Lenders can't afford re-set
Showing posts with label REIT. Show all posts
Showing posts with label REIT. Show all posts
Tuesday, February 27, 2024
Monday, January 25, 2016
Amateur Private Real Estate Finance Includes Notes And Trust Deeds
Private lending has been around for property developers ever since those ancient Pharaohs built their pyramids. Our capital markets today allow for much more public participation and transparency. Bank depositors provide capital for secured mortgages. Real estate investment trust (REIT) investors provide capital for property developers, augmenting the capital available from syndicated bank loans. The private capital market for small-scale real estate investors is now fragmented with boutique solutions. Many such creative real estate investing solutions are complex and not intended for amateurs. They are even fertile grounds for scams.
The assignment of a contract for the purchase of real estate sounds to me like brokering a transaction without being a properly licensed Realtor. I would not want to be in the shoes of an assignor or assignee if a property they're flipping was on some Realtor's multiple listing service and the Realtor files a complaint with their state's regulatory body. Private parties who are not licensed and do not adhere to government regulations or the National Association of Realtors' code of ethics open themselves up to serious risks if they can't complete an assignment deal.
Hard money loans are more expensive for borrowers than bank mortgages. These loans do not conform to standard credit guidelines and default at higher rates. Inexperienced hard money lenders can easily become suckers for a fast-talking sales pitch. Even experienced lenders can be stuck with a non-performing loan book in a significant market downturn, and they may not always have recourse to a bank that can help them offload troubled properties.
Seller financing strikes me as being just plain dumb. A borrower who cannot get a mortgage from a conventional source probably should not qualify for any loan at all, even from a private source. A seller willing to trust such a person's creditworthiness is trading the speed of an easy title transfer for the huge risk of non-payment. The advantages of this deal type all skew towards an unethical buyer: easy money, fast ownership, and rent-free living space if they never intended to pay up. Perhaps a desperate seller would do such a deal just to get rid of a very bad property, which would be just as unethical if the property had serious deficiencies.
The so-called "subject to" real estate deal sounds unbelievably complex for anyone who is not an experienced real estate attorney. The paperwork needed to get iron-clad agreements looks daunting. I looked for authoritative sources in my "subject to" Web search and found mostly amateurish promotions for this deal category that did not adequately describe risks.
Mortgage assumption is possible in some situations where the FHA or VA is involved. The good news is that banks and government regulators have rules for this quasi-official process. Buyers meeting conventional mortgage standards can use assumable mortgages if they meet lending standards and have enough cash to make any needed down payments.
These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.
These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.
Modern finance has tamed what used to be the wild world of real estate finance. Investing in real estate today is as easy as selecting REITs in a brokerage account. REITs come in multiple flavors: commercial, residential, mortgage-only, ETFs, you name it. The publicly traded ones all have prospectuses and histories of SEC filings for transparency. Privately originated notes, trust deeds, and other financing methods are less liquid and transparent than publicly traded securities. Some amateur investors will insist on biting off more risk than they can chew, just to fulfill their fantasies of becoming real estate moguls from their living rooms.
Saturday, August 24, 2013
Timber REIT Performance and Valuation Comparison
My search for hard asset hedges against hyperinflation continues apace. I've already checked out self-storage REITs. Now it's time to check out timber REITs and their related ETFs. The leading candidates are below. My sources are the same as before: Yahoo for P/E and margin, Reuters for EPS and ROE growth.
Rayonier (RYN)
P/E: 18.69
Profit margin: 23.15%
EPS 5yr growth: 8.11%
ROE 5yr growth: 21.01%
Plum Creek Timber (PCL)
P/E: 30.71
Profit margin: 17.77%
EPS 5yr growth: -4.76%
ROE 5yr growth: 14.74%
Potlatch Corp. (PCH)
P/E: 24.59
Profit margin: 11.83%
EPS 5yr growth: -11.09%
ROE 5yr growth: 24.49%
Comparing RYN to its two competitors gives me one interesting implication. The other two have increased their annualized ROE while their EPS have declined. I don't get that at all. The inverse of such a relationship (EPS up, ROE down) holds if a company changes to a more conservative capital structure with less debt. The long-term debt holdings of those PCL and PCH appear to be constant, so they don't seem to be levering up just to increase ROE. I wonder whether they've increased their shares outstanding in recent years, as that would account for a larger denominator in the EPS calculation.
