Social Real Estate Investments –The Trend That Sweeping Europe

In conjunction with REALEXTATE

During the past few years many companies have been offering real-estate investment opportunities in the US and in Europe. Problem was that the large investment amounts required have kept many investors from participating, leaving them instead with safe investments but with low yields. We asked Brook to take a look at the new trend that is changing the game for investors who can now afford to get in the game. 

I was asked by the editors to check out a new real-estate investment trend that has become very popular in Europe. From a first glance, initially this revolution in real-estate investing has been somewhat slow to catch on here in South Africa. I expected this to be just another dull examination of the real-estate market, but instead found a new and interesting way to invest that few locals yet know about – and those who do know, don’t have a clear idea how it works.

To better understand it myself, I met John, one of the long-time investors in the U.S real estate markets, who filled me in about the new trend, the advantages and more importantly, things to look out for before investing in social real estate.

This trend is significantly changing the rules – how is it affecting the industry?

I wouldn’t call it a trend, rather a game changer. And like all revolutions this too will take time and foresee many changes before it takes over a significant share of the real-estate market. What I do see is the growing influence, but it will take time for it to seriously affect the industry.

Tell me a little about how it works

Like crowdsourcing, this too is a social method of investing, involving groups of investors all sharing a common goal. Most of this activity is currently taking place in the U.S real-estate markets. It involves private companies buying houses in the U.S, and dividing the collected rent among investors in accordance with the size of their stake in the property. The investor enjoys the benefit of the company fully managing the property – including finding tenants, doing repairs, and collecting rent. The investors need not spend any time on these tasks, nor do they need to understand in full the real-estate market. Rather they simply need to know what they’ve invested and what their expected return is.

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But what is the difference between this and acquisition groups?

Investment in real estate is usually thought of as reserved for those with substantial capital – problem is, there is a very large segment of population without such means. Not only that, but those who do have such capital, usually prefer not to put all the eggs in one basket, as the saying goes. More generally speaking, acquisition groups are typically long-term investments, bearing many obligations, and lacking the possibility of converting the asset into liquid funds when necessary.

Not sure I understand: all real-estate investments are illiquid.

The big advantage social real-estate investment has is that at any time you can liquidate your assets, meaning sell your units for the full market price. This type of investment combines the advantages of real estate and securities market. You can buy a unit at a certain price, and immediately offer it for sale on an online platform at a price you determine – and so at any given moment units from the property you bought can be sold and bought, and the money is transferred almost immediately into your bank account.

How simple is this for those without experience in the real estate market?

Investment in real estate is usually much more complex, and requires much more attention and involvement than other investment types – a fact that has always limited it to seasoned investors, or at least to those willing to take the time to study the topic, Even more true when the investment is made abroad. With social online real-estate investing there is not a lot to understand, only a small checklist to find out whether the investment is profitable.

Just as the internet removed many barriers in various business segments, it’s now revolutionizing the real-estate market. The 24/7 access to the internet, combined with the increasing popularity of social investing, has brought us to the point of a new era in global real estate investing. And although we’re just at the beginning mark, it’s already clear to anyone in the industry that this is the way of the future, because it enables anyone to invest in a market that was inaccessible until now and with little effort.

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This is an entirely different approach to the classic concept of real-estate investment

Yes, this is why you can see people from all walks of life making these deals: once they were reserved to those with large amounts of money or those with specific knowledge of the business, and now they are available to everyone. There are companies that offer real-estate units from as little as $1500, making it possible for beginners to familiarize themselves with the real estate market, and to then decide whether it suits them.

So what gain is there for an investor in such a unit?

The gain can be double: one is from the monthly rent proportional to your stake in the property, deposited directly to your account; the other is from appreciation of its value.
Let’s say you purchased 20 units out of total 100 units comprising one property. You get a monthly portion of rent the tenants are paying – which in our example is 20% of the total monthly rent which the asset generates.

The great advantage of this type of investment is the ability to create a monthly income that grows over time, as you purchase more properties. This is a great way to establish a pension fund through purchase of a rent generating real-estate asset. But then, of course, you can also sell at any time, for an additional profit if the value of the asset rises, which is exactly what’s been happening in the U.S real estate market since the 2008 crash.

It sounds good, but what should one look out for?

Great question. As with any business decision, one must gain basic understanding of the way things work, expecting full transparency. The large companies operating in this market supply all the relevant documents, including the purchase agreement for the asset, lease agreement that includes the rent paid by tenants, and all the other relevant legal documents. It is important to invest through a large company which owns numerous properties, where everything is totally transparent, and each investor can access any document at any given moment.

How can one learn more about social real estate?

There are several companies successfully operating in this market, and information about them is readily available. Most of them allow potential investors to open a free online account, and to learn more about social real estate investing. I recommend to read a bit about the topic before going forward.