Innovative digital real estate investment platforms provide access to higher yielding interest income than what can be accessed through traditional brokers. Within this market further opportunity has arisen through Tax Cuts and the Jobs Act (TCJA) allowing investors to defer capital gains through investments in opportunity zone properties. The long-term investments are made through qualified opportunity funds (QOF).
At Fund Wisdom we have primarily focused on alternative investing through equity focused portals, rating, showcasing data, and investment offerings across a set of vetted platforms. We have observed a rise in real estate being offered on these platforms and have begun to expand our research into the real estate asset class where I look to share the opportunities we have uncovered.
What are Alternative Asset Real Estate Platform Investments?
Real estate investment platforms provide several structures of loan offerings. These loans are private debt secured by real estate assets. To help you mitigate the risk of losses, find first loans with seniority in the event of a borrower’s foreclosure (not riskier second loan financing).
Real estate lending platforms apply due diligence to find strong loans. They use filters, algorithms, and data analytics to select specific loans. PeerStreet and others screen loans for a favorable Loan to Value ratio. In real estate finance, properties with a high equity balance (property value exceeds loan balance) have a desirable lower Loan to Value ratio.
Real Estate Investment Lending Platforms
Our initial list includes both commercial and residential real estate loan platforms. Some platforms offer real estate equity through investment in real estate properties.
- EquityMultiple offers equity investments in opportunity zone properties
- Fund That Flip
- LendingHome a hard money lender
- Patch of Land
- Prime Meridian Capital Management – Real Estate Lending Fund
Must investors be accredited to use real estate lending platforms?
To answer this question, let’s review the definitions, then zero in on the current debate.
SEC rules for exempt companies
The Securities and Exchange Commission (SEC) decides whether investors must be accredited. If the real estate debt or other securities aren’t registered with the SEC, the company may be exempt under Rule 506 of Regulation D or another exemption. Exempt companies are restricted to accredited investors.
The SEC defines the criteria in its "Updated Investor Bulletin - Accredited Investors." The bulletin describes these sophisticated individuals who can withstand a financial loss. The Federal government agency also defines other types of accredited investors.
“An accredited investor, in the context of a natural person, includes anyone who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).”
Non-accredited investors don’t meet the criteria. The 2012 Jumpstart Our Business Startups (JOBS) Act offers them different crowdfunding opportunities.
The debate about lending platform investors
Brew Johnson, the CEO of PeerStreet, wrote a Forbes article. He favors allowing non-accredited investors to invest in secured real estate debt. The riskier real estate lending platform, Groundfloor, includes non-accredited investors.
What are Opportunity Zones and QOFs?
The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, creates opportunity zone investing incentives. The intent is “to spur economic development and job creation in distressed communities throughout the country and U.S. possessions by providing tax benefits to investors who invest eligible capital into these communities. Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund and meeting other requirements”, according to the IRS. An IRS FAQ explains the concept in detail and includes a link to find available opportunity zone parcels. A percentage of capital gains rolled over within 180 days is deferred. The percent depends on the number of years an opportunity zone property investment is held.
Fundrise ranks “The Top 10 Opportunity Zones in the US”.
Qualified opportunity zone property investing is almost as good a gift as the 1031 real estate exchange. 1031 defers income taxes on gains from qualifying real estate sales. To prevent being caught starkers (defined as naked in the Urban Dictionary), read on. Limiting your knowledge could be a risky option.
Wells Fargo Bank is a leader in reconstruction loans. It addresses qualified opportunity zones in a wealth planning update article. Existing properties must include eligible improvements equal to the original investment amount. These property improvements impact both sides of the loan to value ratio.
Preqin reports the status of qualified opportunity zone funds (QOFs) investing in insight articles. Preqin’s report, “Opportunity Zone Funds: Investors Waiting in the Wings”, presents survey statistics.
Platforms providing filters for opportunity zone properties
The idea of overlaying census tract numbers of opportunity zone properties raises some questions:
- Would lenders on QOF fund real estate loans want to resell those loans directly to real estate lending platforms?
- If yes, is there a financial incentive for the QOF’s involvement?
- Or does the real estate loan investing platform look up the census tract directly?
- Can it find information on the existing lender without involving the QOF?
- Would including qualified opportunity zone property loans improve opportunities for debt investors?
- Is risk mitigated or increased for investors?
- QOF investors are long-term investors in the property. Value increases with renovations, proper maintenance, and increased economic prosperity in the community.
- Does this add another level of diversification to portfolio investments, reducing risk?
- Think about it from the view of an investment overlay manager.
- Consider your portfolio investments held at different sources.
- Decide whether you would be meeting your portfolio diversification objectives.
Real estate lending investment platforms provide portfolio diversification. Some online platforms like EquityMultiple allow investors to invest in qualified opportunity zone properties and we expect more to follow. Should the loans on those properties should be offered as investments is an open question. Let us know your thoughts in the comments below.