A further inspection at the balance sheets of PCL and PCH show increasingly negative retained earnings for several years. RYN's balance sheet shows retained earnings to be large, positive, and increasing annually. That result, along with the positive EPS growth for RYN and negative EPS growth for the others, give me enough reason to favor RYN over its two competitors.
Rayonier has a couple of other things going for itself. Its free cash flow has been positive for three years. Its long term debt is far above the 2X net income I usually prefer in operating companies, but I'm bending that rule for two reasons. One, this is a REIT, where high debt is common. Two, I need a hyperinflation hedge, and hyperinflation reduces debt mountains to molehills. Oh yeah, one more thing. Rayonier's P/E ratio is a lot more fairly priced relative to the S&P 500's historic average of 14, so it's somewhat affordable.
Let's find out just how affordable Rayonier should be for me to buy it. I plugged its dividends into my Alfidi Capital REIT ETF valuation template, using the same assumptions I made for the self-storage REIT. I get an intrinsic valuation of $17.16/share, so applying a 10% discount means I won't pay a penny more than $15.44/share for RYN. It hasn't been that cheap since mid-2009 and it currently trades at $56.29. I'll wait for the market crash first.
I'll also mention timber REIT ETFs, specifically Guggenheim Timber (CUT) and iShares S&P Global Timber & Forestry ETF (WOOD). My objection to these ETFs is that their holdings are much broader than just timber harvesters. These ETFs hold operating companies that are in some ways only marginal users of timber products. Their expense ratios are also extremely high. That's why I'm ruling them out as candidates for my hard asset strategy.
I've found my pure play timber REIT candidate. I will wait to buy into Rayonier when the price is right.
Full disclosure: No position in any of the securities mentioned above at this time.
Rayonier (RYN)
P/E: 18.69
Profit margin: 23.15%
EPS 5yr growth: 8.11%
ROE 5yr growth: 21.01%
Plum Creek Timber (PCL)
P/E: 30.71
Profit margin: 17.77%
EPS 5yr growth: -4.76%
ROE 5yr growth: 14.74%
Potlatch Corp. (PCH)
P/E: 24.59
Profit margin: 11.83%
EPS 5yr growth: -11.09%
ROE 5yr growth: 24.49%
Comparing RYN to its two competitors gives me one interesting implication. The other two have increased their annualized ROE while their EPS have declined. I don't get that at all. The inverse of such a relationship (EPS up, ROE down) holds if a company changes to a more conservative capital structure with less debt. The long-term debt holdings of those PCL and PCH appear to be constant, so they don't seem to be levering up just to increase ROE. I wonder whether they've increased their shares outstanding in recent years, as that would account for a larger denominator in the EPS calculation.
A further inspection at the balance sheets of PCL and PCH show increasingly negative retained earnings for several years. RYN's balance sheet shows retained earnings to be large, positive, and increasing annually. That result, along with the positive EPS growth for RYN and negative EPS growth for the others, give me enough reason to favor RYN over its two competitors.
Rayonier has a couple of other things going for itself. Its free cash flow has been positive for three years. Its long term debt is far above the 2X net income I usually prefer in operating companies, but I'm bending that rule for two reasons. One, this is a REIT, where high debt is common. Two, I need a hyperinflation hedge, and hyperinflation reduces debt mountains to molehills. Oh yeah, one more thing. Rayonier's P/E ratio is a lot more fairly priced relative to the S&P 500's historic average of 14, so it's somewhat affordable.
Let's find out just how affordable Rayonier should be for me to buy it. I plugged its dividends into my Alfidi Capital REIT ETF valuation template, using the same assumptions I made for the self-storage REIT. I get an intrinsic valuation of $17.16/share, so applying a 10% discount means I won't pay a penny more than $15.44/share for RYN. It hasn't been that cheap since mid-2009 and it currently trades at $56.29. I'll wait for the market crash first.
