Real Estate Weekly
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Debt & Equity

How big is the Small Balance Real Estate opportunity?

By Matt Burk, CEO, Fairway America

Among the most popular forms American investment took in the 20th century — not to mention being among the most accessible and lucrative forms, perhaps explaining that popularity  — was residential real estate.

At the cusp of the 21st century, that investment was even more lucrative, with home prices doubling in the span of less than a decade.

Even with the financial implosion (and, perhaps, correction) tied to the problematic funding model of many of those homes and that explosive growth, real estate is once again as popular an investment as ever, at least for individuals who want to make a lot of money: about 77 percent of investors with at least $1 million in assets own real estate.

What shape will this take in a world where we now have, thanks to the JOBS (Jumpstart Our Business Startups) Act, crowdfunding?

Even years after its passage, not much has changed yet, but if Title III (equity crowdfunding) of the JOBS Act is approved by the SEC later this year in October, going into effect at the beginning of next as expected, it has the potential to completely change the way people think about real estate investing and pretty much any other form of investing that involves equity funding.

According to Entrepreneur and a Massolution research report, real-estate crowdfunding was already a $1 billion industry in 2014 and is expected to more than double this year, before we even start to officially see the real beginnings of relevant JOBS Act changes.

The range of that $2.5 billion in real estate crowdfunding will extend from less than $100,000 to over $25 million; that covers a huge portion of the potential investment community.  My colleagues at Fairway and I have developed a name for what is widely considered the lower end of the range of these types of real estate equity crowdfunding investments.

We call it “Small Business Real Estate” (or SBRE) and we define it as any real estate asset-based business model with less than $2,000,000 average equity, but often at a much lower level (e.g. $100,000 to $400,000).

Within what we classify as SBRE itself, we believe there are even more advantages than one might find in traditional REITs or other forms of real estate investment.

To start, opportunities in SBRE can offer many of the things that are precisely sought out by investors but often difficult to find in an investment: downside capital protection (i.e. secured by real estate), attractive yields, regular income, capital appreciation, etc.

As a fund manager, the one thing I hear more than anything else from investors is how they are largely torn between two relatively unattractive options: the unsexy, low-yield financial management offered by large banks and funds or more volatile and unpredictable stock picks.

They’re looking for a Goldilocks solution: something largely uncorrelated to the broader equity markets that is more exciting than the traditional investment opportunities offered by banks or bonds.

The SBRE market offers that kind of solution, with no need to commit to an entire residential property alone, or deal with the upkeep headaches of making such an investment to do it.

There are risks to be sure, like any investment, but evaluated properly, there are many attractions to SBRE.

One other thing we can look forward to when the portions of the JOBS Act relevant to equity crowdfunding go into effect is what it will do for the perception of this type of investing.

The few investors who even know about these investments sometimes believe they are too risky or somehow too good to be true. I believe this perception is largely due to the practices that such opportunities, mandated by law, were required to be marketed nearly in secret.

SBRE funds contain most of the elements that make investing attractive, and yet the general lack of awareness of SBRE funds and how they work among investors (and their traditional advisors) has created some major roadblocks.

Trying to make any meaningful dent in the overall level of awareness was virtually impossible given the long-standing prohibition on general marketing, advertising and solicitation of such investments.

Even when the floodgates open, it will still take time for instruments like SBRE funds to be accorded the same respect as those in traditional investment.

Only long-term solid performance and positive returns — the traditional bar for any investment, and one which I think, industry-wide, competent and ethical SBRE managers and entrepreneurs will consistently clear — will help raise awareness of SBRE as a solid and legitimate investment option.

Inevitably, some funds will perform well, some not so well, and some poorly. As with any other investment area, participants will have to develop the ability to assess their options wisely, and tell the difference between smart and capable SBRE managers and the incompetent and potentially crooked ones.

Of course we know that the SBRE market, along with its advantages and disadvantages, will continue to evolve as there is more flexibility within both SBRE itself and other investment vehicles that will benefit from the advent of equity crowdfunding (e.g. entertainment production).

In any event, greater opportunities for raising capital in the SBRE market than ever before are coming to the fore, and that can be only a good thing for the intelligent investor who wants a well-performing and truly diverse investment portfolio, and is willing to learn how to assess the new opportunities being brought into the open light for the first time in over four generations.


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