Investors have flocked to index funds for stocks and bonds over the last decade or two, and I’ve been on board, having most of my portfolio in these index funds.
I’ve also owned more than my share of residential real estate, and while I haven’t bought homes primarily as an investment, many an investor has done well with single family rental properties.
Republic Real Estate has put together funds that combine elements of both, focusing on specific target markets and investing in both single family rentals and homeshares (fractional ownership on owner-occupied homes). These Cityfunds could be an excellent way to gain passive exposure to the residential real estate market in a city you believe has a strong future.
The following article introducing the concept and investment product was written by Jesse Stein of Republic Real Estate. For disclosure, I receive no compensation for any referrals and am not paid for publishing the article below, but I have invested with Republic Real Estate and am a shareholder in Republic.co.
Thematic investing is an approach which focuses on predicted long-term trends and macroeconomic impacts. One of the drivers of thematic investment has been the success of the ETF industry. There are more than 6,000 ETFs listed today because investors want to be able to allocate capital to specific strategies, whether sector-based, size-based, geographically-based, or factor-based.
Ever since Princeton University’s Burton Malkiel published his book “A Random Walk Down Wall Street” in 1972 and Vanguard’s first passive index fund (1976), the debate between active and passive investment strategies has been at the core of financial services investment products. Active managers, such as mutual fund and hedge fund managers, make the case that by selecting specific investments, they can outperform a benchmark index. On the other hand, passive management products try to simply match the returns of a benchmark index, often at lower cost.
Over the past decade, more than three trillion dollars have flowed to passive equity investing strategies. According to Morningstar, passive funds now hold more than 50% of investment assets.
Investors are attracted to low fees, more liquid products, better diversification, but also outperformance. According to Morngistar, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons; only 23% of all active funds topped the average of their passive rivals over the 10-year period ended December 2020.
Passive Investing has proven to be the winner in the equities space.
But what about real estate?
Real estate investors have yet to adopt passive strategies within real estate primarily because the products have not yet been created and while the powers that be within the industry will defend active management all day long, we’re confident that enhanced transparency and evaluation will lead to the same result as other asset classes.
Introducing Cityfunds: index-like, single-city real estate investment funds
Nada, a digital real estate investment and technology platform, is currently enjoying a wildly successful campaign on Republic’s retail platform. They recently partnered up with Republic Real Estate to create an innovative solution for investors wishing to invest in hard-to-reach, burgeoning real estate markets across the US. The result is a new real estate investment product called a Cityfund.
What is a Cityfund?
A Cityfund is similar to an index fund in that it provides targeted exposure to a city’s residential real estate market. Each Cityfund intends to acquire and manage a portfolio of single-family residential real estate assets (SFRs) in a specific market that offer compelling values with the potential for significant appreciation.
Cityfunds was inspired by the transformational success of actively managed mutual funds and passively managed ETFs in the equities markets. Cityfunds are designed after the latter’s “passive” approach to investing, where the Cityfund’s performance mirrors a market index.
This passive management style typically carries less fees, since returns are driven more by movements in the underlying markets than by the fund manager’s investment decisions. Republic and Nada believe that the real estate investment industry will be next in adopting these principles.
Who would invest in a Cityfund?
To use an example from the equity world, let’s say you want to invest in global clean energy stocks because you believe this industry presents a solid opportunity for future growth. However, you don’t know much about the space and you aren’t too confident in your stock picking skills.
In this case, a thematic investment (like an ETF) that tracks an index of global clean energy stocks might be a great fit for you. Instead of going it alone, you trust an indexed methodology that provides diversified exposure to the sector within a single investment, in exchange for a small fee.
A Cityfund’s approach is much the same—Nada and Republic Real Estate strategically acquire residential properties in a specific real estate market, allowing for targeted, thematic exposure. This approach, coupled with Cityfunds’ plan to create investment opportunities for all investor types (accredited and non-accredited), enables the Cityfund to be more desirable, familiar, and accessible to all thematic investors. The minimum investment in these funds is $500.
The contention is that thriving real estate markets are efficient enough to perform on their own, and the vast majority of people shouldn’t have to overpay for actively managed real estate investments.