I'll also mention timber REIT ETFs, specifically Guggenheim Timber (CUT) and iShares S&P Global Timber & Forestry ETF (WOOD). My objection to these ETFs is that their holdings are much broader than just timber harvesters. These ETFs hold operating companies that are in some ways only marginal users of timber products. Their expense ratios are also extremely high. That's why I'm ruling them out as candidates for my hard asset strategy.
I've found my pure play timber REIT candidate. I will wait to buy into Rayonier when the price is right.
Full disclosure: No position in any of the securities mentioned above at this time.
Tuesday, August 20, 2013
Storage REIT Performance and Valuation Comparison
Storage is one sub-sector within real estate that may hold its value throughout an inflationary period provided it is not subject to local or national rent controls. I want to start testing this theory to see just which leading storage REITs deserve my attention. Let's pick a few, shall we? Yahoo Finance gives me the P/E and margin. Reuters gives me the EPS and ROE growth.
Public Storage (PSA)
P/E: 34.44
Profit margin: 51.91%
EPS 5yr growth: 26.64%
ROE 5yr growth: 10.99%
Extra Space Storage (EXR)
P/E: 32.31
Profit margin: 29.26%
EPS 5yr growth: 19.93%
ROE 5yr growth: 5.55%
Sovran Self Storage (SSS)
P/E: 32.46
Profit margin: 26.92%
EPS 5yr growth: -0.99%
ROE 5yr growth: 5.19%
Cube Smart (CUBE)
P/E: N/A, 3yrs net losses
Profit margin: 1.69%
EPS 5yr growth: ???
ROE 5yr growth: -2.52%
I can immediately rule out EXR, SSS, and CUBE for their poor ROEs. I really don't need to look any farther than that if some potential portfolio selection fails even one of my screening criteria. That leaves PSA as the sole self-storage REIT contender. Their long-term debt has trended down for the last three years to the point where it's now less than 2x their net income (and that's been steadily rising BTW). Their free cash flow is mightily positive. Wow, Public Storage is really firing on all cylinders here.
The final step for me is to determine a REIT's intrinsic valuation. I use my hand-dandy cap rate REIT valuation template just for these occasions. Yeah, I know, I wrote that report with REIT ETFs in mind but it still works fine for stand-alone REITs of any kind because they still have to pass through their earnings as dividends. I plugged in the last five years worth of dividends, left inflation at 5% (based on eyeballing SGS's revised estimate), and set my cap rate and discount at 10% each. There's no expense ratio in a single REIT. I got an intrinsic value of $44.99/share and a desired purchase price of $40.49/share. This entry point is a long way down from where PSA currently trades at over $156/share. That doesn't surprise me given PSA's P/E ratio over 34. Everything is seriously overvalued thanks to quantitative easing. I don't pay a premium for anything.
I keep reminding myself that entering the REIT space either through individual securities or ETFs is prohibitively expensive as long as markets are levitating based on nonsense. I will wait for a market crash. The good news is that I now have one more possible anti-inflation hedge.
Full disclosure: No position in any of the securities mentioned at this time.
Public Storage (PSA)
P/E: 34.44
Profit margin: 51.91%
EPS 5yr growth: 26.64%
ROE 5yr growth: 10.99%
Extra Space Storage (EXR)
P/E: 32.31
Profit margin: 29.26%
EPS 5yr growth: 19.93%
ROE 5yr growth: 5.55%
Sovran Self Storage (SSS)
P/E: 32.46
Profit margin: 26.92%
EPS 5yr growth: -0.99%
ROE 5yr growth: 5.19%
Cube Smart (CUBE)
P/E: N/A, 3yrs net losses
Profit margin: 1.69%
EPS 5yr growth: ???
