Appreciation & Cash Flow: Understanding Two Real Estate Investing Objectives

At the most basic level, every real estate investor has the same goal. Whether they fix and flip homes, diversify their portfolios with syndicated (aka “crowdfunded”) commercial real estate securities, or use investment properties to earn rental income, the ultimate objective is to make money – period.

But naturally, there’s more nuance to it than that.

Real estate has a well-earned reputation for helping generate wealth; after all, 77 percent of U.S. millionaires have real estate in their portfolios. But just as there are dozens of different ways to invest in real estate, there are dozens of different ways to capitalize on its value.

Two of the most important of those ways are appreciation and cash flow. The two concepts can, and often do, work in tandem to facilitate successful investments. Yet depending on an individual investor’s goals, it’s important to understand the difference between the two in order to evaluate whether a potential investment aligns with one’s objectives.

The Appreciation Game

Commonly discussed in terms of home prices, appreciation (also referred to as “equity buildup”) is a huge factor in commercial real estate (CRE) investments, as well. Appreciation is the uptick in value of an asset over time; it earns investors money when they relinquish the asset to realize a price increase since purchase. Appreciation comes in two forms in the real estate world: market appreciation and forced appreciation.

Market appreciation is the organic increase in a property’s value due to a variety of factors outside the investor’s control, including local market forces and surrounding property values. Forced appreciation, on the other hand, occurs when the value of the property increases as a direct result of actions taken by the owner or investor: think renovations, additions, or the incorporation of new features.

Why Appreciation? For long-term buy-and-hold investors, appreciation – especially market appreciation – is the magic of real estate investing: The chance to make money on an asset as it simply sits there.

Why Not? No matter how strong a given market, no investor can put too many financial eggs in the appreciation basket, since solely doing so amounts to speculating that the market will increase in value.

“Some people buy real estate expecting it to appreciate a lot over time,” says David Reiss, a professor of law and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School. “But it can be risky – or even foolish – to pay so much for a property that you’re losing money on an operating basis just because you think it will appreciate.”

Cash Flow is Key

In fact, making money on an operating basis is where cash flow comes into play. With real estate investing, cash flow is the result of proceeds from rent payments.

Investors can earn returns from cash flow on an ongoing basis, either as owners of a given investment property (i.e, as “active” owner-investor landlords) or as pooled “passive” or “crowd” investors in an income-generating property. For the latter, cash flow results in regular cash distributions from the investment – whether distributed monthly, quarterly, semiannually, or annually.

Why Cash Flow? Unlike appreciation, the potential cash flow of a property can easily be calculated in advance of a purchase and packaged to investors in clear investment terms. Positive cash flow also presents owner-investors with an opportunity to more easily refinance (or pull cash out of the property) if necessary.

Why Not? As with all else in real estate, cash flow involves a lot of unknowns – think issues like repairs, maintenance costs, non-paying tenants, and all the rest – and failing to properly factor in the impact of such variables can be a costly mistake.

“Many beginning investors do not account for the unknown, because they really want to make a deal work,” writes Mark Ferguson of Invest Four More. “If you really want to make a deal work and you fudge the numbers to get everything to line up correctly, you may end up with negative cash flow every month.”

Investments on EarlyShares are subjected to a sixteen-point eligibility check assessing cash flow and return projections. To find your next investment, click here.


The EarlyFive: 3 Takeaways from Title III: What the New Rules Mean for Real Estate Crowdfunding

Making sure our customers are educated investors is always one of our top priorities. To support that goal, please consider attending these webinars on December 2nd and 3rd. You won’t be disappointed!

  1. REVA- Raleigh Colonnade- DST. Steven M. Sadler, Managing Director of REVA, will walk listeners through the 1031-eligible investment opportunity in the Colonnade II, a fully leased Class A office building in one of the strongest office markets in the U.S. Click here to register.
  2. Investment Principals-From Asset Allocation to Z Scores. Our Co-Founder & CSO Heather Schwartz, and other leading experts in the investment field, will discuss investment diversification, timing, selection and more. Click here to register.

Until then, we wish you and your family a wonderful Thanksgiving.

re journalNov. 17, 2015
CoStar Group: Investors Still in Love with U.S. Commercial Real Estate
Dan Rafter,
The latest numbers from CoStar Group show that falling unemployment and low interest rates helped boost the value of commercial real estate properties in Q3. Shaky economic conditions throughout the rest of the world also drove more investment dollars into U.S. commercial real estate.

