Market Overview

The Future Of Social Impact Investing? Consider Your Local Community.

The Future Of Social Impact Investing? Consider Your Local Community.

On the heels of controversy over Facebook Inc's (NASDAQ: FB) handling of private user data, some shareholders are reconsidering their investments in the company. The social media giant at one point lost nearly $100 billion in market value over the past couple months.

Investors' reevaluation of Facebook is part of a larger trend as many investors seek ways to put their money where their values reside -- and step up their impact investing over the next decade. Young investors, in particular, want their investments to be sustainable or make positive change.

Real Estate Lending as an Impact Investment

Private real estate lending lets investors improve neighborhoods in their own communities -- creating jobs and boosting local business income by as much as 42 percent. Real estate lending is a vehicle that keeps their investment close to home. Many private real estate funds focus on either a single metropolitan area market or region, so investors know their funds are growing local businesses.

Lending to home flippers is poised to be a lucrative market for investors seeking new community investment opportunities. Home flipping reached an 11-year high in 2017, according to ATTOM Data's new report. Home flip lending is up 27 percent -- reaching a 10-year high and indicating that demand isn't going away anytime soon.

A private loan fund lends money to rehabbers and flippers who buy, renovate and resell properties. Private lenders promote social responsibility in several ways:

  • They recycle run-down homes and rejuvenate neighborhoods, often in neighborhoods where banks are leery of lending money.
  • They boost net worth for lower-income homeowners. Upgraded properties raise the value of surrounding homes -- improving value for homeowners living in adjacent properties, the local economy and even the city's tax base.
  • They support small businesses and solopreneurs. Traditional banks aren't keen to lend money to flippers, many of whom are self-employed. These entrepreneurs often come from the school of hard knocks and achieve the American dream by fixing and flipping homes.

By putting capital in a private loan fund, investors help grow small American businesses. Beyond the flippers themselves, investments support all the service providers they hire, including plumbers, drywallers, and real estate agents. The capital provided by private lenders passes through many hands and strengthens the local economy by creating jobs and beautifying the neighborhood.

How Real Estate Lending Differs from Other Impact Investments

This option to do good while doing well provides two other benefits: It adds diversity to balance the equity and bond investments in an investor's portfolio and it acts as a hedge against inflation.

A socially responsible investor who wanted to balance their portfolio by adding real estate could, hypothetically, purchase a low-income rental property. But in real life, few of us have the time or expertise to manage an investment property. And it's difficult for even experienced investors to make money from the most affordable rentals in a given market.

By contrast, private loan fund investments require no time commitment and far less initial capital investment. They also tend to pay relatively high returns -- up to 8 or 10 percent, depending on market factors -- compared to other social investments.

The income stream from a private loan fund, like the income stream from bonds, is usually paid monthly. However, while bond prices are influenced by interest rate fluctuations, private loan fund earnings are preset and remain the same throughout the term of the offering. That makes private loan funds an appealing investment in markets where interest rates are predicted to rise, as they are this year.

Another indication that private loan funds are a solid investment is the recent entry of large players into the market -- Goldman Sachs recently acquired a California-based private real estate lending firm, for example.

Surprisingly, private loan funds, like the one my team manages at Walnut Street Finance, pay a comparatively high return for a relatively low-risk investment which is secured by a large pool of first-lien mortgages. Instead of investing in a single flip, investors have capital in hundreds of flips -- which is less risky than placing all one's capital in a single property.

As investors seek secure and impactful investment opportunities, they should consider private loan funds that finance small businesses dedicated to rebuilding neighborhoods. It's an investment that offers a chance to help fund the American dream while paying excellent risk-adjusted returns.

Bobby Montagne is CEO of Walnut Street Finance.

Posted-In: contributor contributorsReal Estate


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