ROE 5yr growth: -2.52%
I can immediately rule out EXR, SSS, and CUBE for their poor ROEs. I really don't need to look any farther than that if some potential portfolio selection fails even one of my screening criteria. That leaves PSA as the sole self-storage REIT contender. Their long-term debt has trended down for the last three years to the point where it's now less than 2x their net income (and that's been steadily rising BTW). Their free cash flow is mightily positive. Wow, Public Storage is really firing on all cylinders here.
The final step for me is to determine a REIT's intrinsic valuation. I use my hand-dandy cap rate REIT valuation template just for these occasions. Yeah, I know, I wrote that report with REIT ETFs in mind but it still works fine for stand-alone REITs of any kind because they still have to pass through their earnings as dividends. I plugged in the last five years worth of dividends, left inflation at 5% (based on eyeballing SGS's revised estimate), and set my cap rate and discount at 10% each. There's no expense ratio in a single REIT. I got an intrinsic value of $44.99/share and a desired purchase price of $40.49/share. This entry point is a long way down from where PSA currently trades at over $156/share. That doesn't surprise me given PSA's P/E ratio over 34. Everything is seriously overvalued thanks to quantitative easing. I don't pay a premium for anything.
I keep reminding myself that entering the REIT space either through individual securities or ETFs is prohibitively expensive as long as markets are levitating based on nonsense. I will wait for a market crash. The good news is that I now have one more possible anti-inflation hedge.
Full disclosure: No position in any of the securities mentioned at this time.
Wednesday, July 17, 2013
Fixed Income Facts and Fancy When Staring Down Inflation
An acquaintance got me thinking about the fixed-income universe. I haven't thought about it much lately for good reason. Fixed-income investments are wiped out in high-inflation economies and the Federal Reserve's implied policy of monetizing US sovereign debt dramatically increases the chances of high inflation. The fixed-income universe is much broader than sovereign debt. I ought to see if any income-generating instrument can survive high inflation.
The Dividend Yield Hunter lists multiple categories of fixed-income instruments that go way beyond bonds. I was not aware that exchange-traded debt existed in forms other than preferred stock (not really debt, but acts like it) and funds. The Tennessee Valley Authority, for example, lists its bonds on exchanges for the public to trade (TVC and TVE are examples). The usual cast of characters like MLPs, royalty trusts, and REITs round out exchange-listed offerings. I've never considered business development companies (BDCs) as fixed-income investments because they are unique ways to invest in undercapitalized small companies, sort of like VC firms but publicly traded. Dividend Yield Hunter lists BDCs as fixed-income, presumably because they must pay out their earnings like other pass-through entities. BDCs are also searchable over at QuantumOnline, and that site also lists exotic things like income deposit securities.
Fixed-income investing is a fine stabilizing element for a diversified portfolio in normal times when interest rates are at their long-term historical average and the national debt-to-GDP ratio is manageable. Americans are not living in normal times any longer. Most fixed-income investments will see their principal destroyed when high inflation reduces the dollar's value to nothing.
These are the types of fixed-income investments I have decided to avoid due to their vulnerability to inflation.
US sovereign debt of any kind. The Fed is going to swallow these things whole when foreign central banks sell them in a panic. The QE needed to absorb the world's outstanding stash of Treasuries will have to be monstrously huge.
Coupon debt of any kind. This includes any corporate debt or municipal bonds that pay a fixed coupon based on the bond's face amount. That face amount will be worth less than nothing after hyperinflation ends. Say goodnight, internotes.
BDCs. I don't care how generous the cash flow from repaid loans looks right now. BDCs are highly sensitive to short-term interest rates and real rates will skyrocket at the onset of high inflation. Their funding is unsecured, which means investors have little recourse to recover assets after bankruptcy. No thanks. Finally, their assets are loan portfolios. High inflation is a debtor's dream come true because it allows them to pay existing debts with future dollars that are worth less than current dollars. Inflation will destroy BDC loan portfolios. These are the crucial differences between BDCs and other private equity vehicles.
High yield debt. No way, ho-say. This was the first debt category to crack when the market turbulence of 2007 became the crisis of 2008. Junk bonds are always the first to be wiped out in any market downturn because their issuers have weak earnings or troubled business models.
