Meet the new kid on the block of real estate investment: the American middle class.
Two developments — recent changes to securities regulations and online “crowd funding” technology — have created opportunities to raise real estate capital from a wider pool of smaller investors than ever before.
The regulatory loosening is a result of the Jumpstart Our Business Startups (JOBS) Act, a federal law passed last year with the stated intent of improving access to capital for business startups.
But removing restrictions on the way private companies can solicit investment has implications beyond backroom bakeries. According to advocates, luxury hotels, grass-roots urban renewal groups and small investors previously unable to access real estate investments are all poised to benefit.
In one JOBS Act-related change, companies no longer need to register with the SEC in order to advertise for accredited investors.
Stuart Saft, an attorney who chairs the New York real estate practice group and condominium development team at Holland & Knight, has been talking to his clients about this change for months, he said, because the lifting of the advertising restriction will allow hotel developers more leeway to market condo units that they will manage for the owner as hotel rooms in the owner’s absence.
“This little jewel hidden inside the JOBS Act suddenly makes nationwide sales of real estate investment far simpler,” said Saft.
A developer can now advertise in national magazines or online to raise money to build or purchase a vacation resort, one room at a time.
Advertising investments means only working with accredited investors, Saft said, but the income requirements are modest enough that a working professional without the means or inclination to own an entire vacation home might be a good candidate to invest in a hotel condo.
An accredited investor is anyone with an annual income above $200,000 a year, or a married couple with an annual income of $300,000. For the unemployed, $1 million in the bank will suffice.
Hotel developers are not the only ones poised to benefit from the regulatory changes.
In Southern California, a small development company called AH Capital recently raised $110,000 from four investors it recruited online using a beta-test version of RealtyMogul.com, an online real estate syndication platform that launches in California and Washington State today (Wednesday.)
AH Capital used the money to purchase and rehabilitate a residential duplex in Los Angeles, according to Justin Hughes, co-founder of Realty Mogul, and paid the online investors a 10 percent APR.
RealtyMogul is only available to accredited investors, and an accreditation process is available online.
Once an investor is in, they have access to what amounts to online shopping for real estate investments, and can choose to invest as little as $5,000 in a debt or equity deal sponsored by a third-party investment company. The sponsor pays a two percent fee to RealtyMogul for the service.
“Our target audience is people that understand the value of investing in real estate, yet don’t have the experience to do it themselves,” Hughes said.
Hughes and co-founder and CEO Jilliene Helman plan to roll out RealtyMogul nationally, but are working on a state-by-state basis due to the unique implementation of SEC rules.
Meanwhile, Fundrise, a Washington, D.C. based real estate crowd funding site, offers opportunities for unaccredited investors to buy ownership shares in development sites.
The website focuses on less material benefits of property ownership, emphasizing the opportunity for local residents to exercise control over the development of their own city.
According to Fundrise.com, 194 people have invested $3.2 million though the site.
Not everyone is a JOBS Act fan. Economic analyst Steven Rattner, chairman of Willett Advisors, criticized the law in a recent New York Times opinion column.
Rolling back regulations will leave unsophisticated investors prey to both the real risk of high-stakes investing and, in the case of the advertising provision, a potentially troublesome lack of vetting.
“I’ll wager that most of this new advertising will come from firms that sophisticated institutional investors wouldn’t consider investing in,” Rattner wrote.
On the prospect of inexperienced investors choosing business startups to fund, meanwhile, he suggested they “buy a lottery ticket instead.”
RealtyMogul does run criminal, credit and background checks on sponsors before allowing them to post an opportunity on the site, Hughes said, and performs an amount of due diligence in order to avoid putting investors in a bad position.
But ultimately, the site is a marketplace, and it’s up to the individual investors to assess the risk of an opportunity.
“We’re not an investment advisor,” Hughes said. “We’re not making any kind of claims that this is a good deal or a bad deal.”
Read more about the JOBS Act here.