Real Estate Crowdfunding on blog.earlyshares.comNov 13, 2015
3 Takeaways from Title III: What the New Rules Mean for Real Estate Crowdfunding
EarlyShareholder Blog
These new rules are a vast improvement over the proposed ones from October 2013, but it’s important to be mindful of the unique stipulations as they relate to CRE. The key takeaways that impact the real estate sector center around investment limits, deal selection and due diligence, and alignment of interest between investors and the platform.

forbesNov. 17, 2015
Millennials Drive One-Bedroom Apartment Trend, But That Might Change
Jay Denton,
Since 2012, one-bedroom and studio units rose over two-bedroom units, a trend developers like because they provide more rental value per square foot than larger units. But as millennials begin to age, get married and have families, the development of more two and three-bedroom units is expected to increase. Nov. 17, 2015

download (1)In Las Vegas, A Lucky Streak for Developers
Joe Gose,
Finally recovering from the financial crisis, investors are once again looking at Las Vegas, specifically a 4.2-mile stretch of the boulevard south. Capital has begun pouring into new casinos, a 20,000-seat arena, convention space, property renovations and shopping and entertainment districts. If investing in Las Vegas is in your cards, take a look at our Downtown Vegas Redevelopment.Nov. 17, 2015

downloadProfessional Services Firm JLL Has Ranked the Top 10 Priciest Streets in America for Office Space
Diana Olick and Stephanie Dhue, CNBC
Top 10 Lists are always fun. Take a look at JLL’s summary of the top 10 most expensive streets for office space. It may surprise you that location was not the only factor when it came to those buildings with the highest rents. According to the report, another key factor is that millennials are demanding amenity-rich office space, including those that are high tech and eco-friendly and are willing to pay top dollar for the space. They also want restaurants, retail, entertainment and residential areas within walking distance to the office.

Disintermediation: What Does it Mean for Real Estate Investing?

If you’ve paid any attention to the rise of the real estate crowdfunding industry, you’ve undoubtedly heard a few notable buzzwords used to describe its impact. Crowdfunding is disrupting the commercial real estate (CRE) industry by giving sponsors new tools to fill the capital stack. It’s also democratizing access to real estate investments that have previously only been available to institutions and ultra-high-net-worth investors.

It’s also disintermediating the landscape of real estate investing. Except… what does that even mean?

While it may sound to some like just a piece of tech-industry jargon, “disintermediation” is actually a hugely important element of the value of real estate crowdfunding at large. How so? By eliminating fee-driven middlemen from the capital formation process, crowdfunding is injecting greater efficiency into the commercial real estate market and driving down investor costs as a result.

An ‘intermediated’ present of CRE investing

Like most aspects of private finance, commercial real estate investing has traditionally involved a wealth of third party involvement. Nowhere is this more apparent than in non-traded REITs.

For decades, REITs or “real estate investment trusts” have been the primary vehicle for accessing investments in commercial real estate. A REIT is a type of security that invests in real estate through property or mortgages. Some trade on exchanges in a manner similar to publicly traded stock, making them “liquid,” whereas “non-traded” REITs are purchased by investors and only relinquished when the sponsors of the funds liquidate them through a sale, merger or public listing, returning cash to shareholders.

To be certain, REITs have their value; they pay dividends and can be accessed fairly easily by investors looking for a professionally managed asset. But “professionally managed” is exactly the problem. Like mutual funds, non-traded REITs often come with hidden costs. As the SEC’s Office of Investor Protection puts it:

Non-traded REITs generally have high up-front fees. Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount.

And the fees may be even greater than that. The Wall Street Journal reported in 2014 that most nontraded REITs come with front-end fees ranging from 12% to 15% and could feature other fees over the life of the investment. An April 2014 study found that, after fees and expenses, the average annual rate of return for nontraded REITs was just 5.2%.

“Nontraded REITs are costing investors, especially elderly, retired, unsophisticated investors, billions,” Craig McCann, a former economist with the SEC, told the Wall Street Journal. “They’re suffering illiquidity and ignorance, and earning much less than what they ought to be earning. No brokerage should be allowed to sell these things.”

Alternatively, real estate crowdfunding is creating a new avenue for direct investing and boosting investor returns as a result.

CRE transactions on EarlyShares, for example, are as carefully selected as any in a REIT (traded or non) thanks to our selection methodology, and our investments project average 7% preferred returns and 18% internal rate of return (IRR). In our own estimation, we also lower costs 25-75% for all parties involved in a real estate transaction by simplifying the investment process to make it more efficient creating value for both investors and issuers.

When it comes to commercial real estate investing, disintermediation is the rare buzzword that deserves the buzz. To learn more or start diversifying your portfolio with a return-driven real estate, go to now.


The EarlyFive: Real Estate in Bliss While GDP A Miss

The end of the year is definitely upon us as we head into the third week of November, which makes it a great time to evaluate your investments and see how hard your money has been working for you all year. It’s also never too early to start planning for 2016.

Whether you’re looking for current cash flow or long-term appreciation, take a look at the opportunities on EarlyShares to find one that fits your investment profile.  Read the articles below to see how favorable market trends fit with the transactions on our platform.

forbesNov. 10, 2015
Real Estate in Bliss While GDP A Miss
Ely Razin, Forbes
While recent reports say there’s potential slowing in the US GDP, commercial real estate continues its positive trend with debt and equity continuing to flow. According to Preqin, Q3 showed the largest amount of capital ever raised in a single quarter for closed-end private real estate funds at $37.5 billion.


US Office MarketsNov 9, 2015
Hotel Developers to Keep Building Through 2016
Robert Carr, NREI online
The hotel industry continues to enjoy healthy fundamentals as a result of both strong demand and new supply additions and experts don’t expect it to peak anytime soon. Occupancy is expected to hit 65.5% by December 2015, the highest annual level on record. It could be a good time to consider an investment in a hotel. Take a look at the Courtyard Marriott opportunity on EarlyShares.


