REAL ESTATE INVESTOR REPORT Trends, Insights, And Opportunities For .
REAL ESTATE INVESTOR REPORT Trends, insights, and opportunities for real estate investment managers
appfolioinvestmentmanagement.com
A letter from Nat Kunes, Senior Vice President of AppFolio Investment Management To gain insight into the relationships that real estate investors have with their investment management companies, their goals, and their concerns about the industry, our team at AppFolio Investment Management surveyed 102 individual real estate investors in the United States. We conducted a similar survey in 2019, and after seeing the dramatic changes the industry has experienced since then, we wanted to survey the real estate investing market once again to get an understanding of how these industry impacts affected investor sentiment and concerns. Overall, we’re seeing that investors are optimistic and opportunistic about their real estate investments, and close to half plan to increase their real estate holdings over the next few years. At the same time, investors’ expectations of their investment managers are rapidly changing and there is work to be done to meet these needs, particularly with younger investors entering the market. The information in this report is meant to help you build strategies to assist current clients better and gain new ones. One of my takeaways from these findings is that we have entered a new frontier in investor relationship management; investors are more tech-savvy and eager for information than they have ever been. There is great opportunity for investment managers to leverage technology to impress investors and exceed their expectations. Read on for more detailed information about the current state of real estate investors and the opportunities you have to upgrade the investor experience. Nat Kunes Nat Kunes Senior Vice President, AppFolio Investment Management Trends, insights, and opportunities for real estate investment managers 1
Survey methodology This survey was given to 102 real estate investor participants, was administered over the internet and took an average of 15 minutes to complete. Respondents filled out their observations and opinions between March 23rd and April 19th, 2021. The sample was diverse, and included individuals with different backgrounds, levels of expertise in the industry, investment amount, age, and region. For deeper insights, this report will include additional views split by investor age ranges (18-44 and 45 ) and investor net worth ( 5M and 5M ). In 2019, we surveyed 101 real estate investors with the same criteria, and a majority of the same questions were asked. Certain question results will reference and compare to this 2019 data, to demonstrate evolutions in investor sentiment. All survey participants met the following qualifications: Some part of their portfolio is invested in real estate. Have a personal income of 200k or more or a household income of 300k or more. Have a net worth of 1M or more. Have at least 25k invested in real estate. Receive a K-1 or 1099-DIV/INT tax form from their real estate investment management firm. 2 appfolioinvestmentmanagement.com
Table of contents A profile of today’s real estate investor Investor sentiment and concerns 04 19 Investor knowledge and tools 26 How investors view investment management companies 34 Conclusion 52 Trends, insights, and opportunities for real estate investment managers 3
A profile of today’s real estate investor Investors favor real estate for its growth potential. Today’s real estate investor remains optimistic about their real estate investments. Investors hold on average 2.2 types of real estate investments, with the two most popular choices being direct purchase and owning real estate and real estate investment trusts (REITs). Investors increased the real estate portion of their portfolio from 2019; they like local and national investments and have an average holding time of four years. Additionally, most investors considered themselves to have some experience with real estate investing. Splitting the data by age, the 18–44 age group of investors were more interested in short-term performance, while the 45 group opted for long-run performance. Investors favor Core/Core Plus and Value-Add strategies. They are most interested in their ROI when viewing existing and potential opportunities. From today’s investor, it is apparent that real estate investment managers need to look for strategies that will satisfy the needs of new and seasoned investors. Investment managers also need to look for ways to get information and educational materials to clients at their convenience. 4 appfolioinvestmentmanagement.com
