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Why is investing in real estate so hard?

Written by: 
Yishai Cohen
“Buy land, they’re not making it anymore.”

-Mark Twain

When Amit and I founded Landa, we were inspired by these words from almost a century ago, but also knew that Twain’s advice is not as simple as it sounds.

Before we founded Landa, we tried to buy an investment rental property, but our experience was awful. We were overwhelmed by the time and energy that goes into sourcing, financing, buying, renovating, managing, and selling a property. We saw an industry that is broken, unfair, and inaccessible.

Our generation has seen inflated housing prices, financial crises, increased college debt, and job instability. We are eager to take the reins on our financial future. Real estate ownership is the biggest source of wealth generation but it is out of reach to most Americans. As housing inequality grows, so does wealth inequality, and property ownership remains inaccessible for families, generation after generation. Amit and I started to brainstorm a way to lower the barriers to real estate investment and provide more people with the ability to access an asset that has historically been available only to a privileged few. We decided to build Landa as a platform to provide a simple, convenient and affordable way for everyday people to invest in real estate.

Why Real Estate?

Many of us invest in real estate, whether we realize it or not. We may have retirement funds, insurance policies, or savings accounts, which are usually heavily invested in real estate. Yet, only 7% of Americans own rental property, based on rental income reported on tax returns.

If our top-tier financial institutions believe that real estate is a good investment, why don’t more people invest directly themselves? In short: it’s too complicated and prohibitively expensive. The traditional journey of buying and renting property is daunting, intimidating and inaccessible. Only people with the capital, network, time, knowledge, credit, and access to good deals have opportunities to invest directly in real estate properties.

REITs = Dilution

People seeking real estate as an investment can already invest in real estate investment trusts. REITs own and operate income-producing real estate properties. The concept sounds great: No headaches. No maintenance. All money. In reality, the return on those investments can be significantly diluted. Why? In a word: fees. Many of them.

A typical institutional real estate investment will incur:

  • Property management fee
  • Acquisition fee
  • Broker fee
  • Disposition fee
  • Leasing fee
  • Asset management fee
  • Legal fee
  • Sponsor fee/success fee
  • Onboarding fee
  • Eviction fee
  • Construction fee

These fees amount to overpaying financial institutions to manage our real estate investments. The fee structure is so complicated that investors can’t track the actual fees that they pay. And when you don’t know how much you’re paying, you’re probably paying way too much.

The REIT portfolio can do well, collect rental income, and appreciate in value, but net minimal returns to the individual investor. Why? The property management company will take a portion of the fund rental income (a fee for leasing, and fees for eviction, renovation, marketing, etc.), then the REIT will usually take 20% of the profits, an acquisition fee (1%-2% of the purchase price), property management fees (8% of gross rent), disposition fees (1%-2% of the sale), and asset management fees (1% of the assets under management). On top of that, a whole host of other institutions can cut their own fees — insurance companies, retirement funds, hedge funds, and so on. By the time the investment’s return makes its way back to you, it has shrunk many times over.

Build your empire in real estate, share by share.

A $50,000 investment, with a 7% return compounded over 40 years will result in $748,723. Imagine a 12% return you could get without all those middlemen. That would give you $4,652,549. That vast gap in returns is the difference between entering as a fourth-hand investor and directly owning the rental property.

We looked for ways to solve the real estate investment problem and asked ourselves:

How can we provide a real, equal investment opportunity to anyone who wants to participate?

Providing access to real estate is a life-changing moment for those who were left out.

Landa is built on the following core principles:

Access. Each rental property offers an economic interest (or shares) that investors can purchase for as little as $5 per share, creating an affordable starting point for online real estate investing. Investors who purchase these shares receive their portion of the property’s profit (based on performance). We designed a mobile app that makes it easy to browse properties and invest. We use clear language and a user interface that is inclusive, inviting, and educational.

Liquidity. A property can take months (or years) to sell. We decided to turn real estate properties into securities, allowing investors to conveniently buy and sell their shares.

Reduced Costs. By investing in shares, investors can avoid the costs of typical real estate ownership transfer (no brokers, closing attorneys, or title companies to pay). We use technology to make day-to-day property management more efficient, and use economies of scale to reduce costs (insurance, maintenance, improvements, etc.). We internalized the sourcing, acquisition, and property management of the properties. Currently, we take an acquisition fee of 6% and a property management fee of 8% of gross rental income, period. The acquisition fee replaces the costs of traditional real estate transactions, and allows us to source, buy, file the properties and list the investments in the app. By overseeing the property management ourselves, we can use technology to build a great experience for our residents, which translates to revenue for investors.

Tech. We embrace a tech-first approach to our entire business. For every challenge that we have (real estate, legal, accounting, operations), our first call is to hire another engineer rather than another operations person. We evaluate and select properties using data analysis models. We analyze market data to empower our investor community, increasing yields while reducing vacancies. Our residents use a custom-built app to make rent payments, request maintenance, renew leases, etc.

Through these combined efforts, we offer an inviting, empowering, and supportive investing experience to anyone who wants to participate. Real estate investing for everyone. That’s the future of equal opportunity that we want to live in — together with you.

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