent, robust, safe and global, where all parties interests are aligned.’’