‘Have that safety net’: Experts weigh in on alternative real estate investment apps
With home prices increasingly out of reach, some Canadians are turning to alternative investing options to get exposure to the residential and commercial real estate sector.
This phenomenon has given rise to various apps such Willow and addy, which use crowdfunding models to give clients access to commercial real estate that they might not have otherwise tapped into.
While these apps offer the real estate exposure many young people want, they also come with their own unique set of risks.
“It’s an interesting space,” said Zainab Williams, a financial planner with financial advisory firm Elleverity, in a phone interview.
“For millennials and Gen Zs who are trying to get into investment properties, but [who] don’t have the actual funds to purchase an investment, such as a home or a building, it gives them the ability to split up the risk with others.”
Willow launched on Jan. 31 as the first regulated real estate investing platform in Canada, and offers a fixed number of 100,000 units each in two Ontario buildings. It received approval from the Ontario Securities Commission to operate as an exempt market dealer and bills itself as an alternative option to traditional real estate investment trusts (REITs).
Willow Chief Executive Officer and Co-founder Logan Yergens said one of the big appeals of the app is that the investor has more control.
“With a REIT, you’re buying a pool of properties managed by someone else. You don’t know what properties you’re investing in, your returns are averaged across the whole pool of properties, with the REIT recognition rules they’re constantly having to redeploy capital regardless of attractiveness. What we offer is the ability to buy a piece of a property that you can actually see and know,” he said in a phone interview.
Willow offers a limit order marketplace and is a market maker, meaning it has the ability to step in and improve liquidity when it deems it’s necessary. Clients must meet suitability requirements and receive regular financial disclosures about the building they’re invested in.
But it’s the liquidity risk that Williams said investors need to be aware of.
“It’s really important to understand what exactly you’re investing in and what exactly you’re putting your money into because taking that money out – that’s usually the main concern for a lot of people,” she said. “If you’re a person who’s looking for the liquidity of taking money out if you have an emergency, that becomes problematic.”
For certain investors who feel they might need access to those funds in a pinch, she said investing in a REIT might provide better liquidity.
“You want to have that safety net for yourself. You want to know that I am investing in something that is well established and can provide that dividend income stream. And if I have an emergency, I’ll be able to liquidate my position – and there’s an actual buyer on the other side, who is able to purchase my shares when I’m ready to get out of this position,” she said.
Yergens acknowledged that liquidity on Willow is currently constrained but said the company is working to scale up and buy more buildings to bolster its marketplace.
“With us, you set the minimum and maximum you’re willing to pay or sell for, you submit that order, you can see all of the other available orders. And that order may not be filled immediately, but we’re trying to add as much liquidity as possible, and we’re acting as a market maker ourselves to facilitate that,” he said.
“I’m not going to say we’re going to be as liquid as Apple trading on the [Nasdaq] but we’re also a lot more liquid than buying a building at Queen [Street] and Spadina [Avenue] yourself,” Yergens added.
REITs typically also give an investor exposure to multiple properties compared to apps such as Willow, which have a small number of buildings on their platform so far.
“My biggest issue with any of these property websites […] is quite often you’re only investing in one or two properties. So they can show you the numbers that say that it’ll generate income or you’re expected to make X amount. It may or may not happen and more importantly, you’re only buying one or two things,” said Barry Choi, a personal finance expert at moneywehave.com, in a phone interview.
“Whereas if you’re purchasing a REIT, you have access to a company that manages multiple properties, and when I say multiple, I mean possibly hundreds of properties. So it’s really about diversifying your portfolio and that applies to anything you’re investing in, not just real estate.”
Choi said alternative real estate investment apps are likely best suited for investors who want to invest a minimal amount or simply want to diversify their existing portfolio.
“I don’t think people are investing in these kinds of websites to get rich quick. That said, there is a potential higher return than a high interest savings account, so it might be worth that risk. It really depends on the individual investor,” he said.
For those considering using such a platform, Williams said to conduct due diligence and ask questions such as whether the company is regulated, whether they’re an exempt market dealer, what type of leverage they’re using to purchase properties and what positions company management might have in the buildings.
“It’s really a matter of going through all of this and making sure that the deal makes sense, and you’re also protected as an investor,” she said.