These are the types of fixed-income investments I am open to considering, given the caveats mentioned. Their common denominator is their basis in a hard asset sector.
MLPs. I like pipeline MLPs as a play on hard asset servicing. Oil and gas are energy hard assets whose demand will be price inelastic during high inflation. My concern is whether FERC regulations will prove to be so onerous during hyperinflation that they destroy the pricing power of MLPs and their pipeline operating companies. I cannot rule out regulatory risk with pipeline MLPs. I may have to wait until renewable MLPs are active.
Royalty trusts. These are collections of orphaned oil and gas wells whose owners do not need to spend capex to upgrade them. They pass their earnings through to trust holders as the wells' reserves run down.
REITs. These are the trickiest to consider. Some residential REITs will fair poorly during hyperinflation if their holdings are concentrated in urban areas that are hostages to rent control ordinances. Those will not retain their pricing power during hyperinflation. Commercial REITs will fare better but many REITs own a mix of properties. The best sector bet for me may be iShares Dow Jones US Real Estate (IYR), an ETF of REITs, but based on its dividends it's currently trading more than twice what it should be worth.
I feel like restating my enmity for actively managed funds of any kind, including fixed-income. Bond mutual funds are no longer needed now that index funds and ETFs exist. Active management of fixed income portfolios is for institutional investors and corporations who must immunize their portfolios against interest rate moves or match durations to liabilities. They have specific goals in liability-driven investing. The larger investing world doesn't need to constantly fine-tune a fixed-income portfolio.
I must also reiterate my disdain for the superficial analysis some fixed-income investors use to evaluate the attractiveness of securities. I've heard some investors claim that MLPs and REITs trading for less than book value are bargains, but if those same entities have low ROEs then there's a reason they trade at such discounts. The market is discounting their ability to generate cash flow because a low ROE indicates they use capital inefficiently. They may be paying too much for debt because of past negative credit events or committing capital to operating payouts (like lawsuit settlements or regulatory fines) instead of facilities maintenance or improvements.
Finally, it's worth noting that rising volatility hurts the valuations of fixed-income investments. The VIX is currently trading below its historical average of about 20. Any rise in the VIX hurts fixed-income securities, with or without hyperinflation.
I'm staying the heck away from fixed-income investments. I'll keep my eye on only those few types that generate cash flow from hard assets like commodities or real estate.
The Dividend Yield Hunter lists multiple categories of fixed-income instruments that go way beyond bonds. I was not aware that exchange-traded debt existed in forms other than preferred stock (not really debt, but acts like it) and funds. The Tennessee Valley Authority, for example, lists its bonds on exchanges for the public to trade (TVC and TVE are examples). The usual cast of characters like MLPs, royalty trusts, and REITs round out exchange-listed offerings. I've never considered business development companies (BDCs) as fixed-income investments because they are unique ways to invest in undercapitalized small companies, sort of like VC firms but publicly traded. Dividend Yield Hunter lists BDCs as fixed-income, presumably because they must pay out their earnings like other pass-through entities. BDCs are also searchable over at QuantumOnline, and that site also lists exotic things like income deposit securities.
Fixed-income investing is a fine stabilizing element for a diversified portfolio in normal times when interest rates are at their long-term historical average and the national debt-to-GDP ratio is manageable. Americans are not living in normal times any longer. Most fixed-income investments will see their principal destroyed when high inflation reduces the dollar's value to nothing.
These are the types of fixed-income investments I have decided to avoid due to their vulnerability to inflation.
US sovereign debt of any kind. The Fed is going to swallow these things whole when foreign central banks sell them in a panic. The QE needed to absorb the world's outstanding stash of Treasuries will have to be monstrously huge.
Coupon debt of any kind. This includes any corporate debt or municipal bonds that pay a fixed coupon based on the bond's face amount. That face amount will be worth less than nothing after hyperinflation ends. Say goodnight, internotes.
