The recent trend toward the online “crowdfunding” of investment opportunities has started to make real estate investments available to accredited investors. But real estate is an illiquid asset – so how can current income be realized during the period before a sale might occur?
If done right, real estate crowdfunding can give investors a chance to “have it all” – ongoing cash flow and, with equity investments, participation in potential appreciation. These investments can run the gamut of possible real estate opportunities – from loans to residential rehab investors and continuing through to equity stakes in larger commercial properties such as large multi-family apartment complexes, retail shopping centers, self-storage facilities, office and industrial buildings, and hotels.
Allied Capital Advisers offers investors a chance to participate in interest or rental payments from various types of real properties – hard assets that won’t disappear (unless there’s a natural disaster or other calamity). This can occur via loans based on real estate, or through equity stakes in properties that are already “up and running” – in either case, providing an investor with regular “cash on cash” returns. These recurring cash distributions can occur either through the receipt of loan payments or through “preferred” payouts on equity investments.
For equity investments, Allied Capital Advisers pools investors into a single LLC or other special-purpose entity so that the sponsors only have to deal with a single “investor” entity, bringing them a relatively large amount. On the flip side, the individual investors making up the ownership of that LLC are able to participate in these larger commercial projects at much lower minimum investment amounts than were ever before possible. It’s a win-win for all parties!
The cash flow available from loans based on real estate is pretty straightforward; it’s the interest rate payable to the investor. Generally these payments will be payable on a monthly basis, so that investors should enjoy frequent recurring payments.
With equity investments, the cash flow derives from the “preferred return” that is typically part of the financial structure arranged by investment portals such as Allied Capital Advisers. This return, usually paid out on a quarterly basis, derives from the cash available from the net operating income of the property. The payments of this return are not as dependable as loan interest payments; the preferred return depends on the property’s actual income and expenses, and on there being sufficient distributable cash after those cost items are accounted for. Generally, however, the sponsoring real estate companies and the investors in a project give a lot of forethought to the anticipated amounts of those revenues and costs, and the parties expect that the project will generate sufficient income to periodically pay the preferred return out to investors. Indeed, in most instances the sponsors don’t get the bulk of their own upside – the so-called “promote” interest” – until those preferred returns are first paid.
The other feature of equity investments is, of course, the chance to participate in the property’s appreciation at the time of sale. Equity investments are typically held for longer periods than loans, but with the prospect for appreciation the ultimate potential return on them can be substantially greater. Projecting this potential appreciation is difficult, but educated guesses can be made by calculating it as a multiple of the property’s expected operating income at the time of sale.
Real estate has proven to be one of the most effective investment vehicles for generating recurring, passive cash flow, although of course no investment is without risk. Until recently though, other than through a REIT holding a pool of numerous properties, an average investor had little prospect of participating in commercial real estate investments. The advent of real estate crowdfunding sites like Allied Capital Advisers has allowed people without pre-existing industry connections to participate in specific commercial real estate projects, and with smaller individual investment amounts, than ever before. These sites feature opportunities with such ongoing cash flow, whether through lending opportunities or through equity investments featuring preferred payout structures.