How is a Cityfund Built?
Cityfunds invests in single family residential real estate using two strategies:
- Buy and Rent – Cityfunds acquires single-family homes with the purpose of renting the property. The Cityfund realizes a return from rental income and appreciation over time as the home increases in value.
- Homeshares – Homeshare investments are made into owner-occupied homes whereby the Cityfund provides an upfront payment in exchange for a share of the home’s future appreciated value, representing fractional ownership. The Cityfund generates unrealized returns as the home appreciates in value. Cash returns are realized when the homeowner takes certain actions, such as:
- selling their entire home
- refinancing their mortgage
The combination of these strategies allow each Cityfund to develop a sizable portfolio within a given market while limiting the amount of property management required to support the portfolio.
Structured as LLCs, Cityfunds pass through depreciation to its members.
Cityfunds deliver enhanced transparency
The Nada Portfolio Manager app is fully integrated with Cityfunds and designed to provide investors with a transparent and seamless experience. Investors receive real-time alerts for new acquisitions, valuation updates and current news on Cityfunds.
How are Cityfunds managed?
Cityfunds are managed through a joint venture between Republic Real Estate and Nada Asset Management (Nada platform).
Republic Real Estate is the tech-enabled real estate investment vertical of Republic led by Jesse Stein. Jesse has 20+ years of industry experience and has been involved in multiple real estate public offerings and over $1B of real estate transactions.
Nada is a vertically integrated real estate services & technology company that offers residential realty, insurance, title, and financial services to retail consumers and real estate investors—making real estate ownership more accessible and affordable for everyone. Led by a team with 30+ yrs experience in real estate and financial services, 20+ years of investment experience managing $1B+ in assets.
Cityfunds pay the management company a 1.5% annual management fee. There are no promotes or incentive fees charged by the management company. Investors receive 100% of the net returns.
What is Cityfunds’ acquisition process?
Single-Family Rentals (“SFR”s)
Nada leverages its boots-on-the-ground real estate team and market experience to source opportunistic property acquisitions. Acquisitions are targeted in single cities and their emerging fringe markets.
Investment considerations include attributes such as high rental yield forecasts, attractive school districts, and light renovation costs. SFR properties are acquired at a target gross yield of 8 – 12%.
Tenant placement is handled by Nada Realty’s real estate sales team, while property management services are handled by third party service providers, also managed by Nada.
Single-Family Equity Investments (“Homeshares”)
Homeshare investments are made directly by Nada and sourced through their network of licensed real estate agents and direct-to-consumer marketing channels.
Homeshare investments allow the homeowner to retain the majority equity share of their home. This helps to naturally align them with investors, who share the same goal of increasing the value of the property.
Benefits for homeowners
Homeshares offers liquidity and diversification for homeowners by converting fractional interest of their home equity into cash at a discount to the home’s current market value.
Benefits for investors
For investors, homeshares unlocks a new way to invest in high-growth markets with limited inventory. Homeowners in these markets are often equity rich and less inclined to sell their entire home, which helps maintain the fund’s passive strategy.
Cityfunds are designed to provide returns that are related to the home-price appreciation of a specific market. While management is focused on sourcing acquisitions that have the potential for capital appreciation, the market will ultimately determine returns.
Based on recent historical and assumed continuing home-price appreciation, Cityfunds expects both single-family rental acquisitions as well as Homeshare investments to generate annual internal rates of return (“IRR”) of between 12% and 15% over a 7-year period.
Cityfunds intend to pay dividends twice per year using cash flow derived from rental income, Homeshare repayment, and the sale of wholly owned properties. Dividend yields excluding distributions made from the repayment of Homeshares or the sale of properties is expected to be consistent with publicly traded SFR REITS.
Cityfunds plans to scale into additional markets across the country as new opportunities arise, providing even more opportunities for investors around the world to take part in owning a piece of the US.
How to learn more and invest in Cityfunds
If you are interested in learning more about investing in the Cityfunds that are now live on Republic, click the links below. The minimum investment has been lowered to $500 and the funds are open to all investors (accredited and non-accredited).
What questions do you have about Cityfunds? Ask in the comment box below!