What % of your investment capital is allocated in the following: 29% Stock Market Older (45 ) investors have more capital in stock market 39% 26% Real Estate 19% 401k 9% 6% Venture Capital 6% Hedge Funds 5% Other Cryptocurrency Younger investors have more money in venture capital 16%, cryptocurrency 12%, and hedge funds 12% Where is your investment capital allocated? Real estate investors have 26% of their portfolios invested in real estate. Compared to 2019 data, real estate allocations rose about 3%, while stock allocations dropped about 6%. This data shows that investors followed through 3% Compared to 2019 data, real estate allocations rose about 3%. with their 2019 plans to increase their real estate allocations. Older investors tended to have larger allocations in the stock market, while younger investors are more open to alternative types of investing such as venture capital, cryptocurrency, and hedge funds. 6% Compared to 2019 data, stock allocations dropped about 6%. Overall, real estate investors favor real estate investments over all other types surveyed aside from stocks. Younger investors are more likely to branch out and invest in non-traditional products. This means that the next generation of investors are educating themselves and looking for new ways to grow their money. These investors will benefit from real estate investment managers that are well versed in what they do and offer innovative ways to self-educate and track their investments. Trends, insights, and opportunities for real estate investment managers 5
What vehicles do you use to invest in real estate? Direct purchase and own real estate 78% Real estate investment trusts (REIT’s) 48% Real estate investment funds 35% Real estate exchangetraded funds (ETF’s) 30% Real estate syndications Other 19% 6% Driven by young investors (18-44) 78% 78% of respondents hold physical real estate that they have purchased themselves, including their primary residence. What vehicles do you use to invest in real estate? 78% of respondents hold physical real estate that they have purchased themselves, including their primary residence. The most favored secondary vehicle for real estate investing is REITs. Interestingly, real estate investment funds, real estate ETFs, and real estate syndication investing strategies are driven by the 18–44 investor group. Again, pointing to newer investors taking it upon themselves to learn about different investing techniques and being open to branching out. 6 appfolioinvestmentmanagement.com
How much money do you invest across all of your real estate investments? 99K 100K- 249K 3% 8% 250K- 499K 22% 500K- 999K 22% 1M or more 46% How much money do you invest across all of your real estate investments? The total amount of capital invested in real estate investments averaged 835k for all respondents. Respondents with a net worth over 5 million have almost twice the amount of capital invested in real estate as those with a lower net worth. The 18–44 group’s average total capital investment is 20% lower than the 45 group. In combination with the data from the first two questions, this data indicates that newer investor portfolios are less mature than the 45 group. As a result, portfolios in the 18–44 group are more likely to be contributed to for longer. 2x Respondents with a net worth over 5 million have almost twice the amount of capital invested in real estate as those with a lower net worth. 20% The 18–44 group’s average total capital investment is 20% lower than the 45 group. Real estate investment managers should be looking for new ways to capture investment contributions and new investor money coming into this investing sector. Trends, insights, and opportunities for real estate investment managers 7
Which of the following is the best description of your overall investment strategy? I seek bargains – investment opportunities that are currently undervalued 13% 19% 68% I prefer passive management investment strategies 84% Increase in those that see themselves as value investors. I seek opportunities that promise substantial growth regardless of their current price and performance Which of the following is the best description of your overall investment strategy? Respondent’s investment strategies lean heavily to growth as they had in 2019. In 2021, investor appetite for aggressive growth strategies dropped by only 7%, showing that investors continue to prefer taking on risks for future returns. On the other hand, there was an 84% increase in those that see themselves as value investors. Real estate investment managers can use this information to appeal to all groups by seeking investment avenues offering growth and value. 8 appfolioinvestmentmanagement.com
