Modern Portfolio Theory is based on the idea that certain types of investment risk can be mitigated through a strategic pattern of diversification and asset allocation.
Diversification is important because it spreads risk across multiple types of investments within a single portfolio. By diversifying into different investments, the overall portfolio’s risk is reduced so that the investor isn’t as exposed to a loss from a single investment.
Asset allocation is important because it reduces the risk of an outsized impact on an investor’s portfolio from a market moving change in one asset class. In addition, asset allocation takes into account each individual investor’s risk tolerance, time horizon and investment goals.
Bull markets don’t last indefinitely. Markets and asset classes will have good and bad years. For these reasons, it is important for investors to choose a variety of asset classes and allocate their investment selections within each class strategically.
Real estate is an important part of a well-diversified portfolio, and the advent of online real estate investing makes it easy, convenient, and transparent for all investors to add real estate to their investment strategy.
The Many Faces of Online Real Estate Investing
Online real estate investing can be categorized into two distinct types of investments.
Equity-based real estate investments offer private investors a means of buying shares in a deal or a real estate project. These investments reward investors with a return on investment on the back end when the property is sold in the form of value appreciation and may also include quarterly or annual dividends based on cash-flow from rents.
Debt-based investments allow investors to pool their money on projects that pay back monthly dividends as interest on a loan and are usually short-term – as short as 6-months in the case of bridge loans. Charles Clinton at MarketWatch identifies three types of online real estate investing by dividing debt-based structures into two separate platform types.
Despite the short history of online real estate investing, the ecosystem continues to grow and expand, offering private investors more and better opportunities than ever before.
Here are 8 ways to invest in real estate online and easily build a diversified portfolio within this alternative asset class:
- Equity Investing – There are many examples of equity real estate investing platforms. Each platform is different. Some platforms do their own underwriting. Some have low minimums while others specialize in particular types of real estate or structure their equity arrangements in a unique way. RealtyMogul and RealtyShares are examples of equity-based real estate platforms that underwrite their own deals. RealCrowd and CrowdStreet both specialize in offering commercial real estate from professional developers, but they don’t underwrite the deals.
- Debt Investing – Just as equity-based real estate investing has splintered into specialization, so too has debt-based investing. A bridge loan is a type of short-term debt-based instrument that allows developers to fund projects, usually while they are adding value to a property, before the property is then financed with a bank. Lending Home is a platform that specializes in bridge lending, sometimes also called hard money lending. You’ll also find firms that specialize geographically, such as East Coast-based Fund That Flip. Sharestates started in New York City but has since expanded into other states. Patch of Land and PeerStreet are national platforms in the debt-based category. Platforms may also specialize in certain types of properties, i.e. residential, multifamily or commercial, like Money360.
- Rental Property Investing– Real estate platforms that offer rental properties are taking advantage of a big ‘Mom & Pop’ market that owns around 90% of single family rentals in the U.S. According to a recent report on the single-family rental market, at least 56% of all rental houses are owned by individuals or small entities that own fewer than five units. Roofstock and HomeUnion now allow investors to purchase single-family rental units across the country.
- Lease Investing – Commercial leasing is another subclass that can offer long-term benefits for real estate investors. Rich Uncles has carved a niche for itself in the triple-net category (NNN). VTS is another platform with a focus on commercial leasing management.
- Digital REITs – Fundrise introduced the first online real estate investment trust (REIT). Called eREITs, Fundrise pairs modern technology and recent legislation with a nearly 60-year-old income-producing real estate investment vehicle. RealtyMogul’s MogulREIT is open to any investor ready to start with a $1,000 minimum investment.
- Real Estate Funds – AlphaFlow changed real estate crowdfunding by becoming the first aggregator to offer a variety of investments across platforms in a professionally managed fund, then took the concept one step further and developed portfolios with automated diversification. Blackstone manages the largest alternative investment portfolio in the world. While the company hasn’t fully embraced proprietary technology, it has invested in Fintechs, showing that legacy financial management firms are taking notice of the opportunities in online real estate investing and automation.
- 1031 Exchanges – 1031 exchanges are popular tax deferment tools with serious real estate investors. Investors can exchange a like-kind property within a certain time period to increase earnings and lower the current year’s tax burden. While other platforms offer 1031 exchange programs, ‘1031 Crowdfunding’ is a marketplace designed specifically for 1031 exchanges.
- Self-Directed IRAs – There are a lot of rules associated with self-directed IRAs. In a nutshell, real estate investing through an IRA allows investors to grow their income while minimizing taxes associated with capital gains. There are multiple tax considerations when using SDIRAs for real estate. Most platforms allow investors to buy and sell real estate through their IRAs and partner with various SDIRA custodians who are well versed in working with this alternative asset class, and with online providers.
How Private Investors Can Diversify Their Real Estate Portfolios Seamlessly
Online real estate investing opportunities continue to grow. A few years ago, investors had limited choices, and could only find them through private networks and publicly traded REITs. Today, opportunities exist in fix-and-flips, commercial and residential properties, ground-up developments, REITs, funds, and more. These investments are easily available, accessible and provided by companies that place importance on transparency, track record and trust. This allows investors to diversify their portfolios into real estate, and to diversify their investments within real estate asset class.
This article was originally written for, and published on CrowdfundInsider, September 2017.