Real estate crowd investment comes to the CRD

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Investors can participate in a Sooke home purchase for as little as $1. But what does this mean for the overheated local real estate markets?

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Photo: James MacDonald / Capital Daily

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A new investment opportunity was launched in Sooke this month and although it sold out within weeks, comments from some locals forecast negative returns.

The company is called Addy and positions itself as an accessible real estate investment that allows ordinary people to invest small amounts in residential and commercial real estate. The company recently purchased a piece of a small 1960’s apartment building at 2068 Townsend Rd in Sooke from 947 investors, each investing an average of $345.

“We are enabling essentially ordinary Canadians to take the place of a generally wealthy individual who would write a check for half a million or a million dollars and be the investor in this type of real estate. We’re essentially breaking that down so anyone can invest the way a wealthy person can invest,” Addy co-founder Steven Jagger told the Capital Daily podcast.

Projects Addy invests in include fixer-uppers, passive investments that only generate rental income, and new developments. But they are not involved in management or business decisions; You only invest as a limited partner. In other words, they have a financial stake but no say in how projects are managed. As important as it is to value the property itself, Addy finds it just as important, if not more important, to ensure that the general partner – the company with majority ownership and control over the management of the building – is a good fit.

Companies like Addy differ from real estate investment trusts (commonly known as REITs) in that investors invest in specific properties rather than buying into and earning income from a portfolio of properties.

“I mean, in a lot of ways it’s not that different from a real estate investment trust,” explains real estate analyst Leo Column wood. “But, you know, less regulated and more specific to individual traits. … I think it’s sort of a Web 2.0 twist on things.”

On the Sooke property, Addy investors own approximately $325,000 of the building. The company projects a 20% return over three years, with the average investor earning $75 — a return that just so happens to be nearly equal to the $25 annual membership fee, meaning investors who actually want to profit much more to invest than the average 2068 Townsend owner.

Home prices in Sooke have skyrocketed over the past 10 years, with benchmark prices rising more than $200,000 in one year, similar to the rest of the West Coast.

Some attribute these increases to real estate being treated as an investment to be exchanged for profit, rather than being treated as homes.

Whether or not investors — who recently include Addy — are responsible for soaring home prices, investor-owned buildings are sure to increase. Statistics Canada reported that in BC, 43% of new homes (built since 2016) are owned by investors and 24% of all homes in the province are owned by investors.

“Like any other buyer… they’re increasing demand,” saysspaltholz. “So in general, if there are investors participating in the market, they would push the price up.”

But he adds that capital in the Greater Victoria real estate market isn’t exactly constrained right now, so the extra cash inflow specifically from crowdfunding investment firms like Addy probably won’t be enough to make a difference.

But investors becoming major players in the real estate market are a problem for a number of reasons, said Marc Lee, senior economist at the Canadian Center for Policy Alternatives.

First, it’s really difficult for first-time homebuyers to compete against investors whose wealth has likely increased significantly due to the rise in home prices, assuming they own other properties.

“It also contributes to this broader phenomenon that we call financialization, where housing is viewed much more as an investment and less as a place to live. And that causes a lot of huge inequality in our society. Right now we need to think more about housing as a human right, as a protection,” Lee said.

The way Canada taxes real estate sales acts as an incentive for real estate investments, Lee said. No tax is levied on the gain on the sale of a primary home and only half of the gain on the sale of a second home is taxed. That means real estate investors pay a lower income tax rate than employees.

“It’s definitely a lot better than, say, working to make a living,” Lee said. There are structural issues that are pushing people to financialize real estate, and then when it starts showing double-digit gains every year, people see it as easy money — and want to jump in.

Sooke Councilor Tony St-Pierre says he sees “brilliant potential” in Addy. “To me, this sounds like an opportunity for the average person in the community who has money to spare to invest in affordable housing in their own community,” he says.

He even goes so far as to compare it to council housing in the UK, where flats are owned and rented out by local government – although he admits that council housing is “not exactly the same” as flats owned by a collection of owners private investors.

Additionally, there is no guarantee that the profits will stay in Sooke or benefit the people of Sooke, as an out-of-town investment company handles the payments and there are no requirements that only locals invest.

“My concern would be that it’s basically for funneling real estate investment into the community — but then taking those dollars out of the community without giving anything back.”

For split wood, the real damage is initially the lack of purpose-built living space. The investment is only attractive because supply is severely limited – a problem that is only getting worse.

“We stopped building a lot of purpose built rental housing for a few decades. So we shouldn’t really be surprised that investors are participating in the market,” he says.

These investors may not always have the same goals as people in the community or people who already live in the properties they are buying.

“Behaviours that some people might not be too comfortable with — that’s the investment opportunity, right?” saysspaltholz. “They take a building that’s probably a bit run down, pull out all the tenants, renovate, and then rent it out at much higher rents.”

He fears that’s exactly what will happen in Sooke – something Addy pointed out in an email pitch to potential investors of 2068 Townsend Rd. There is no known plan to redevelop the property in the near future, but the economics of real estate investment include an enticing potential for existing tenants to renovate to generate higher returns.

“It’s a pretty old building,” he says. “Part of their pitch is… ‘They could make additional profit if this gets rehabilitated.'”