Private Equity FundsNov. 11, 2015
Retail, Office Fuel Q3 Commercial Lending Uptick
Erik Dolan-Del Vecchio, BisNow
Multifamily and commercial mortgages saw a strong Q3 according to the MBA reports, rising 12% over what is was last year. In the lead were retail and office property originations, with retail and office seeing increases of 39% and 17% respectively. Perhaps you’d like to invest in real estate debt? If so, take a look atRacquet Club Mezzanine Loan.


costar groupNov. 4, 2015
As Retail Finally Enters Recovery, More Investors Backing Malls, High-end Shopping Centers 
Randyl Drummer,
Rising retail rental rates, stronger tenant sales and a dwindling supply of quality, well-located shopping center spaces are causing more US and offshore investors to move back into the retail real estate sector. If you agree with this logic, take a look at Downtown Las Vegas, which may be a good fit for your interest.


Private Equity FundsNov. 11, 2015
Q4 Multifamily Forecast: Supply, Demand Remain High
Chuck Sudo, Bisnow
According to the just released Marcus & Millichap’s Q4 apartment research market report, several factors are influencing a positive forecast for multifamily development that are increasing renter demand. Our sponsors agree: take a look atPhiladelphia Multifamily Fund II and East 3rd St.

3 Takeaways from Title III: What the New Rules Mean for Real Estate Crowdfunding

The investment crowdfunding industry has finally received the stamp of approval it’s been waiting for! After three years of delays and deliberation, the Securities and Exchange Commission (SEC) voted October 30 to adopt the final rules for Title III of the JOBS Act, which – once in effect come Summer 2016 – will enable non-accredited retail investors to access more opportunities in the private market.

With its long-awaited decision, the SEC has broadened the pool of investors eligible to participate in (and benefit from) private investment opportunities from a mere 8.7 million accredited investors to over 300 million Americans. The vote creates a new wealth creation tool for the generation public and finally validates the market opportunity that dozens of crowdfunding platforms, including EarlyShares, were founded on following the passage of the JOBS Act in April 2012.

Ultimately, the many months the SEC took making up its mind about Title III appear to have been time well spent. The approved rules are a vast improvement over the proposed ones released in October 2013, making it clear that the Commission listened to the many loud voices in the crowdfunding sector – including ours – to settle on rules that will protect investors and help businesses raise capital efficiently while advance the online private investing market as a whole. Yet the final Title III rules do include some unique stipulations that will impact its application in the real estate sector, and here’s how we see the key provisions shaking out.

Investment Limits & Thresholds

As outlined in the JOBS Act legislation, startups, small businesses, real estate companies, and other “issuers” of private securities will only be able to raise up to $1 million in a 12-month period under the Title III rules. How much they can raise from an individual investor, however, will vary:

  • Non-accredited investors with annual income or net worth up to $100,000 may invest the greater of $2,000 or 5 percent of annual income or net worth in all crowdfunding issuers in a 12-month period.
  • Non-accredited investors with annual income or net worth over $100,000 may invest up to 10% or the lesser of annual income or net worth.
  • Accredited investors may only invest up to $100,000 in Title III crowdfunding offerings over any 12-month period.

The Takeaway: The decision to cap how much accredited investors can invest through Title III crowdfunding is an odd one, given that there is no such cap under the existing Title II rules. But overall, the investment limits will likely encourage more diversification among all investors utilizing the new regulations – helping grow the real estate crowdfunding industry by broadening the scope of available investments.

Deal Selection & Due Diligence

Whereas the proposed Title III rules only allowed crowdfunding portals to use “objective criteria” for offering selection, the final rules let platforms use more subjective analysis to determine which capital raises make the cut. But that doesn’t mean any deal is a-ok; Crowdfunding portals must perform due diligence on each issuer and are tasked with the “responsibility to assess whether [they] may reasonably rely on an issuer’s representation of compliance.”

The Takeaway: We’re thrilled that the SEC is giving portals the option to curate investments according to their own selection criteria. Why? Because as the real estate crowdfunding industry has matured under the existing Title II rules, platforms have tailored their deal selection methodologies to meet the needs of specific investor audiences (i.e., to specialize in particular asset types, deal structures, etc.) By allowing that for Title III, as well, the SEC is supporting the kind of segmentation that will help portals differentiate themselves from one another.

Portal Compensation

Come Summer 2016, one of the equity investors in a crowdfunded real estate project may be the portal it was crowdfunded on! In an interesting move, the SEC voted to allow platforms to take an equity interest in an offering as part of its compensation (provided it’s on the exact same terms as that offered to investors).

The Takeaway: This provision – which wasn’t in the proposed rules – is one of the biggest ‘win-wins’ for investors and platforms in the final rules, because it will help each platforms put their money where their mouths are by keeping their financial interests aligned with those of their investors. Coupled with the fact that portals cannot promote one offering over another once it makes it to their website, this consideration will also help ensure that the playing field stays level for issuers and investors in the new Title III landscape.

What do you think of the new Title III rules? Let us know in the comments.

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