By Dan Brewer
If you’ve been on social media lately, you’ve likely seen some ads popping up regarding crowdfunding opportunities in real estate. In fact, I’ve even noticed some confusion surrounding those ads in recent weeks from brokers and investors alike, regarding how real estate crowd funding differs from traditional private equity funds. While the two share some similarities, they do vary in numerous ways. If you’re interested in making an investment in senior housing, consider the following before signing on the dotted—or digital—line.
Private Equity and Crowdfunding: Apples to Apples
Let’s get started by defining what private equity and crowdfunding are. Private equity funds have been around since the 1940s. When it comes to real estate, they involve pooling money from numerous sources and investing it in one or many properties. The properties are selected by a fund manager, making this a passive investment opportunity. The right fund manager will seek to invest and diversify the fund as well as possible for the sake of all investors involved.
Crowdfunding similarly allows investors to pool their dollars—usually via online platforms—to make larger investments in real estate and other initiatives. Crowdfunding became popular in real estate with the Jumpstart Our Business Startups (JOBS) Act of 2012, which allowed primarily accredited investors to access real estate through crowd-funding and peer-to-peer lending. Although crowdfunding is technically considered a passive investment, that term comes with an asterisk, as the responsibility of researching and selecting investment properties falls directly on the investor. In that sense, investors must be a bit more savvy—or at least passionate about the industry—in order to be successful.
When it comes to investing in senior housing, both private equity funds and crowdfunding share a few major commonalities. First, they both qualify as “alternative investments” meaning they fall outside the realm of traditional investments like stocks, bonds, and currency. They include things like equity funds, venture capital, and real estate. Alternative investments have been growing steadily in today’s low-yield market. In fact, they’ve grown at twice the rate of non-alternative investments since 2005. The Yale Endowment, for instance, credits its focus on alternative investments for making it a top-performer in the university endowment world (New York Times).
For those interested in investing in senior housing, this means that while alternative investments may involve higher risks than traditional investments, they may also offer higher returns. This is a positive for those who have a higher tolerance for risk in their portfolios.
Second, both private equity funds and crowd-funding sources that invest in senior housing could be said to fall into the “impact investing” sector. This means the money invested aims to do far more than create positive returns for its investors. It also aims to have a positive impact in the community—in this instance, creating sale, quality housing for the country’s growing senior population.
Lastly, as of 2015, both private equity funds and crowdfunding platforms allow investments from both accredited and non-accredited investors, although this will vary by specific fund offering. Indeed, the JOBS Act of 2012 also protects smaller private equity funds in the same way it does crowdfunding platforms—so on the face of things, both seem fairly similar.
The largest difference between private equity funds and crowdfunding investments is the size of the minimum investment itself. While private equity funds generally start at minimums of $50,000+, those in the crowdfunding sector start as low as $1,000—a bonus for those with less capital to invest.
Which is Right for Me?
If you are interested in investing in senior housing, both private equity funds and crowdfunding sources could help you achieve your goal, while also helping to house our booming senior population. But given the differences in size and structure, the following are a few things to think about in deciding which avenue is right for you:
- How Much Do You Want to Invest? By far, this will be the most decisive point for most investors. Crowdfunding opportunities work especially well for those who want to invest but lack a large amount of liquid capital. Private equity funds, on the other hand, generally require a larger investment up-front.
- How Involved Do You Want to Be? Private equity is a truly passive investment opportunity. Although investors need to do their due diligence to select a fund manager they trust, they do not need to worry about researching market opportunities or selecting the right investment. Crowdfunding eliminates the middle man, meaning investors create their own portfolios—playing a much larger role in value creation. Depending on how much involvement one wants to have in their investment opportunities, this will also be a large factor in determining which investment works best for you.
- Are You Flexible? When it comes to crowdfunding, investors need to understand that the investment will not go forward until the entire fund is fulfilled. For instance, if the investment opportunity is set at $20 million, the investment will not be made until that mark is met. In terms of private equity, that isn’t always the case. The Fund Manager may set the fund limit at $20 million but will be making investments throughout the fund fulfillment phase in order to ensure returns are met. The manager can also close the fund at any time, for instance to capitalize on certain market conditions.
- Do You Know How to Diversify Your Portfolio? Diversity is key when building a strong financial portfolio. When it comes to private equity, investors will have a fund manager working to diversify the fund on their behalf. When it comes to crowdfunding, that job will fall on their shoulders—for better or worse.
- Do You Value Performance History? Private equity funds have been around for more than half a century. Crowdfunding has been around for less than a decade. Determine how comfortable you are investing in next-gen opportunities.
- Do You Prefer Personal Support? Because crowdfunding platforms are based online, you may not receive the personal support provided by a traditional private equity team, which will commonly walk you through the investment and/or accreditation process.
Senior Housing has been outperforming other asset classes of commercial real estate for a decade, and with demographics showing a huge boom of seniors still on the way, this is still a strong market in which to invest. Both private equity funds like SeniorLivingFund.com and crowdfunding platforms like CrowdStreet offer numerous opportunities to invest in the sector. Visit their sites to learn more.
About the Writer:
Dan Brewer is Chief Fund Manager of Senior Living Fund, a private equity company investing in quality senior housing communities nationwide. Dan has nearly 25 years of business development and real estate investment experience, including 15 years in commercial real estate (CRE), and is a frequent speaker and panelist at industry conferences throughout the country. He is passionate about the social implications of aging and bringing senior housing to the forefront of the impact investing sector.