When investing in real estate, what are your preferred property types? (check all that apply) 77% Residential (Net) 54% Single-family residential 45% Multi-family residential 35% Land 30% Office Industrial / Warehouse 24% Retail 24% 17% Self-storage 15% Hospitality Other 5% Higher among 18-44 year olds; single-family (69%) & multi-family (60%) When investing in real estate, what are your preferred property types? (check all that apply) When it came to physical property investment, single-family residential was 2.5 On average, investors invest in 2.5 types of properties. the most popular choice potentially because it included respondents’ primary residences. Close to half of investors (45%) are invested in multifamily residential properties, followed by land, office, industrial, retail, self-storage, hospitality, and others. The 18–44 group tended to invest more heavily in residential properties than 45% 45% invested in multifamily residential properties. other property types. This could be because of the amount of money required to invest in other types of properties, the complexity involved with getting into and owning these properties, and the general knowledge of their real estate investment manager. When it comes to real estate investing, investors know what they want and have clear preferences: on average investors invest in 2.5 types of properties. Trends, insights, and opportunities for real estate investment managers 9
What is your preferred investment hold period? 21% 10 years 14% 6-10 years 23% 3-5 years 15% 24-35 months 14% 23 months 15% Sell any time 3-5 yrs Respondents report preferring to hold their investments for 3-5 years. Older (45 ) investors have an average holding time of 6.5 years Younger (18-44) investors have an average holding time of 3 years What is your preferred investment hold period? Respondents report preferring to hold their investments for 3-5 years, closely followed by 10 or more years, with an average of 4.8 years. The 45 group tended to hold for longer than the 18–44 group. The difference in holding time between the two groups indicates that the 18–44 group may do more 4.8 yrs self-directed investing and might be more flexible in their investment choices. The average investment holding time is 4.8 years. 10 appfolioinvestmentmanagement.com
How would you describe your level of experience in real estate investing? 11% New 59% 30% Some Seasoned 18-44 (n 48) 45 (n 45) 5M (n 57) 5M (n 45) I am new to it 17% 6% 9% 13% I have some experience 48% 69% 65% 51% I am a seasoned real estate investor 35% 26% 26% 36% Indicates significant differences at 95% confidence level How would you describe your level of experience in real estate investing? The majority of real estate investors consider themselves to have some experience in real estate investing. This data begins to tell us that investors rely on information from their real estate investment managers to make a decision. Real estate investment managers that make it easy for their clients to access information about available products will be the best equipped to serve the majority of today’s investors. Trends, insights, and opportunities for real estate investment managers 11
What is your primary reason for investing in real estate? 2021 28% 2019 Expectation of market-beating performance in the long run 46% 27% 20% Expectation of market-beating performance in the long run 33% Portfolio diversification 33% Expectation of superior performance in the short run 15% Stable low-risk performance 9% Tax-based incentives 28% In 2019, 46.5% of investors were in real estate for market-beating performance in the long run; in 2021, that number has dropped to 28%. 11% Portfolio diversification Expectation of superior performance in the short run 2% Stable low-risk performance 7% Tax-based incentives 1% Other What is your primary reason for investing in real estate? This data shifted significantly from 2019. In 2019, 46% of investors were in real estate for market-beating performance in the long run; in 2021, that number has dropped to 28%. The number of people investing in real estate for portfolio diversification also dropped 6%. 9% more people are investing in real estate for short-term returns and 13% more investors are in real estate for its stable lowrisk performance. This data expands on the question asked about investment strategies, and how more investors are seeking value investments in 2021. Overall, investors have a positive outlook on their real estate investments and are aggressive. However it should be noted that they are beginning to show signs of caution in their reasoning and strategies behind real estate investing. 12 appfolioinvestmentmanagement.com
What’s most important for you to consider when assessing a real estate investment? Data split by net worth Asset location 51%, 47% Cash-on-cash return percentage 49%, 42% IRR (Internal Rate of Return) 47%, 38% Minimum investment amount 46%, 33% Sponsor experience and knowledge 32%, 40% 30%, 33% Holding period 28%, 29% Management fees 18%, 38% Asset class Under 5M 5M Indicates significant differences at 95% confidence level What’s most important for you to consider when assessing a real estate investment? #1 Asset location The top two most important factors for all net worth levels were asset allocation and cash-on-cash return percentage. Sponsor experience and knowledge was also important for those with a net worth of 5M , and those under 5M valued internal rate of return. This data says that investors want investment products that fit their needs #2 Cash-on-cash return percentage and budgets. Trends, insights, and opportunities for real estate investment managers 13
