When you’re watching the evening news and you see a segment on gene editing, you’ll probably be pretty amazed by the technology if it’s the first time you’re hearing about it. The first thing that might cross your mind shortly afterwards is “how to invest in gene editing“. Plug that search term into Google and you’ll get this article from Nanalyze which tells you how. That’s what we do. We tell you how to invest in emerging technologies.
As part and parcel of that mandate, we also find ourselves delving into other aspects of investing like “multi asset class risk management“, “optimal asset class allocation based on your risk profile“, and “smart beta strategies“, all of which sounds boring as isht, because they typically are. Retail investors like exciting things, which is why people generally like investing in technology stocks. They’re hoping to find the next Cisco or Netflix. The truth is though, most investors will become wealthy over time by investing in things like boring old dividend growth stocks, or realty.
One asset class that’s just begging to be reinvented these days is that of realty. What’s the matter with realty and why does it need to be reinvented? A few problems:
- The traditional way to invest in property is to buy a single house which offers zero diversification to the buyer
- Commercial property is not very accessible for retail investors due to higher price points
- Real estate has very, very low liquidity. You can’t buy or sell it very fast.
Historically, the preferred way to invest in realty without buying a house is through buying Real Estate Investment Trusts (REITs) like Federal Realty Investment Trust (NYSE:FRT) or Realty Income (NYSE:O), both of which we hold in our own portfolios. A REIT is a stock that is essentially just a portfolio of real estate that is being held and managed with special tax privileges. While the properties are now diversified, the stock you’re holding isn’t. You could create your own motif with a collection of REITS, but this still doesn’t allow you that many control over what those REITs decide to invest in. If only there was a way to allow retail investors to access real estate in a much more direct way without large capital requirements or dreadful liquidity when it comes time to sell. Here are 10 startups working on these problems.
Founded in 2014, New York startup Cadre has taken in $133 million in funding so far from investors that include some big names like Alibaba’s Jack Ma, Goldman Sachs, Khosla Ventures, and Peter Thiel’s Founders fund to name a few. Just last week, Cadre closed their Series C round of $65 million led by Andreessen Horowitz. Led by the former head of Goldman Sachs’ real estate investment division, the firm offers high net worth individuals the opportunity to pony up a minimum of $100,000 per transaction to participate in a minimum equity investment of $15 million with a 4-7 year hold period.
These transactions are conducted through an online investment platform and their fee load is 40% lower than a traditional fund construct.
Founded in 2008, London based LendInvest is the UK’s leading online platform for property lending and investing having taken in a total of $58.62 million in funding to develop their platform. Over the past 9 years, LendInvest has lent $1.28 billion in loans to developers that have bought, built, or renovated 3,000 properties across the UK. Right now they have 356 “live loans” at an average size of $1.2 million, 78% of which are bridge loans. Similar to Cadre, LendInvest caters to sophisticated investors like high net worth individuals and corporates.
Founded in 2012, Los Angeles startup RealtyMogul.com has taken in $45 million in funding so far to develop an “online market for real estate investing”. More than 120,000 investors are using the platform to invest $270 million into commercial real estate deals. Apparently there’s some liquidity as well, since the platform has returned $65 million back to investors. The self-described crowdfunding platform let’s you invest with as little as $1,000 per transaction. If you’re worried about the quality of the properties on offer, RealtyMogul spends over $1 million a year on data and technology to vet each deal for their platform. Deals available include debt (bridge loans and mezzanine debt) and equity (property purchase).
Founded in 2013, San Francisco startup RealtyShares is a crowdfunding platform for both commercial and residential real estate financing which has taken in $35.7 million in funding so far (think Lending Club for real estate). With minimums starting at $5,000, the platform is much more accessible to the average retail investor. Over $300 million in funding has changed hands across 1000s of properties with the terms of the financing solutions on offer seen below:
If you’re a developer looking to get funded, there’s no easy money to be had here. Out of the roughly 2,700 applications they receive per month, fewer than 5% meet their standards.
