The very idea of socially responsible real estate investing may raise some eyebrows. Some have argued, credibly, that profitable real estate investing inherently promotes economic inequality. Housing policy in the United States at the federal and local level has historically reinforced racial economic inequality (as Richard Rothstein vividly points out in The Color of Law). Depending on the herd you run in, you also may be well aware of the cyclic displacement that gentrification can effectuate – urban areas were hollowed out by “white flight” – fleeing capital, a diminished tax base, and lack of economic opportunity; those areas become attractive again as affluence grew around these submarkets; communities that settled there (in some cases because it was the only affordable neighborhood) are displaced as yuppies flock to industrial chic yoga studios and beer gardens and rents correspondingly rise.
In a sense, real estate investing is a fundamentally rent-seeking practice: successful real estate investors find attractive basis (going-in asset prices), find ways to increase rents to or above prevailing market rates, and sell once the enhanced cash flow potential of the property has been established.
All of this is true, but nevertheless people still need places to live, socialize, eat, do business, drunkenly rub up against each other, etc. The U.S. struggles with housing affordability – there is simply an undersupply of affordable units in markets from coast to coast. While rent stabilization policies may have a hand in the fix, the answer almost certainly entails more building and more real estate investing. So, what can you do? I’m going to assume you already understand the case for private real estate investing – tangible illiquid assets that historically bear relatively low correlations to public markets. If not, here’s a decent article on the topic. Assuming that you are on board with the notion of adding real estate to supplement stocks, bonds, and cash, the question is… how can I invest in real estate without being a total douche?
If you are interested in socially responsible real estate investing, you should be encouraged by the general evolution of the finserve space and “platform-based” investing ecosystem. This basically means a broader set of access and greater transparency for you, the individual investor intent on not being a douchesnozzle.
Before I get into some specific platform recommendations, let’s talk through the present state of socially responsible real estate investing. As noted, real estate investing carries the possibility of displacement and exacerbating housing affordability issues. However, certain types of real estate investments and certain focuses among Sponsors (lead investors who you would invest alongside through a platform) lend themselves to community-focused real estate development and better outcomes. In no particular order:
- Leveraging tax credits and federal or local incentive programs: this could be a national program like Section 8 or HUD incentives, a municipal incentive program, or taking advantage of the relatively new Opportunity Zone program. In pursuing one or more of these programs, a real estate sponsor may be able to offer passive investors attractive returns while adding quality housing stock or mixed-use development in areas that will benefit from increased supply.
- Density Development: the real hallmark of shitty gentrification that marrs communities and exacerbates housing affordability? Non-density luxury residential. A 2,000 square foot luxury condo in a “transitioning” neighborhood may pencil out, but not for the non-douche investor, not for the righteous money. Instead, look for density housing that truly serves the community. This may be upgrades to preexisting, aging multifamily stock, creating a net increase in units that are smaller but are safer, better insulated, and have upgraded appliances and other features, while still offering reasonable rents for community residents. Extra points if it is particularly accessible to public transit.
- Unconventional or Stigmatized Models: ever invested in a mobile home? I have. Except that the concept has moved beyond stigmatized terms like “trailer parks” to more palatable (and accurate) “manufactured homes” or “manufactured home communities.” Both the design quality and economic terms have improved for residents in many cases. While there are no doubt some less-than-stellar manufactured home communities (or whatever you want to call them) out there, an investment in quality manufactured home communities can be a “win-win-win” situation, providing affordable housing for families in suburbs and exurbs with access to job markets. Other novel housing models, such as “co-living” or density micro-housing, have evolved to serve urban areas that are struggling with housing affordability. I have noticed a growing number of these investments available through real estate investing platforms.