Which of the following strategies do you prefer when investing in real estate? 60% 51% Core/Core Plus Stabilized, performing asset 36% Value-Add Capital improvement projects Opportunistic New construction 18-44 45 5M 5M Growth Investor Index Investor Value Investor Core/Core Plus 56% 63% 63% 56% 67% 39% 47% Value-Add 71% 33% 58% 42% 52% 46% 53% Opportunistic 54% 20% 44% 27% 45% 23% 16% Which of the following strategies do you prefer when investing in real estate? Investors favor Core/Core Plus and Value-Add strategies when investing in real estate. Overall, investors prefer to put their money into the Core/Core Plus group, indicating that investors prefer to put their money into assets already performing well. 14 appfolioinvestmentmanagement.com
What is your strategy for the geographic location of your investments? 2021 - Split by Net Worth 60% 60% 60% Nationwide 52% 53% 51% Local 23% 23% 22% International No geographic preferences 8% 5% 11% Total Under 5M 5M What is your strategy for the geographic location of your investments? Split by net worth Investors don’t always keep their portfolio local; some investors are willing to diversify their holdings by investing in multiple locations. Investors hold parts of their portfolio locally, nationally, and internationally. Trends, insights, and opportunities for real estate investment managers 15
What is your strategy for the geographic location of your investments? 2021 - Split by Growth/Value/Index Investor Nationwide Local 39% 20% International No geographic preferences 67% 46% 7% 8% 54% 53% 39% 11% Growth Index Value What is your strategy for the geographic location of your investments? Split by Growth/Value/Index Investor When layering this data over the results of the previous question, “Which of the following is the best description of your overall investment strategy,” we found that growth-minded investors are more inclined to invest nationwide, while value investors are more interested in local markets. 16 appfolioinvestmentmanagement.com
What is your strategy for the geographic location of your investments? 2019 - Total Local 36.6% Nationwide 36.6% 17.8% Local & nationwide 4% No preference Specific non-local 3% What is your strategy for the geographic location of your investments? Data collected in 2019 Looking at the data from 2019, it is apparent that investors today are more willing to branch out from their local investments and internationally. For real estate investment managers, knowing markets outside your locality will help to serve the interests of new investors. Trends, insights, and opportunities for real estate investment managers 17
What metrics are important to you when evaluating potential opportunities, and which are important when evaluating existing investments? 5M Return on investment (ROI) 5M 58% 56% Internal Rate of Return (IRR) 53% 47% 39% 48% Capitalization rate (Cap Rate) 36% 28% Cash-on-cash return (CCR) 35% 32% Time-weighted return (TWR) 26% 23% Equity multiple (EM) 25% 26% 44% 33% 40% 54% 40% 42% 31% 20% 40% 37% 18% 32% 28% 29% 18% 22% 28% 28% Indicates significant differences at 95% confidence level Return on investment was the most important for both net worth groups. 64% 67% 20% 16% Potential investments Existing investments What metrics are important to you when evaluating potential opportunities, and which are important when evaluating existing investments? Investors are most concerned with their return on investment, followed by Internal Rate of Return, capitalization rates, and cash-on-cash return. Return on investment was the most important for both net worth groups, making a return on investment the most important metric to investors. 18 appfolioinvestmentmanagement.com
Investor sentiment and concerns Investors are optimistic and opportunistic. Most investors surveyed see that “the market is hot,” “there is money to be made,” and plan to increase their real estate investment holdings over the next few years. They are overall positive about their investments and are concerned about the political environment and being sure they are up-to-date with current trends and events. Surprisingly, 2020’s events have not deterred investors from real estate investing or caused them to change strategies. Investors were also pleased with how their investment managers handled the time of uncertainty. Overall, investors like their real estate investments. Investors are looking for advisors that can help keep them up-to-date and give them new investing ideas that fit with the ideals they want to uphold. Trends, insights, and opportunities for real estate investment managers 19