Founded in 2015, New York startup Knock has taken in $34.5 million in funding to solve the problem of poor liquidity in residential real estate. Their online home selling platform provides a guaranteed way to sell their home in six weeks. Once you contact the company, they’ll get back to you in one day with a “competitive market price”. The fees are 6% which also includes a 3% commission to the agent representing the buyer. Why we still need “agents” in this day and age is mind boggling. These people are like that dude in the club bathroom who hands you a towel to dry your hands after you get done using the bathroom and expects a tip. While Knock definitely helps improve liquidity, 6 weeks still seems like long time. As you would expect, all those homes they’re buying up are also available to buyers.
Founded in 2015, Oakland California startup Roofstock has taken in $33.25 million in funding to develop an online marketplace that lets you invest in leased single-family rental homes. Essentially, you can become a landlord by purchasing homes that already have tenants. Here’s an example of where an initial investment of $100,000 ($25,000 per house) can be used to purchase 4 houses with leverage (bank loans):
U.S. homes are actually one of the world’s largest asset classes worth about $35 trillion (here’s an article that puts that number in perspective). Unless a residential home is empty, it produces a stream of income for the owner of the property. If you bought a $100,000 house for cash and rented it constantly at $600 a month, that’s like owning a stock that pays you a 7.2% yield. Of course there are property taxes, deadbeat renters, broken water heaters, paint, roof, etc. that will eat into that yield. With Roofstock, you don’t need to deal with any of that isht.
Founded in 2014, London England startup Property Partner has taken in $32.26 million in funding so far to develop a platform that offers residential real estate crowdfunding with a secondary exchange for investors to trade holdings on. If we were going to imagine what a crowdfunding marketplace for realty would look like, this would be it. They’ve broken the entire thing down to a mini-market where each property is represented as traded shares which offer a yield (like the example we gave earlier):
While this ease of access to the hot UK property market may seem compelling, keep in mind that some of the properties are leveraged. If interest rates go up, the dynamics change a lot for leveraged properties. While you will never go “under water” so to speak, this will mean people will pay less for your shares because the yield is less. If there’s a crisis and buyers dry up, liquidity is going to cost you. Pretty slick platform though, innit.
Founded in 2015, Arizona startup Offerpad has taken in $30 million in funding so far to offer solutions that make the online buying and selling of homes more efficient. The basic value proposition on offer is like that of Knock (the startup we talked about earlier) that makes you an offer in just one day. In the case of Offerpad, that offer to buy can close in as little as 5 days and up to 90 days. Theoretically, you could sell your house in 6 days which is actually approaching some decent liquidity. Here’s what that costs:
Looks like 3% to Offerpad and 6% for agency fees – and they’ll also pay your moving costs. As they say at Offerpad, “what is your time and convenience worth“? Apparently a 9% commission.
Founded in 2013, Los Angeles startup Peerstreet has taken in $21.1 million in funding so far to develop a crowdfunding platform for investors to easily access high yielding loans, collateralized with real estate. Similar to finance people, real estate people love to obfuscate the simplicity of investing with all kinds of nomenclature. Basically, real estate investing breaks down into debt investing or equity investing. In equity investing, you take $100,000 and buy a $100,000 house. The price of that property goes up or down and you get a yield if you rent it. If property prices crash, you sell at a loss or keep holding the property (no liquidity). If you took a mortgage out, the person who gave you that mortgage is engaging in “debt investing” as seen below:
You see, debt investors don’t care what about what property prices do because they get a fat 6-12% yield no matter what. They only care if the person who took the loan stops paying their mortgage. If that happens, the house is sold and the proceeds are first used to settle the loan. That “LTV” acronym above stands for “loan-to-value” which means that property prices could fall 25% and you’re still safe as a lender. Of course rising interest rates can complicate things but let’s not get too caught up in the details. This is essentially Lending Club with better returns and quality collateral to back the loan.
Founded in 2014, Hamburg startup Exporo has taken in $18.03 million in funding so far to build a real estate crowdfunding platform specifically for zee Germans. Since our token German is on holiday, we can’t tell you much more except that they appear to have a very nice platform (like Property Partner), they accept investments with as little as $558 (that’s how much 500 euros is worth these days), and they just took their most recent funding round of around $9 million last month.
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