This past week my wife and I had two separate but interesting conversations with friends and family. The first conversation was with some friends who have purchased small homes as investment properties. I am not sure exactly how these investments have performed financially but the general view from our friends was these investments were taking a lot of time, things like tenant issues were a real hassle, and the returns being realized did not justify the time and worry related to the investment.
The second conversation involved discussing a real estate crowdfunding deal and the fees being earned by the real estate sponsor that brought the deal to investors. The targeted returns on this specific investment exceeded 20% annually to investors but the person I was speaking with kept pointing to the 30+% targeted returns that the sponsor would achieve when factoring in all fees, etc. The deal was a development opportunity and the sponsor had spent years on securing the land, getting a loan approved, planning the construction, pulling permits, etc. There was no way I could replicate this deal myself.
These two conversations crystallized a few reasons why I like real estate crowdfunding as a way to invest in real estate.
- I do not have the hassle of being a property manager and these assets are truly passive after I complete my due diligence on the investment.
- I am getting access to good deals that have real upside potential by leveraging the expertise of sponsors that have experience with the deal type and usually the local markets they invest in.
- On top of that, the potential returns are at least equal to, if not higher than, what I would expect if I were to invest in real estate directly.
- I am not stuck with one property and one or two tenants – instead with real estate crowdfunding I can easily diversify among various properties, property types, and locations.
On that note, this week I closed on my third transaction through CrowdStreet. The investment is an apartment building in the Washington D.C. region. Here is a summary of the deal:
The Deal – Washington D.C. Apartment Building
Last week I closed on an investment that owns an apartment building in the Washington, D.C. region. Why? Existing apartment buildings should perform okay during the COVID-19 crisis due to more stable cash flows so I like these investments relative to other real estate right now. The problem with this asset class right now is there is a greater risk that renters will fail to pay rents over the next few quarters. With this deal, I think limited market supply and an in-place master lease on individual apartments should keep occupancy and collection rates high for the foreseeable future. Below are the key points I liked about the investment:
- The Apartment Building has a master Lease with a local university: A local university needs student housing and has entered into a multi-year master lease with the Sponsor, and currently leases a majority of the apartment units at the property. The master lease has multiple renewal options and so far the university has agreed to lease any apartment that becomes available. The apartments are in close proximity to two of the main university campuses and the long-term demand for units from the university should remain high. This master lease could make occupancy rates near 100%.
- Local, Tenured Sponsor: The Sponsor has been focusing on deals in Washington, D.C. for almost 20 years and is a vertically-integrated, local apartment building owner, developer, property manager, and general contractor. The Sponsor has a solid track record of delivering good returns for its investors and it has invested more than $1 billion in the Washington, D.C. region. The Sponsor also has a long standing relationship with the university which gave me greater comfort that the master lease would likely be renewed over time.
- Good Location: The apartment building is located very close to a metro station and other public transit options that make traveling to different parts of D.C. easy for residents. The apartment building is also very close to various restaurants and shops, not so relevant right now during the pandemic, but highly relevant when students and other young professionals are deciding where to live.
- Limited Supply: Apartment supply in the local submarket is limited as the neighborhood has often fought against new construction. However, in recent years, new retail development near and around the property has been more welcome. Currently, the submarket has only 160 total multi-family rental units, 100 of which are held by property.
Remember there is always risk that could impact future returns. I believe the main risk with this deal is related to the university deciding not to renew its master lease. This risk might be higher than normal due to the uncertainty around whether students will have to continue to learn through on-line courses when school starts up again in the fall. If distance learning continues during the 2020-2021 school year then there could be a risk that the university would not want to renew its master lease. I teach right now at a local university and remote learning is not a great option for students or the school. Therefore, I think universities will want to get kids back on campus next year and the risk of distance learning taking hold for a long period of time is small.
Another minor downside is this investment does not have returns as high as some of the other deals offered on CrowdStreet. The deal is a core investment that should generate average annual cash yields in excess of 7% with potential upside on the sale of the property in 5-7 years.
If you want to avoid the headaches of actively managing your real estate and you want to leverage the expertise of others than investing in deals like this one through a real estate crowdfunding platform is something you should look into.