Ease of use and portfolio diversity among the benefits to investors
By Brian Fritton, Chief Technology Officer at Patch of Land
Automatic investment tools are gaining traction with real estate crowdfunding platforms as a way for investors to obtain greater access to transactions that meet their investing criteria
Available on most well-known real estate crowdfunding platforms, auto investing allows real estate investors to select parameters to gain regular and immediate access to deals that meet their investment strategy. Technology working in the background does the bulk of the work for the investor, putting their money into deals that meet their pre-selected criteria.
The benefits of automatic investing to the real estate investor are multifold:
- It levels the playing field. Auto investing technology brings opportunities to passive investors with full-time careers —doctors, lawyers, teachers, business professionals and others – to invest automatically alongside sophisticated full-time investors such as hedge funds, day traders and financial institutions.
- It improves flexibility. With automatic investing, investors don’t need to be at their computers or mobile devices as the emails on the latest deals come across their Inbox. Under the manual method, popular real estate crowdfunding transactions on some platforms are fully funded within minutes or hours, leaving investors who aren’t able to watch for the new opportunities to hit their email inbox at a disadvantage. Until deal volume increases on some of these platforms, many deals will sell out before investors even see them.
- It may allow for higher investments. Some auto-investing features, depending on the platform, allow an investor to participate in more projects for the same dollar amount versus the manual investment method.
- It increases portfolio diversity. Real estate investors are able to better diversify their portfolios by taking advantage of more investments with a lower minimum investment in each opportunity.
- Investors gain access even when demand is high. There are a number of different ways that individual real estate crowdfunding platforms will select deal participation when the demand exceeds supply. Patch of Land, as an example, uses a pro-rata formula to guarantee that investors get into all high-demand deals that match their criteria, although they may not get in for the full dollar amount they seek. Investors who invest more per month with certain platforms might get a higher pro-rata share in such instances.
What’s Included in Auto Investing
While each real estate crowdfunding platform’s auto investing feature is somewhat unique to their site, all have some general features that investors are likely to find:
- An account dashboard that explains how to set up an account and provides data on an individuals’ past transactions.
- An investor-controlled decision on the total amount of funds invested per month. Once an investor’s monthly limit is reached, auto invest programs stop placing orders.
- An investor-controlled determination of how much money to put into each transaction, up to the monthly total investment commitment.
- Greater flexibility on minimum investment amounts. Some platforms allow an investor to invest less money into each deal if they are using the automatic feature.
- The ability to set multiple parameters to uniquely define which deals an investor wants to invest in. These parameters may include annual percentage rate (APR), loan-to-value (LTV), the investment type (e.g., residential, commercial, multifamily, purchase loans, refinance loans, rehab loans), the term of the loan, and after-repair value (ARV) of rehab loans.
- A direct connection to a bank account or platform funding portal for seamless investing via automatic withdrawals.
- A cancellation policy with a timeframe for investors to get out of a particular auto-invested deal. There may be monetary penalties attached, depending on the platform or the number of times an investor seeks to cancel an auto-invest transaction.
- Real-time data. Some platforms may provide high-level data that shows an investor how many investments are available based on the investment criteria selected. This allows an investor to see what investments are available based on their pre-selected criteria on each platform and make comparisons to see which sites offer the most opportunities for the types of deals they seek.
- Robust underwriting data. Technology-driven real estate crowdfunding sites have a host of data at their disposal which allows them to vet deals before offering them to the crowd. This provides piece-of-mind to investors because risks have been quantified and only deals that meet the platform’s standards are being offered.
How auto investing helps lenders
While the multiple benefits of automatic investing are fairly obvious to investors, real estate crowdfunding lenders stand to benefit as well. Using data gathered from investor parameters selected in a respective platform’s auto invest feature, the lender is able to see if a loan will fully fund or by what percentage it will fund before the loan documents are ever signed or approved.
This data helps determine whether an appetite exists on a particular real estate crowdfunding platform for a specific loan. If the crowd has no appetite for the loan, then it won’t be made. If there’s a huge appetite for a particular loan type, then more of those types of loans may be offered.
Lenders who have built-out this type of auto-investing technology in an intelligent way will have an audit history to see how investing parameters have changed over time, which will help to make smarter lending decisions now and into the future.
Lenders, armed with auto-investing data, will be able to draw trend lines on how investors are or are not changing their investing parameters. For example, a lender could look at whether investors are opening up their credit box to higher LTV loans this fall compared to what they were doing a year ago. Is the appetite for riskier loans on the rise or on the decline? In another example, the data might show that investors are funding commercial deals at a higher percentage than residential loans as compared to their past investing behavior, or they may have stopped funding rehab loans altogether.
With the range of parameters available for study, lenders with robust technology have a wealth of data at their fingertips that can be used to make future lending decisions. This could mean making a decision to deny a loan application because “crowd” investors have no appetite to fund it while prioritizing another loan through the approval and funding process because of high demand from investors.
In a win-win for investors and for lenders, auto invest technology allows lenders of real estate crowdfunding sites to be proactive in offering products (loans and real estate deals) that its investors want to invest in while avoiding deals investors have no desire to fund.
Differences among platforms
It should be noted not all real estate crowdfunding platforms operate under the same securities rules. Some may only accept accredited investors under the JOBS Act’s Rule 506(c) of Regulation D. A big benefit of Rule 506(c) is that it allows a platform to market its offerings to the investor world via a host of mediums and gain faster funding as a result. The 506(c) rule requires that a platform must verify anyone investing on its platform is an accredited investor.
Other platforms operate under Rule 506(b), which limits the ability to solicit investors, but allows a platform to accept a limited number of unaccredited investors they deem to be sophisticated. A sophisticated person is generally deemed by the Securities and Exchange Commission to be a person of sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment. The 506(b) rule still requires accredited investors to be verified.
To be considered an accredited investor, one must have a net worth of $1 million, either alone or with a spouse, not including the value of the investor’s primary residence. Or the investor must be able to prove they have made $200,000 a year over the past two years (or a $300,000 income when combined with a spouse) with a reasonable expectation of continuing to make that amount in the current year; or they may submit a letter of accreditation by a CPA, attorney or other professional.
As technology continues to allow for automation and artificial intelligence, it’s simply a given that investing will continue to move toward greater automation. We’ll likely continue to see discussions going forward about whether auto-investing is on par with investing done via the guidance of a professional financial planner, and we welcome such discussion.
It’s our belief that automatic investing is making it easier for investors of all types to invest smarter in real estate.
As co-founder and CTO, Brian Fritton oversees technology strategy for Patch of Land