Education paramount as more investors look to real estate

The democratization of real estate, by various means including crowdfunding, fractional ownership, public real estate investment trusts and tokenization, has opened an investment pathway that once was restricted to only the very wealthy. Today, it is possible to sink as little as $10 into partial ownership in office towers, multifamily or single-family housing, shopping centers and malls, and even industrial properties.

Thanks to some regulatory changes in the US and across Europe, real estate crowdfunding continues to grow. In the US, the Jobs Act allowed non-accredited investors to participate in real estate crowdfunding, an industry expected to see continued growth. According to research company Absolute Markets Insights, the US real estate crowdfunding market was valued at $13.2 billion in 2018 and is expected to reach $869 billion by 2027 with an estimated CAGR of 58.5 percent over the forecast period.

“By and large, the democratization of real estate is a desirable trend because it enables small-scale investors to access an asset class fundamental to diversification and building personal wealth,” says Piotr Trzciński, Savills Investment Management’s head of Poland.

The democratization trend is making it easier for more people to invest in real estate, but these new opportunities can present new risks for inexperienced investors. Advances in technology can give a false impression about the ease of real estate investing, leading some to invest without fully understanding the market and the associated risks, or without completing their due diligence on the properties and companies involved, potentially exposing new investors to financial losses.

Doing due diligence

So where do potential investors who do not traditionally invest in the real estate sector go to understand how the industry operates and what the risks are? The answer is, there is no one place, so investors must pull information from various sources and often rely on their own due diligence. It helps to have access to a good real estate adviser to aid in negotiating the ups and downs of what can be a cyclical market.

Due diligence includes researching the targeted property market as well as the REIT or platform that investors will use to complete their transaction, including any regulatory or compliance and reporting issues as well as the technology behind these various platforms. This is on top of the normal concerns faced by these retail investors that traditionally trade in stocks and bonds, looking at risk, growth profiles and return projections.

Unlike traditional real estate transactions, blockchain technologies and tokenization are often more transparent and offer increased liquidity and security thanks to the public ledgers associated with these new technologies, according to Deloitte. Moreover, they can reduce transaction costs by eliminating intermediaries.

Besides owning a piece of a tangible asset, real estate can offer reliable and stable cashflow, an inflation hedge, capital growth over time and tax incentives. Diversifying an investment portfolio can benefit investors and also adds new sources of equity into what has long been an institution-only investment class.

Real estate research

With advances in technology, investing in a piece of a real estate can be simple for the do-it-yourself investor, a trend that millennials have popularized in recent years. Much of that happens online through crowdfunding platforms that have minimum investment requirements and annual fees. As a result, real estate investors are going online to educate themselves, turning to social media and researching articles from more established media sources and the platforms themselves.

RedSwan, CrowdStreet and Yieldstreet, for example, have educational tabs on their online platforms explaining the process and addressing frequently asked questions, in addition to research articles. Crowdfunding platforms are usually required to offer investors education materials to help them understand the investments and risks, according to the US Internal Revenue Service.

“Despite fragmented ownership opportunities, real estate is still a complex asset class,” Trzciński says. “While online real estate investments are generally more liquid than physical ownership, they are not ‘one size fits all’ and have their challenges, such as the disconnect between investors and the deal sponsor.”

Plus, first-time investors need to know about the importance of location, property type, cyclicality, tax structuring and the misconception that real estate has bond-like stability. On a global basis, data centers, industrial properties and self-storage facilities have been the strongest performing sectors in 2023, according to analysis by the National Association of REITs, while office and infrastructure sectors have lagged this year. As with any investment, the real estate market certainly has its risks.

Real estate is not a very attractive sector for day traders or investors looking for quick returns. However, the commercial real estate market continues to see average annual returns in long-term investing that beats many traditional stocks. Average 20-year returns in commercial real estate outperform the S&P 500 index, at about 9.5 percent, while diversified real estate investments do a bit better at 10.6 percent. REITs perform the best, with an average 20-year annual return of 11.8 percent last year, showing why more and more retail investors are turning to real estate.

Education is key

Trzciński warns of biases toward selling investors on a particular investment. “To make informed decisions, potential investors have to do their own due diligence, understand associated risks, their personal controlling power, or the long-term nature of real estate investing.”

There are a variety of resources online that discuss the types of platforms available for investing in commercial real estate for the casual or inexperienced retail investor, but finding a single unbiased source can prove difficult and new investors should take a deeper look into investment choices and options before making any investment decision.

Education plays a pivotal role in real estate investing, serving as the cornerstone for success in a dynamic field. A well-informed investor is equipped to navigate the complexities of property markets, understand financial implications and make strategic decisions. Knowledge of market trends, property valuation, and legal intricacies empowers investors to identify lucrative opportunities and mitigate risks.

Education also fosters a comprehensive understanding of real estate strategies, such as rental income or long-term appreciation. Investors can leverage this knowledge to develop personalized and effective investment plans aligned with their financial goals. Additionally, staying abreast of regulatory changes and industry updates is essential for compliance and informed decision-making.

Overall, a solid education in real estate investing and the various platforms available will provide the necessary tools for investors to build wealth, capitalize on opportunities and navigate the intricacies of the market with confidence.