If you’ve been interested in commercial real estate it’s likely you’re aware that investors have traditionally accessed commercial real estate returns through real estate investment trusts (REITs) or direct property ownership. And unfortunately both options present an inherent trade-off that reduces the attractiveness of either investment option.
First and foremost, if you’re reading this blog it’s likely that direct ownership of commercial real estate is off the table. Even for those who may have the lump sum cash on hand needed to acquire such a property, individual commercial real estate property ownership lacks diversification and likely subjects you to unnecessary concentration risk. Not to mention the unavoidable workload or headaches associated with property management and being a landlord. Because of this, real estate investment trusts (REITs) have been a popular investment vehicle for the average investor looking for commercial real estate exposure.
So while REITs do offer advantages such as accessibility and liquidity, they are taxed as ordinary income and do not offer the tax benefits of direct ownership. And for anyone with an understanding of the tax code, the tax benefits offered through depreciation (and specifically bonus depreciation) of real estate assets, is precisely what sets real estate ahead of many other asset classes.
Direct ownership on the other hand allows for tax benefits, but is time-consuming and offers little liquidity. And like we mentioned above, is largely inaccessible for the average investor just getting started, or without access to large amounts of capital.
This is where LEX Markets come in. LEX Markets was created to bridge the gap between REITs and direct ownership, offering the tax benefits and management expertise of direct ownership with the accessibility and liquidity of REITs. Investors on LEX can conduct their own due diligence and access liquidity through a secondary marketplace.
What is LEX Markets?
LEX Markets is a new way to crowdfund real estate, and it’s an exciting option for inexperienced investors. Crowdfunding real estate services involve pooling money from many investors to buy, rent, etc., properties and assigning equity in those properties based on the proportion of invested capital. In return for fees, the service manages everything, so you don’t have to worry about renting, tenants, leases, etc.
LEX Markets stands out because it acts as a third party between investor and property owner. A property owner can approach LEX Markets to sell “shares” of their commercial real estate. LEX Markets will assess the viability of the property and assign a proportion of the property to their IPO shares priced at $250. The shares will then trade on the secondary market much like stocks do after IPO (initial public offering).
LEX Markets was founded in Fall 2019 by brothers Drew and Dean Sterrett and co-founder Jesse Daughtery. They received $4M in seed funding to get the platform started, and an additional $15M in Series A funding in January 2022. The founders wanted to increase access and liquidity for real estate investment. Large-scale investing has historically been restricted to accredited investors, and equity in real estate can be difficult to sell when desired. LEX Markets’ “share assignment” concept helps to mitigate this issue.
Liquidity Problem Solved
Real estate has historically had issues with liquidity, often requiring a 5+ year commitment and locking up capital. LEX offers access to liquidity through a secondary marketplace and allows assets to trade like stocks with a ticker symbol and CUSIP number. LEX securities are even held by investors at firms like Schwab and Merrill Lynch.
LEX Markets Competitive Advantages
There are 4 distinct features that LEX Markets brings to the table that we haven’t seen from any other real estate crowdfunding company.
- Access – LEX allows any U.S. investor to invest, regardless of accreditation status. The days of needing over $1 million in assets and income above $200,000/year to gain access to one of the best performing asset classes in history is a time of the past. If you are an accredited investor, be sure to check out our review of First National Realty Partners, and RealtyMogul.
- Properties are not pooled – Unlike most of its competitors in the crowd funding commercial real estate space, LEX allows investors to evaluate the risk and return profiles of each individual property. And with a $250 minimum investment to any property, investors can compile a portfolio of properties that match their investment needs.
- Robust underwriting – LEX has a robust underwriting process and deep industry knowledge to identify talented management teams. This allows them to extract the most value from an asset and be motivated to operate efficiently and produce healthy returns for shareholders.
- Pass-through taxation – The value of pass-through taxation benefits can not be overstated. Because LEX investors receive a Schedule K-1 each year, they are able to receive quarterly distributions and still reap the benefits of amortization and depreciation to potentially reduce their overall tax liability. Most competitors provide 1099s, forcing investors to treat distributions as ordinary income.
- Liquidity – As we touched on above, LEX’s secondary trading and liquidity is facilitated by its SEC-registered trading system (ATS). This continuously matches orders during trading hours, facilitating transactions without lockups or trading periods. This means LEX securities trade like any other stock in a portfolio.
Is LEX Markets worth it?
We believe LEX Markets is an exciting opportunity for investors. Its accessibility to individual commercial real estate deals for non-accredited investors is unprecedented and game-changing. Additionally, LEX’s secondary market ensures liquidity, addressing what is often considered the biggest drawback for commercial real estate. Click here to get started with LEX Markets today.
You may be interested in: What is a Real Estate Investment Trust (REIT)?