Editor’s Note: This article was updated on March 17, 2021, to correct the year Roofstock was founded.
When it comes to real estate investing, the typical approach for most people is to focus on Real Estate Investment Trusts (REITs). These are companies that own portfolios that generally produce rental income. There are also lucrative tax benefits. That is, if 90% or more of the income is paid as dividends, the REIT does not owe federal income taxes. This is why the yields tend to be attractive.
But with the ubiquity of the internet and smartphones, the real estate sector has been seeing much more innovation. The result is that there are other ways for investors to get exposure to this asset class. Some of these include crowdfunding and fractional ownership.
However, before looking at these vehicles, it is first a good idea to consider some of the hottest markets right now and get a sense of how real estate is trending.
The Hot Markets
According to the S&P CoreLogic Case-Shiller Home Price Index, the prices for homes — on a nationwide basis — grew by an impressive 10.4% last year. This was actually the best performance since 2013.
Low interest rates were a major factor, of course. Then there was the shift in demand from urban to suburban areas, driven by the impact of the Covid-19 pandemic. Oh, and there were also difficulties with the development of new homes.
Then what were some of the top markets for the past year? Here’s a look:
- Phoenix (14.4%): Even with the increase, the prices are still reasonable. The market has become attractive to millennials who are looking for their first home purchase. Phoenix also offers advantages like good weather, nice shopping and dining options and an affordable cost of living.
- San Diego (13%): This coastal town is beautiful and prices are reasonable, at least compared to high-cost areas in Southern California like Malibu and Newport Beach. San Diego also has thriving technology and biotechnology industries.
- Seattle (13.6%): The Covid-19 pandemic hit this city hard. But the real estate market has been able to make a strong comeback. Then again, it certainly helps that the economy is diverse and has large employers like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:MSFT), which have been able to thrive during the pandemic. The increase in remote working has made it possible for people to buy more affordable homes on the outskirts of Seattle.
Real Estate Investing and Crowdfunding
Traditionally, investing in real estate has been difficult because of the need for high investment amounts and access to debt financing. It can also be a challenge to find quality deals.
But over the past decade or so, there has emerged the trend of crowdfunding, which has made the process easier and much more affordable. For the most part, it involves raising capital from a large number of investors. In some cases, the minimum investment amount may be as low as $10! Another key benefit of crowdfunding is that an investor gets the benefit of vetting the deals and ongoing management.
“Right now there is more money than ever flowing toward real estate crowdfunding as people seek alternatives to the traditional stock market,” said Deidre Woollard, who is the editor of Millionacres.com. “The biggest advantage is that once you make your investment, it is relatively passive. You will get consistent updates but there isn’t a lot of monitoring required.”
Roofstock allows investors to get fractional ownership in a single-family rental property. The company acquires it and puts the ownership in a trust. This allows for the issuance of ownership across a group of investors, who get potential net rental income, capital gains and tax benefits.
Now there are certainly risks. Keep in mind that there is usually not a way to sell off a position. Then there are the issues of high fees and even the risk of mismanagement. In other words, it is important to do some research and diversify your investments.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.