BDCs. I don't care how generous the cash flow from repaid loans looks right now. BDCs are highly sensitive to short-term interest rates and real rates will skyrocket at the onset of high inflation. Their funding is unsecured, which means investors have little recourse to recover assets after bankruptcy. No thanks. Finally, their assets are loan portfolios. High inflation is a debtor's dream come true because it allows them to pay existing debts with future dollars that are worth less than current dollars. Inflation will destroy BDC loan portfolios. These are the crucial differences between BDCs and other private equity vehicles.
High yield debt. No way, ho-say. This was the first debt category to crack when the market turbulence of 2007 became the crisis of 2008. Junk bonds are always the first to be wiped out in any market downturn because their issuers have weak earnings or troubled business models.
These are the types of fixed-income investments I am open to considering, given the caveats mentioned. Their common denominator is their basis in a hard asset sector.
MLPs. I like pipeline MLPs as a play on hard asset servicing. Oil and gas are energy hard assets whose demand will be price inelastic during high inflation. My concern is whether FERC regulations will prove to be so onerous during hyperinflation that they destroy the pricing power of MLPs and their pipeline operating companies. I cannot rule out regulatory risk with pipeline MLPs. I may have to wait until renewable MLPs are active.
Royalty trusts. These are collections of orphaned oil and gas wells whose owners do not need to spend capex to upgrade them. They pass their earnings through to trust holders as the wells' reserves run down.
REITs. These are the trickiest to consider. Some residential REITs will fair poorly during hyperinflation if their holdings are concentrated in urban areas that are hostages to rent control ordinances. Those will not retain their pricing power during hyperinflation. Commercial REITs will fare better but many REITs own a mix of properties. The best sector bet for me may be iShares Dow Jones US Real Estate (IYR), an ETF of REITs, but based on its dividends it's currently trading more than twice what it should be worth.
I feel like restating my enmity for actively managed funds of any kind, including fixed-income. Bond mutual funds are no longer needed now that index funds and ETFs exist. Active management of fixed income portfolios is for institutional investors and corporations who must immunize their portfolios against interest rate moves or match durations to liabilities. They have specific goals in liability-driven investing. The larger investing world doesn't need to constantly fine-tune a fixed-income portfolio.
I must also reiterate my disdain for the superficial analysis some fixed-income investors use to evaluate the attractiveness of securities. I've heard some investors claim that MLPs and REITs trading for less than book value are bargains, but if those same entities have low ROEs then there's a reason they trade at such discounts. The market is discounting their ability to generate cash flow because a low ROE indicates they use capital inefficiently. They may be paying too much for debt because of past negative credit events or committing capital to operating payouts (like lawsuit settlements or regulatory fines) instead of facilities maintenance or improvements.
Finally, it's worth noting that rising volatility hurts the valuations of fixed-income investments. The VIX is currently trading below its historical average of about 20. Any rise in the VIX hurts fixed-income securities, with or without hyperinflation.
I'm staying the heck away from fixed-income investments. I'll keep my eye on only those few types that generate cash flow from hard assets like commodities or real estate.
Monday, June 17, 2013
Crowdfunded Real Estate Limitations
The crowdfunding phenomenon is now taking on real estate investing. Sites like RealtyShares and iFunding are enabling small-time retail investors to become silent partners in projects they could not otherwise afford. Passive investments in real estate have been around forever in the form of limited partnerships. Crowdfunding things like trust deeds just lowers the entry barrier. It does not change the threshold for due diligence.
The key to success in real estate has always been location, location, location. A crowdfunding investor can only perform a minimal assessment of a property's value without physically visiting the property. Anyone can log on to Zillow and view the most recent valuations of neighboring properties, or check a parcel's assessed value at the county assessor-recorder's office. Those are beginning steps. The next steps involve property appraisals, traffic analysis, and other checks on the track record of property managers. Those things can be crowdsourced to some extent but there's no complete substitute for traditional on-site legwork.
Investing in residential property since the housing bust poses additional challenges. Getting clear title is a problem if a home mortgage was bundled and changed hands several times. I can't know whether a given trust deed on a crowdfunding portal has title problems without checking with a title search company first.
