With growing economic uncertainty and no end in sight to skyrocketing inflation, investors are frantically looking for stable investment opportunities that can hedge against inflation.
Precious metals like gold and silver are one option, but returns tend to be limited to simply outpacing inflation so this is unattractive to many investors. Real estate is more popular because it generally produces cash flow while appreciating in value, but with massive demand and limited inventory, it has become less viable. Investing directly in companies can be an effective option as long as you find a solid company in a growth industry. And right now, real estate technology, also known as proptech, is one of the most lucrative growth industries.
Nearly $19 billion in growth equity and debt capital was raised in the U.S. proptech category in 2021—more than twice the capital raised in 2020, according to a recent report by Houlihan Lokey, a global investment banking firm. Of that, 154 ventures raised $20 million or more, which represents more than 2.6x the number of $20+ million rounds in the category year over year. And multiple ventures, including AvantStay, Lessen, and Up&Up, raised capital in excess of $100+ million dollars.
There are two key factors driving this opportunity.
The first is the massive demand for real estate. It’s not uncommon for a property today to sell for tens or sometimes even hundreds of thousands of dollars over asking price. Aggressive bidding wars often start as soon as a property hits the market, quickly driving prices up. And in many cases, the sale is closed long before buyers who find the property through conventional channels, such as the MLS system, even have a chance to put a bid in.
And the second is that the industry simply has not kept up with technology. This includes Realtors, brokers, investors, property managers, vendors, and virtually everyone else tangentially related. The real estate industry is generally about ten years behind other industries when it comes to technology.
Because of growing competition driven by high demand and low inventory, skyrocketing inflation, and more aggressive acquisitions by institutional investors, the industry is being forced to evolve. Effectively leveraging technology is no longer a luxury—it will be essential to thrive over the coming years. Businesses and employees alike will need to become more efficient, access and analyze large datasets, and build relationships with clients, partners, and vendors across multiple channels.
Matt Andrews, a real estate investor and venture capitalist who also runs an incubator group for real estate investing tech companies, explains,
“Institutional investors learned a lot following the last real estate crash. Back then, it was like the Wild West and a lot of smaller investors were able to make a ton of money pretty easily, but the landscape has dramatically changed since then. Today, we’re not only competing against well-funded institutional investors, but also a growing army of smaller investors as well. Proactive investors are leveraging technology to find and close more deals, more quickly, leaving fewer opportunities for those who aren’t effectively leveraging technology. Bottom line—it’s no longer a luxury, it’s a necessity if you want to thrive in the real estate industry today.”
Andrews’s group, Family Mastermind, focuses heavily on this because its members understand the role tech has played in fellow members’ success. During both virtual and in person events, the group’s members frequently share, in detail, exactly how they’re using technology to run and grow their businesses so other members can implement the strategies in their own businesses.
Technology has played a huge role in recent years to make better decisions in the real estate industry and that role will become even more important in the coming years.
In the past, Reators, developers, and investors have had to rely on small, localized datasets and their gut to make market trend predictions, which provided limited accuracy and was prone to biases. But today, professionals are leveraging big data, algorithms, and artificial intelligence to quickly analyze massive, national datasets. As reported by consulting giant, McKinsey, this makes predictions more accurate because a larger dataset includes a greater number of relevant variables and helps to reduce statistical anomalies. And the ability to make a more accurate analysis means being able to spot trends earlier, and that tends to result in a lower investment cost along with a faster and greater return on investment.
“The world of real estate and residential home moving is now so complex that without data we are all just guessing. And data does more than just describe a trend, a location, or a person, it can predict trends in the future. And it can learn from countless past events. So data is both descriptive and time based. These are the two dimensions that data can help with so that marketing is targeted and more personalized than in the past.,” explains Ed Carey, CEO of Audience Town, a company that provides large scale data to the real estate industry.
Professionals now have access to more data than ever before, as well as the tools to quickly and accurately analyze that data to make better-informed decisions. This capability was once available only to giant corporations, but thanks to technology, the playing field has been leveled creating a powerful competitive advantage for those who choose to leverage it.
For investors who aren’t comfortable investing in smaller proptech companies, a more traditional route is available through the stock market. There, investors can easily purchase shares in household names like Zillow, Redfin, and Opendoor through traditional brokerage accounts, but so far, this path has failed to deliver because proptech stocks have consistently underperformed the market in recent years.
Charles Payne, host of the Fox Business show Making Money, explains, “There is no doubt this giant industry is perhaps the most fragmented (maybe healthcare’s disparate systems are more disjointed) and present a huge opportunity. The problem right now has been timing and implementation. Perhaps this is why there is so much private sector venture capital going on right now.
The challenges are illustrated by the saga of Zillow turning to its own technology know-how and algorithms to aggressively get into the business of buying and selling homes. When management announced their new initiative in April 2018 the company’s stock was changing hands at $46.00. The goal was to eventually purchase up to 5,000 a month by 2024.
Wall Street loved the idea and the stock took off like a rocket, rallying to $198.00 by February 2021. But it turns out the ‘insider technology edge’ wasn’t enough and soon the company had too much inventory and seemed to be a step behind the plodding industry of retail investors and handshake business. Since then shares have come back down to $40.00 a share.
This is going to be a monster niche for investors but timing and the right pure play are not obvious to me at this time.”
Proptech has even expanded into the burgeoning world of blockchain, with ownership being tied to equity real estate. Think of it like digital fractional ownership of a physical property, and you can get into that property at a much lower cost while still receiving many of the same benefits of owning it outright. According to Stylecaster and RLBLC founder, Ari S. Goldberg, investing in real world assets powered by the blockchain, is an "unstoppable combination, particularly because it enables investors to build generational wealth.”
The key, regardless of whether you choose to invest directly in smaller proptech companies or in stocks of larger, publicly traded companies, is first, to truly understand the real estate industry.
Making a sound investing decision requires that you understand the competitive landscape and how a company fits into that. Does the company bring something unique to the table, or is it just another solution in search of a problem? For example, the industry probably doesn’t need yet another CRM system, but a tool that helps Realtors find and connect with home owners before they decide to list their home could be immensely valuable.
The idea is to look for companies that fill a particular need that matters to others in the industry. This might be something that other companies aren’t addressing at all, or it could be something they’re addressing poorly. But it’s critical to make sure there’s actually a market for that product or service.
Often, when an investor lacks expertise in a particular industry, they may think something is a great idea but the people who work in that industry don’t. That’s why it’s essential to either have some expertise in the real estate industry, or invest time talking to others who are, to ensure that the companies you’re considering investing in are providing a valuable product or service that others will spend their hard-earned money on. True value comes from making the work lives of industry professionals easier, more efficient, and more productive. If a company can do that, it’s more likely to be a solid investment. That being said, the most effective investments are often in companies founded by someone in the industry to fill a need in their own business that wasn’t being filled by other companies.
This industry will continue to evolve, and over time, technology will eventually catch up with the rest of the world. But in the meantime, there is a tremendous opportunity for investors looking for aggressive growth.