The Top Platforms for Socially Responsible Real Estate Investing
So, with that in mind, where does the righteous money turn? What investing channels provide non-douch investors access to socially responsible real estate projects? The good news is that real estate investing platforms (real estate crowdfunding) are generally younger, nimbler companies with less entrenched bureaucracy, and may be more willing to embrace unconventional projects and be responsive to the growing interest in ESG investments (even as it pertains to real estate). While sclreotic, traditional sources of debt and equity capital may be unwilling to pursue projects aimed at positive social outcomes, these platforms may be able to step in. This is not an exhaustive list (and, as always, should not be construed as investing advice). Based on my observations and investing activity…
- EquityMultiple
The company started in 2015 and has seemingly grown more earnestly than some of the early-stage players in the “real estate platform” space. While they present an impact-agnostic approach to sourcing investments (nowhere do they suggest an embrace of ESG investing), their track record of past investments evinces a decent proportion of workforce housing, affordable housing, and alternative models for residential development. No single-family residences. One recent investment, in Chicago – alongside a community-focused developer – was aimed at rehabbing a multifamily property in a working class neighborhood and modernizing amenities and common spaces, while seeking to maintain affordable rents. This sort of project feels reasonable for an investor seeking to earn a healthy return on a professionally managed property while not being a douche.
They have also participated in a number of Opportunity Zone projects. While the program overall has been panned for being a plaything of Trump son-in-law and perpetual evil baby Jared Kushner, that doesn’t mean all Opportunity Zone projects are tools of displacement. EquityMultiple’s Opportunity Zone investments have fallen more into the “creating jobs” bucket, which is fine – better than industrial chic condos in affluent markets where an Opportunity Zone was designated as a favor. One facet of the Opportunity Zone program that shouldn’t be overlooked: capital must stay put for 10+ years in order to reap the tax incentives offered under the program. In theory this should make residential projects less prone to “make-a-buck-and-leave” opportunism. EquityMultiple did offer a manufactured housing community (MHC) Opportunity Zone Fund, operating across a number of states in the interior of the U.S. This is the most compelling Opportunity Zone project I have seen offered through an investing platform to date from a social benefit standpoint.
Overall EquityMultiple strikes me as a platform that is mostly seeking returns, but run by decent people who would prefer their investments benefit communities. They present details of the sponsor (real estate investment firm who leads the project) on each offering, and they generally seem to have a local focus. The other benefit here is that their investments are presented in fairly extensive detail; you can pick those that feel right to you, ignore the ones that don’t, and ask them if you have questions. They generally seem responsive.
- Small Change
Of all the real estate investing platforms I have encountered, Small Change is the only one that professes to wholly focus on socially responsible real estate investing. For this, the Righteous Money commends them. They present a “Small Change Index” – a rubric for understanding the social impact of each investment on their platform. Is this fluff? Possibly! Is it better than nothing? I think so!
Some of the investments on the platform seem truly hellbent on delivering community-minded development that neighborhoods that could really use investment. I participated in the Innovation Houses project, which seems to be a legitimately innovative model for community building and inclusive housing.
Generally, Small Change is lighter on real estate diligence and full project transparency than EquityMultiple. On the plus side, many of their investments are open to non-accredited investors. For more, please check out my full review of Small Change.
- Fundrise
Fundrise, as the name implies, offers private real estate fund products – which they dub “eREITs” – and cater almost entirely to non-accredited investors.
Fundrise has created at least one specific product to address affordable housing: a residential development fund in the Los Angeles MSA, one of the most constrained markets in the country as far as affordable housing supply. Fundrise also offers an Opportunity Fund, comprised of Opportunity Zone investments.
As of Summer 2020, Fundrise has invested in over 200 assets ranging from single-family homes to large industrial ground-up projects. No doubt some of these could be classified as socially responsible real estate investments. The main issue in this regard is their fund model: investors have no control over which specific assets they are allocated to. Fundrise lacks the mission focus of Small Change and the transparency and affordance for self-direction of EquityMultiple. That said, they do make some effort toward affordable housing development, and we can hope that they will prioritize other socially responsible real estate fund products in the future.
Conclusion – A Long Way to Go
As you can see from this scant list, there aren’t many options for the righteous money when seeking socially responsible real estate investing. The REIT space has been at least waving a hand at ESG real estate investing in recent years, but I would have the same reservations as I do with the Fundrise model – transparency is lacking. Publicly traded REITs also tend to correlate more closely with the stock market, so from a pure returns perspective, I would rather pursue private-market assets.
As ESG investing compels more and more of the aging millennial demographic, we can hope that real estate investing platforms in turn devote more resources to socially responsible and affordable housing-focused programs.