by David Drake
Each day in the United States, an estimated 10,000 baby boomers retire. With a population placed at 78 million, the boomer generation, representing those born after World War II (between 1946 and 1964) currently control 70% of the household wealth in the U.S. according to Brian Sozzi of the Belus Capital Advisors. It has also been predicted that about $12 trillion worth of assets will be transferred from the greatest generation (those born between the 1920s and 30s) to the boomers in the near future, according to Bank of America’s Sarbjit Nahal and Beijia Ma. Against this backdrop, to ensure a constant flow of income during their retirement, the need for proper management of their accumulated and inherited wealth arises.
With the youngest boomer age 50 and most of the generation retiring over the next 16 years, making the right investment decision has become more crucial than ever before, as the risk of making speculative gambles can no longer be entertained. Current estimates state that less than 50 percent of the boomers (4 out of 10) have financial advisers. Thus, understanding the best practices in asset allocation could not come at a better time for them.
If you belong to this generation, making the right choice today as to which is the best asset class to invest in, and the most innovative way of doing so, will help in securing your financial future. While many innovative investment vehicles such as private equity and pension funds have emerged in recent times, boomers will need to learn about the benefits of crowdfunding, which is a relatively newcomer.
As many boomers are still recovering from the loss of their investment, (mostly in equities), suffered in the wake of the financial crisis of 2008, a more stable and diversified alternative asset class like real estate is what is needed to preserve their wealth. Economists have predicted that baby boomers are likely to re-allocate their portfolios as they approach retirement. They shift from risky asset classes (such as equities) to less risky ones like real estate that provide constant flow of income.
Real estate investment in the U.S. has recovered quickly, after it suffered a major setback in the aftermath of the financial crisis, and still represents a stable asset class for investors. As an alternative asset class, real estate provides benefits such as a stable flow of income and a diversified portfolio with minimal risk. Unlike equities, bonds, and hedge funds, real estate is not open to volatility in market prices (it is hedged against inflation) thus providing a stable flow of income for many years to come.
It is important to note that the value of real estate did not fall during the financial crisis because it is a volatile (less stable) asset class. Rather, the fall in value occurred because of exposure to Wall Street by institutional investors. However, through crowdfunding, direct investment in real estate shields it from volatility in the stock market. Through crowdfunding, investors from across the globe connect to real estate developers and managers without having to pass through an intermediary. This shields their investments from Wall Street influences.
In addition, diversification of investment in order to mitigate risk and receive higher returns is easier under a crowdfunded real estate investment. Although pension funds or bank deposits, as less risky investments, would have been better options to equities, they yield lower returns on investment.
While many are aware of the vast benefits of investing in real estate, only the affluent (mostly high and ultra-high net worth individuals) have been able to do so over the years, due to the large amounts required to invest. However, crowdfunding has democratized real estate investing to allow participation from average individual investors.
Today, there are about over a hundred real estate crowdfunding platforms in the world. The list includes platforms like Fundrise, iFunding, Realty Mogul, Prodigy Network, Patch of Land, Carlton Group, Groundbreaker, RealCrowd, and Crowdstreet. With minimum investment ranging from $100 to $50,000, investors can now participate in real estate offerings on these platforms.
Presently, the U.S. crowdfunding laws as released by the SEC allows only accredited investors (those with a net worth of over $1 million or an annual income of 200,000 for the past two years) to participate in real estate crowdfunding. The SEC also estimates that only an estimated 8.7 million U.S. households qualified as accredited investors in 2010.
However, according to a report by the U.S. congregational budget office, majority of the baby boomer generation do not belong to this league of investors. The report reveals that only 1 percent of baby boomers control about one-third of the generation’s wealth while the wealthiest 10 percent account for more than two-thirds. This leaves the larger part of the boomer population with little wealth as they approach retirement.
Therefore, the boomers need a democratized means of investment to allow average individual investors with minimal investment capacity to participate in real estate transactions.
Fundrise, a pioneer firm in the real estate crowdfunding industry has leveraged on state exemptions to allow non-accredited investors to participate in crowdfunded deals. The New York based firm has so far successfully navigated through blue sky laws in three states, Washington, Virginia, and Maryland, to allow individual investors with as little as $100 to participate in equity real estate crowdfunded deals. The firm has also signified its intentions of extending this service to other states. For most of the baby boomer generation, this is good news, as this gives those who are not accredited investors, the opportunity to reap the huge benefits of real estate investment.
Founded in 2010, Fundrise has more than 43 companies with over $57.6 billion in assets under management. The DC-based firm has facilitated over 30 real estate deals and raises about $1 million weekly from investors online.
A report by the U.S congregational budget office shows that about 30% of the baby boomers do not own any financial asset. This only gives credence to the unequal distribution of wealth within the generation. Through crowdfunding however, the situation could change as individuals with as low as $100 in investment can now have a stake in a high yielding real estate property. By so doing, we can see the reduction of the inequality in asset distribution within the boomer generation and achieve the social inclusion of the less privileged.
Accredited baby boomer investors who control the larger share of the generation’s wealth no longer need to invest through intermediaries such as institutional investors, as crowdfunding provides a better option. Registering with an online real estate crowdfunding platform helps in cutting away intermediaries and their costs by connecting investors directly to real estate offerings across the globe.
In addition, crowdfunding gives investors control over the deal process by allowing them to make choices from different classes of properties. The returns on investment are also encouraging as most crowdfunding platforms promise a 10-14% return to their clients. While platforms such as the Carlton Group are exclusively for accredited investors with a minimum of $1 million in investment, others accept lower amounts.
Wealthy baby boomers looking to leave a legacy behind can also utilize Fundrise services for their impact investment activities (philanthropic investment for financial returns). Fundrise specializes in facilitating creative urban development projects that impact local communities. This presents a fertile ground for the impact investment activities of affluent baby boomers that have been looking for a low-pressure route to do so.
Average baby boomer investors also can take advantage of this unique service to be part of those funding creative development projects in their local communities. After all, it takes a minimum of $100 to do so.
By allowing both accredited and non-accredited baby boomer investors to participate in real estate deals, crowdfunding platforms like Fundrise are evolving their business strategies to help this generation of seniors invest their monies wisely. Real estate investments through crowdfunded deals provide them with benefits such as a constant cash flow and minimized risk through a more diversified portfolio, which will help to secure the financial future of this flock of retirees.
If you belong to this generation, the time to act in order to secure your financial future is now. The way to do so is by investing in real estate through crowdfunded deals.