Do you plan to increase, decrease, or maintain your real estate investments in the next few years? 55% 39% 6% 55% 55% of investors plan to increase their real estate holdings in the next three years. “Lately, I have made good money and I would like to widen my investments.” “I will continue increasing for as long as there is money to be made.” “The market is hot and will only grow.” “Equity markets are over-valued.” “I do not want to overextend myself financially and I want to grow my current holdings closely.” “I see no need to change; what I do is working for me.” Increase investments Maintain investments Decrease investments Do you plan to increase, decrease, or maintain your real estate investments in the next few years, and please explain why. 55% of investors plan to increase their real estate holdings in the next three years; 12% more investors plan to increase their real estate holdings in 2021 compared to 2019. Only 6% of investors reported that they plan to decrease their allocations to real estate, indicating that investors look at their real 12% 12% more investors plan to increase their real estate holdings in 2021 compared to 2019. estate investments favorably and plan to increase allocations when they see opportunities. This information denotes that investors are generally open to investing more and would be more likely to do so with the appropriate information from their real estate investment manager. 6% Only 6% of investors reported that they plan to decrease their allocations to real estate. 20 appfolioinvestmentmanagement.com
Looking at the next 6-12 months, how do you feel about the following issues? Pessimistic (1) Neutral (2) Outlook for the domestic economy Optimistic (3) 2.3 Outlook for the real estate market 2.5 Interest rates 2.1 Changes in real estate laws & regulations 2.1 Availability of attractive real estate invest deals Political landscape 2.3 2.0 Performance of my real estate investments Security of my personal information and data 2.6 2.2 Looking at the next 6-12 months, how do you feel about the following issues? Investors are more upbeat about their investment performance and the real estate market, and least about the political landscape. The 18-44 group, those with a lower net worth ( 5M), and smaller investors ( 1M) are more optimistic than their counterparts. The positive outlook on the real estate market, domestic economy, and investment performance are consistent with the 2019 survey data. Conversely, since 2019 investors have gotten more positive about changes in RE laws and regulations and their personal information and data security. Trends, insights, and opportunities for real estate investment managers 21
In your opinion, what is the major opportunity for real estate investors today? “Warehouses “Warehouses serving“Adaptive strong local markets, reuse “Cash strapped especially those focusing on immediate delivery” entities / serving strong of unwanted foreclosed local markets, retail, hotel and “Adaptive retail, properties — especiallyreuse those of unwanted office space and hotel andon office space and industrial entities where focusing industrial real real estate.” owners want immediate estate.” “Cash strapped entities / foreclosed properties.” out.” delivery.” “Entities where owners want out.” “People moving from big cities — suburbs, Midwest homes, single-family homes.” “Peoples moving from big cities.” “Suburbs.” “Midwest homes.” “Single-family homes.” In your opinion, what is the major opportunity for real estate investors today? Respondents shared that they are aware of urban flight, the need for warehouses, unwanted retail space, and foreclosures and are looking for ways to capitalize on these trend changes. 22 appfolioinvestmentmanagement.com
For you as a real estate investor, which of the following tasks presents the biggest challenge? Total Investors 18-44 45 5M 5M Staying up-to-date with the industry trends 43% 63% 26% 47% 38% Keeping track of my investment performance 35% 54% 19% 42% 27% Having access to information about my investments 32% 58% 9% 35% 29% Finding an investment manager to invest with 28% 48% 11% 35% 20% 3% - 6% 2% 4% 27% 8% 43% 21% 33% Biggest Challenges Other None of the tasks are challenging Indicates significant differences at 95% confidence level For you as a real estate investor, which of the following tasks presents the biggest challenge? 2019 Data Staying up to date with industry trends is the biggest challenge for real estate investors. Additionally, accessing information about their investments, including investment performance, has been challenging. The 18–44 group reported that staying up-to-date on trends was their biggest challenge, while the 45 group reported no significant challenges. Interestingly, the 18–44 group was also more concerned with keeping track of their investments, having access to information, and finding an investment manager to work with than the rest of the groups. The 18–44 group is most concerned with the information they have access to and choosing the right person to supply that to them. The overall sentiment shifted from finding an investment manager in 2019 to staying up-to-date, indicating that more real estate investment firms are entering the market, making the access that your clients have to information paramount. 31% Finding a good investment manager 27% Staying up-to-date with industry trends 23% Keeping track of my investment’s performance 10% Having access to information about my investments 8% None of the tasks are challenging Trends, insights, and opportunities for real estate investment managers 23