I am concerned that novice investors could be hurt by a severe downturn in the housing market just as they were hurt in the housing crash that started in 2006. Buying a share of a note secured by a trust deed is like becoming a hard money lender rather than a title owner. The investor owns a share of a syndicated loan, denominated in dollars as a fixed-income instrument that pays a predetermined yield. If the US economy experiences high inflation, those note owners will see the value of their note evaporate as the dollar loses its value. Meanwhile, the actual property owner (either through an LLP, private REIT, or whatever) laughs all the way to the bank at the stupidity of those crowdfunding note holders. That doesn't happen in normal times but these aren't normal times.
I think crowdfunding would work best for small projects that members of a community can see firsthand. Urban farmers could form a land trust, for example, and crowdfund it to establish community gardens in a blighted urban neighborhood. Charities like Habitat for Humanity could crowdfund a housing project for a low-income buyer and hand them title when the project is done. The valuation for such projects would have fewer variables to calculate because they're brand new and presumably unencumbered with the problems of previous owners. Crowdfunding portals can eventually be useful for conventional real estate investors once the housing market stabilizes, with the median property value for a given metropolitan area at somewhere between 2x and 3x of the area's median income. I am looking forward to seeing miscellaneous real estate investments like liens and rights-of-way traded on crowdfunding portals.
Investors who have neither the time nor skill to evaluate a crowdfunded real estate project can always choose a publicly traded REIT or real estate index fund (or ETF) instead. A widely held fund has two advantages over a single property. It has no entry barriers or limitations for non-accredited investors and it arbitrages away the location problem by holding a large number of properties. Maybe some sharp investment manager will crowdfund a private REIT.
The key to success in real estate has always been location, location, location. A crowdfunding investor can only perform a minimal assessment of a property's value without physically visiting the property. Anyone can log on to Zillow and view the most recent valuations of neighboring properties, or check a parcel's assessed value at the county assessor-recorder's office. Those are beginning steps. The next steps involve property appraisals, traffic analysis, and other checks on the track record of property managers. Those things can be crowdsourced to some extent but there's no complete substitute for traditional on-site legwork.
Investing in residential property since the housing bust poses additional challenges. Getting clear title is a problem if a home mortgage was bundled and changed hands several times. I can't know whether a given trust deed on a crowdfunding portal has title problems without checking with a title search company first.
I am concerned that novice investors could be hurt by a severe downturn in the housing market just as they were hurt in the housing crash that started in 2006. Buying a share of a note secured by a trust deed is like becoming a hard money lender rather than a title owner. The investor owns a share of a syndicated loan, denominated in dollars as a fixed-income instrument that pays a predetermined yield. If the US economy experiences high inflation, those note owners will see the value of their note evaporate as the dollar loses its value. Meanwhile, the actual property owner (either through an LLP, private REIT, or whatever) laughs all the way to the bank at the stupidity of those crowdfunding note holders. That doesn't happen in normal times but these aren't normal times.
I think crowdfunding would work best for small projects that members of a community can see firsthand. Urban farmers could form a land trust, for example, and crowdfund it to establish community gardens in a blighted urban neighborhood. Charities like Habitat for Humanity could crowdfund a housing project for a low-income buyer and hand them title when the project is done. The valuation for such projects would have fewer variables to calculate because they're brand new and presumably unencumbered with the problems of previous owners. Crowdfunding portals can eventually be useful for conventional real estate investors once the housing market stabilizes, with the median property value for a given metropolitan area at somewhere between 2x and 3x of the area's median income. I am looking forward to seeing miscellaneous real estate investments like liens and rights-of-way traded on crowdfunding portals.
Investors who have neither the time nor skill to evaluate a crowdfunded real estate project can always choose a publicly traded REIT or real estate index fund (or ETF) instead. A widely held fund has two advantages over a single property. It has no entry barriers or limitations for non-accredited investors and it arbitrages away the location problem by holding a large number of properties. Maybe some sharp investment manager will crowdfund a private REIT.
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