One of the greatest mantras in all of investment strategy is “diversify, diversify, diversify.”
For good reason, too. We know from academic studies, history and personal insight that diversification is one, if not the primary driver, of any portfolio’s performance. It can mean, the difference, during good times, between mediocre and healthy returns, and during bad, between remaining solvent and hitting the financial skids.
While the basics of portfolio diversification are readily met, the task of allocation doesn’t simply end with a few choice bonds plus stocks from a handful of sectors.
Apportioning the correct kind of assets is of even greater importance.
Getting it right is so central, in fact, that David Swenson, Chief Investment Officer at the Yale Endowment, stresses that “approximately 90% of the variability of returns stems from asset allocation.” Swenson, in an effort to clarify what an optimal portfolio should resemble, constructed the Yale Model of allocation.
The model outlines various slices for assets like domestic equity, fixed income, and natural resources. Most notable, however, is the percentage his model devotes to income producing real estate, which, at 22%, checks in second only to private equity. The model’s results have been staggering, as the endowment has averaged nearly 14% annual compound return over the last two decades.
This underscores commercial real estate’s importance and financial benefits: high annual cash distributions, equity buildup, ability to be leveraged effectively, exists as a hard asset, and offers superior tax advantages.
Despite its importance, many investors find that allocating 20% or more of their portfolios to income producing real estate is a challenge. Market inefficiencies needlessly burden investing in the best all around asset class.
Which poses the question: How can investors access commercial real estate and benefit from its inherent advantages?
The Legislative and Technical Solution
Not long ago, the simplest way to invest in commercial real estate was to have access to the “country-club network.”
In other words, getting first-round, relatively unmediated access to real estate investment opportunities meant having exclusive connections to the people that controlled the real estate (such individuals are known as real estate operator/developers or simply ‘operators’). Historically, real estate operators have invited only their friends, business associates, or family members to partner with them financially and benefit from the returns.
Standing in the way of opening up attractive real estate opportunities to wider circles, wasn’t selfishness or nepotism on the part of the operators. Indeed, real estate operators benefit greatly from having more potential investment partners.
Rather, two obstacles made the wider circulation of investment opportunities impossible. The first was legislative. The second, practical.
On the legislative side, the specific hurdle was the “ban on the general solicitation” which simply said an operator may not solicit or offer the sale of securities to an investor if they did not already have an existing relationship. Now, however, the Jumpstart Our Business Startups Act (aka the JOBS Act) has reversed that ban and allows operators to invite people beyond their traditional “country-club network” to partner on investments.
Still, despite the JOBS Act’s removal of this legislative barrier, real estate operators have an additional problem to solve. Specifically, the wider circulation of investment opportunities remain, even if legal, entirely impractical.
While providing real estate investment opportunities to a greater network of investors theoretically means closing more deals more quickly, operators are met with a severe bottleneck in actually attempting to do so.
Namely, every additional investor entails an additional set of administrative tasks, ranging from the execution of documents to the distribution of investor reports.
The solution to this second, practical problem is technological.
With the advent of secure cloud-based platforms and networks, comes the automation of administrative tasks for real estate operators, removing the bottleneck that previously constrained the number of investors an operator could practically work with.
What this means for real estate operators is a more streamlined, efficient and organized way to connect and communicate with investors. Operators can partner with a higher number of investors and at the same time reduce administrative time commitments. This allows them to focus more deeply on purchasing quality real estate and maximizing the value of these assets.
Preserving the Open Marketplace
The RealCrowd Platform is founded on leveraging these new legal and technical advancements to provide a direct, streamlined relationship between operator and investor, and between investor and investment.
The result is greater access to investments, fewer fees, more transparency, and potentially higher returns than among other investment opportunities.
Because it is an open marketplace, RealCrowd doesn’t structure any promotes (participation in the asset’s profit) or participate in any of the ongoing fees. Although any investment is risky and has the ability to lose some/all of the original investment, our platform believes that the investor and operator should be the full beneficiary of the profits and success of the asset.
Perhaps most importantly, the platform has empowered investors to reallocate their portfolios to be in-line with the high-performing Yale Model. It is now possible to have access to assets and truly balance an investment portfolio.
Other marketplaces that introduce new inefficiencies into the real estate investing process (i.e. duplicative tax/due diligence departments, additional layers of ownership entities, additional reporting requirements, etc.), are only taking a step backwards, repeating the mistakes of the past, and ultimately slash into the profits of investors.
The essence of a strong marketplace is the lack of obstruction where real estate investors are fully empowered to interact with operators, and vice versa.
The RealCrowd Platform takes this simple fact and runs with it.
The Open Marketplace Benefits Every Investor Type
RealCrowd’s distinct approach — providing operators and investors with an open, unhindered, yet information-rich platform on which to conduct business — offers powerful advantages for accredited individual investors, family offices and even institutional funds.
Relevant and centralized data allows family offices, for example, to spend less time hunting for deals that meet certain criteria, or beating paths to the doors of quality operators. Instead, diverse offerings from the nation’s best operators are immediately and easily accessible from RealCrowd’s website. This means less time on leg work and more time maximizing the value of assets under management.
The variety of offerings plus the ease at which investments can be made provides for more nimble strategies and greater potential for capitalizing on shorter term market fluctuations. When the market moves, so can your capital.
Institutional investors also enjoy the benefits of developing relationships with greater ease, directly investing with operators and compressing time spent on administration and leg work. RealCrowd also gives highly granular control over allocation variables, so institutional investors are able to finely tune investment amounts and types, i.e., filling in a 2% or 10% gap to meet an allocation target becomes dead simple.
RealCrowd also opens up a new world of investment for retail investors. Fee-heavy REITs are no longer these investors’ only option. Now individual investors can gain access to the same investments, privileges and offers as the rest of the real estate investment community.
The Bottom Line
The traditional relationships between investor and operator were burdened with inefficiencies. New laws and new technologies have made it possible to change that for good. The RealCrowd Platform empowers investors and operators to interact directly and with full transparency with the goal of producing higher profits for both parties. The RealCrowd Platform is a better way to invest in real estate.