What do you think is the biggest challenge when investing in real estate today? Regulations “Banking equity requirements and regulations.” Economy “Uncertainty of the economy.” COVID-19 “COVID-19 virus making rent hard to collect in some areas.” Availability “Finding good, long-term tenants / good properties.” What do you think is the biggest challenge when investing in real estate today? The major challenges seen by respondents include regulations and equity requirements, economic uncertainty, finding responsible long-term tenants and good properties, and the changes COVID-19 has brought about. The responses show that most real estate investors are active and doing their best to stay upto-date with the market and trends. 24 appfolioinvestmentmanagement.com
What changes are you making to your real estate investment strategy in response to COVID-19 in the upcoming year? Most investors said: “No changes made / None planned” Some said: “Invested more in real estate” What changes are you making to your real estate investment strategy in response to COVID-19 in the upcoming year? The overwhelming response was that investors planned to make no changes, and some investors invested more in real estate. Investors see the changes COVID-19 has brought about as transitory and are not changing their plans. Trends, insights, and opportunities for real estate investment managers 25
Investor knowledge and tools While it varies by age, investors understand the importance of technology and trends in real estate. 64% 64% of investors reported being knowledgeable about opportunity zone investing. The survey found that the 18–44 group is more open to alternative types of investing, including blockchain. This group was also more concerned about how their investments fit into ESG (Environmental-Social-Governance) criteria and reported understanding opportunity zone investing. 64% of investors reported being knowledgeable about opportunity zone investing. 27% of them reported being invested in opportunity zones and are ESG 18–44 group is more open to alternative types of investing, including blockchain. This group was also more concerned about how their investments fit into ESG (EnvironmentalSocial-Governance) criteria and reported understanding opportunity zone investing. experiencing favorable performance. This indicates that real estate trends like these could influence investing strategies for all age groups and especially new investors. Software and investor portal use generally varied with age. For example, the 18–44 group were more likely to use investor portals and reported using them to access information and sign documents with their investing firm. Investors of all ages reported gaining information from general interest media, and the 18–44 group reported gaining more real-time news and trend information from investor portals than other groups. On the whole, investors are arming themselves with knowledge and information the best they can with their time. Investors want to be educated about their investments while receiving good returns. In the future, real estate investment managers that can help investors learn about the products they are interested in and keep up with the news will be favored over managers that do not provide these services. 26 appfolioinvestmentmanagement.com
How knowledgeable are you about blockchain technology, and how interested would you be in investing through blockchain-based securities or cryptocurrencies tied to real estate? Blockchain technology knowledge Total 23% 45% 11% Total 32% 19% 25% 18-44 45 Interest in investing through blockchain/cryptocurrencies 69% 20% 5M 23% 5M 22% 24% 18-44 56% 45 39% 10% 9% 5M 39% 54% Indicates significant differences at 95% confidence level 5M 50% 13% 37% 21% 69% 76% 15% 42% 16% 9% Not at all / slightly 42% 60% 31% Moderately Very / extremely How knowledgeable are you about blockchain technology, and how interested would you be in opportunities to invest through blockchain-based securities or cryptocurrencies tied to real estate? Investors aged 18–44 reported being very knowledgeable about blockchain technology, and a significant percent would be interested in investing in blockchain-based real estate investments. The 45 group reported less interest in these types of investments. This information reiterates the point that the 18–44 group of investors is more open to alternative types of investing and willing to sel
A profile of today's real estate investor Investors favor real estate for its growth potential. Today's real estate investor remains optimistic about their real estate investments. Investors hold on average 2.2 types of real estate investments, with the two most popular choices being direct purchase and owning real estate
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