‘Have that safety net’: Experts look at alternative real estate investment apps

With house prices increasingly out of reach, some Canadians are looking to other investment options to gain exposure to the residential and commercial real estate sector.

This phenomenon has spawned various apps such as Willow and addy, which use crowdfunding models to give customers access to commercial real estate they might not otherwise have access to.

While these apps provide the real estate exposure that many young people want, they also come with their own set of risks.

“It’s an interesting space,” Zainab Williams, a financial planner with financial advisory firm Elleverity, said in a phone interview.

“For Millennials and Gen Z trying to get into investment properties, but [who] don’t have the actual funds to buy an investment, like a house or building, it gives them the opportunity to share the risk with others.

Willow launched on January 31 as Canada’s first regulated real estate investment platform and offers a fixed number of 100,000 units each in two properties in Ontario. It has received approval from the Ontario Securities Commission to operate as an exempt market dealer and presents itself as an alternative option to traditional real estate investment trusts (REITs).

Willow CEO and co-founder Logan Yergens said one of the great appeals of the app is that the investor has more control.

“With a REIT, you buy a collection of properties managed by someone else. You don’t know what properties you are investing in, your returns are averaged across the entire pool of properties, with REIT recognition rules they must constantly redeploy capital regardless of attractiveness. What we offer is the ability to buy a portion of a property that you can actually see and get to know,” he said in a phone interview.

Willow offers a limit order market and is a market maker, meaning it has the ability to step in and enhance liquidity when it deems necessary. Clients must meet suitability requirements and receive regular financial information about the property in which they are investing.

But it’s liquidity risk that Williams said investors need to be aware of.

“It’s really important to understand exactly what you’re investing in and what exactly you’re investing in because getting that money out – that’s usually the main concern for a lot of people,” she said. “If you’re a person looking for the liquidity to withdraw cash in an emergency, that becomes problematic.”

For some investors who feel they might need access to those funds on the fly, 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 stream of dividend income. And if I have an emergency, I can liquidate my position — and there’s a real buyer on the other side, who can buy my shares when I’m ready to exit that position,” she said.

Yergens acknowledged that liquidity on Willow is currently limited, but said the company is working to expand and buy more buildings to strengthen its market.

“With us you set the minimum and maximum you are willing to pay or sell, you submit this order, you can see all other available orders. And this order may not be executed immediately, but we try to add as much liquidity as possible, and we act 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 are also much more liquid than buying a building in Queen [Street] and Spadine [Avenue] yourself,” Yergens added.

REITs typically also give an investor exposure to multiple properties compared to apps like Willow, which have a small number of buildings on their platform so far.

“My biggest issue with any of these real estate websites […] is often that you only invest in one or two properties. So they can show you the numbers that say it will generate revenue or you are expected to earn X amount. It may or may not happen and more importantly you only buy one or two things,” said Barry Choi, personal finance expert at moneywehave.com, in a phone interview.

“Whereas if you buy a REIT, you get access to a company that manages multiple properties, and when I say multiple, I mean maybe hundreds of properties. So it’s really about diversifying your portfolio and that applies to everything you invest in, not just real estate.

Choi said alternative real estate investment apps are probably best suited to investors who want to invest a minimal amount or simply want to diversify their existing portfolio.

“I don’t think people invest in these kinds of get-rich-quick websites. That said, there’s a higher potential return than a high-interest savings account, so it might be worth the risk. It really depends on the individual investor,” he said.

For those considering using such a platform, Williams said to do your due diligence and ask questions such as whether the company is regulated, whether it is an exempt market broker , what kind of leverage they use to buy properties, and what positions company management might have in buildings.

“It’s really about going through it all and making sure the deal makes sense, and that you’re protected as an investor as well,” she said.