Wednesday, February 19, 2020 / by Callie O'Brien
From house flipping television shows to the Zillow app on cellphones, home buying has become a part of our culture, but for many real estate investing is still out of reach.
But since the Tax Cuts and Jobs Act of 2017 relaxed regulations on direct-to-consumer security sales, a new trend called micro-investing has added a new wave of investors to the real estate market. Micro-investing allows consumers to buy shares of properties and customize portfolios, for as little as $5.
“The best portfolios are diversified, and real estate performs very uniquely, in a way that is uncorrelated to the stock market and bonds… We want to offer the same asset class at a lower price point,” said Janine Yorio, founder and chief executive officer of a New York City-based real estate micro-investment app called Compound, which sells properties at a profit for investors.
The model is similar to the traditional real estate investment trust (REIT), but micro-investing companies give investors the ability to become part owners of specific properties — which creates lower fee structures, favorable tax benefits and assets that are not tied to the stock market.
“REITs are just like owning stock, subject to stock market volatility and other unrelated factors to the actual performance of a property. So in addition to REITs, savvy individual investors add private real estate to their portfolios for greater diversification and returns,” said Darren Powderly, co-founder of CrowdStreet, Inc., a Portland, Ore.-based micro-investing firm that allows investors to buy shares of commercial real estate around the U.S.
Self-directed investments have become increasingly popular since the advent of the internet, paralleling the rise of self-directed retirement investments, said Matt Bronfman, chief executive officer of Jamestown, the sponsor of Jamestown Invest, an Atlanta-based micro-investing firm that allows investors to buy shares of commercial real estate in Atlanta.
“I think micro-investing and democratization is really interesting and speaks to the future… Democratization of investing coming to real estate is interesting. You can go direct. Traditionally, this is not the way the real estate industry has worked,” said Bronfman.
Providing easy access to ‘a great long-term investment’
For $260, Compound lets people invest in a share of an apartment in the Miami Beach Faena House, a 47-unit ultra-luxury condominium on Miami’s “Billionaire Bunker” island. The condo neighbors properties owned by Goldman Sachs CEO Lloyd Blankfein, Citadel CEO Ken Griffin, and Apollo Global Management’s Leon Black.
After three to five years, Compound will sell the properties and distribute the profits among investors. The company has raised $2 million to date, with investors including Glenview Capital President John Rodin, and venture capital funds, including Kairos Ventures, Zing Capital, Blue Ivy Ventures and Republic Labs.
Compound currently offers investment opportunities in and manages four properties in Brooklyn, Austin and Miami. The startup makes money by being the buy-side broker in the initial purchase of each property, charging a brokerage commission to the seller, similar to a typical residential real estate brokerage firm, according to Yorio.
“We’re looking to give people access to properties they would want to own for themselves and are proud to say they own a part of — but that also makes a great long-term investment,” said Yorio, who said that Compound buys properties with potential for price appreciation.