[Editor's Note: I have had a number of representatives of real estate crowdfunding sites wish to submit guest posts to the site. I have turned a whole bunch of them down. Most of the posts discuss all the great benefits of crowdfunded real estate and provide a link to their site, which I find to be not particularly useful to readers. I can easily write a post about the benefits, and besides, the site already has posts discussing that. I have asked most potential guest posters to return with a post either discussing the downsides, or better yet, comparing one site to another, or even how to choose between investments on any given site or even between sites. This is the first post I've gotten back after one of those requests.
This is written by Lawrence Fassler, who currently works as counsel for RealtyShares. His compliance folks want this statement in the post: ” RealtyShares offers equity securities through WealthForge, LLC, member FINRA/SIPC.”
When I first met him, he was working for Realty Mogul (a WCI advertiser and WCI Scholarship Gold Level Sponsor), and in fact has submitted a guest post featuring their firm in the past. Lawrence knows this industry as well as anybody. I liked how his post compares one firm to another, and also the fact that he is one of the few who has personal experience with more than one company. You will notice that I have inserted a few comments into the post detailing my limited experience with these companies. All my comments are in italics.
By way of introduction for those to whom this concept is new, what I like about these investments is the following:
- I qualify for them (since I'm an accredited investor.)
- No management hassle. Once I select an investment, it takes little more hassle than holding an index fund.
- High projected returns. Projected returns on most debt investments (basically hard money lending) are in the 9-10% range (and backed by a hard asset.) That's dramatically better than high quality bonds, and although less than I'm doing with P2P loans, are significantly less risky given the hard asset backing. Projected returns on most equity investments are in the 12-17% range, far better than anybody thinks the stock market is going to do over the next 5-7 years.
- An opportunity to be paid for illiquidity. The investments generally must be held for 5-7 years. I don't mind having some of my portfolio illiquid, as long as I'm paid for it. The promised returns are adequate payment in my view.
- Low correlation with my other investments. The obvious alternative to this sort of thing is just buying a Vanguard REIT index fund. However, those of you who held that fund with me throughout the Global Financial Crisis remember that not only did it NOT provide any useful diversification against the rest of the stock market, it fell even further (78% peak to trough.)
- Low minimum investments which allow me to diversify against that which I don't know, rather than spending large amounts of time and money doing due diligence. Many of you remember Dennis Bethel, MD who wrote some guest posts in the past. He works with a firm that does these sorts of private real estate deals, but the minimums were $50-100K, which are a little high for poor old me. If I'm going to drop that kind of money into a single project, I feel like I need to run a background check on the principals, fly out and meet them, walk through the project etc. But for $5K? It's not worth my time or money to do that sort of thing. Instead, I can spread myself over 10-20 different projects, so if it turns out one or two are poor investments run by scammers, I should still be okay.
- The ability to invest in real estate outside my local area. What are the odds the best investment returns are available in my home town? Pretty darn low.
At any rate, as you'll notice in my comments below, I'm only dabbling a bit (like I did when I got into Peer to Peer Lending) in this relatively new industry, but I'm seeing a lot of promise and anticipate increasing investments in the future. As noted below, I now have a financial relationship with RealtyShares. Without further ado, on to the guest post.]
Real Estate Crowdfunding Sites – A Comparative Overview
Online capital marketplaces have come to real estate, with many companies now providing accredited investors access to a new “passive” way to invest in commercial properties. These new marketplaces give accredited investors (net worth > $1 million, or annual income > $200,000 [single, $300K married-ed]) a platform that allows for direct access to commercial real estate investments such as larger apartment buildings, retail centers, self-storage facilities, office buildings, and other commercial properties that previously were beyond the reach of all but the biggest investors.
A lot of entrants have come into the field, and many have their own particular focus and strategy. Some real estate crowdfunding sites make direct investments in real estate, others buy mortgages, and others make peer-to-peer loans. There are probably 50-plus platforms now in the market, each with slightly different operational characteristics.
Despite all the new companies jostling to gain position in this new industry, however, only a half dozen or so are emerging as leaders in the space. Here’s an overview.
A quickly up-and-coming company with headquarters in San Francisco, RealtyShares has distinguished itself by its variety of investment offerings. It features not only conventional equity and 1st-lien debt offerings, but also “preferred equity” and mezzanine (2nd-lien) debt investments. These hybrid investment types present somewhat more risk 1st-lien debt, for example, but are less risky than conventional equity. Mezzanine debt and preferred equity investments can pay accordingly higher return rates than conventional 1st-lien debt, and have been met with enthusiastic demand from investors. The company recently raised $10 million in a Series A financing round led by Menlo Ventures, a leading Silicon Valley venture capital firm, and through July 2015 had helped fund over 200 different properties worth more than $450 million. The real story, though, is that over 50 of those properties were funded just in the last quarter, and the company is starting to move ahead of firms that had a sizable head start. Its recent acceleration translates to year-over-year growth of approximately 500%, making it a platform to beat.
[Editor's Note: Obviously this is Mr. Fassler's current firm, so it is listed first in his post. However, it is a firm I have some limited familiarity with and like what I see. On the date this post was edited, there were three investments available on the site, all debt at 9-11.9%, with minimums of $1,000-5,000. I have one relatively new tiny investment ($2K) with them, a 1 year, hard money loan on a single family home in New York paying 9%. ]
[Editor's Note: Update 2/7/17: This is a newer crowdfunded company, but is backed by a firm that has been around since 2002. They generally charge 10% of profits on both equity and debt deals. They are ranked # 14 out of 85 by one review site. I have an affiliate relationship with them but have not yet had a chance to invest with them. As I learn more about them, I'll be sure to share. If you choose to invest through them, I would appreciate you using this link.]
This Washington, D.C.-based pioneer in the field began by letting local investors participate in nearby community redevelopment projects. The idea had a lot of appeal, but selling securities to the broader public meant that it had to pay for expensive SEC registration statements. Fundrise now focuses on accredited investors, like most other crowdfunding companies. It has a particular focus on debt investments; for equity deals, it refers investors directly to the sponsoring real estate companies, sort of like an “eBay” for real estate projects. The company recently received significant funding from Renren, a Chinese social networking company, so Fundrise is likely in it for the long haul.
[Editor's Note: I am also familiar with FundRise. I have a relatively new, small investment ($5K) with them FundRise, an apartment building being built on the same street as another syndicated real estate investment I hold– the offices for my practice in Salt Lake City. It is a preferred equity investment projecting 14% returns. On the date I edited this post, there were five investments available to fund on the platform, two debt (5-11% returns, 2-5 years) and three preferred equity (13-14% returns, 3 years) all with a $5K minimum. ]
Patch of Land
Another company with some serious recent financing ($24 million) under its belt, this debt-focused platform has also seen solid recent growth. It takes advantage of the new SEC Rule 506(c), which allows it to show investments even to newcomers on its platform — although as a result it requires extra financial documentation from investors. It also recently started a move in the industry toward bankruptcy-remote lending vehicles, providing some assurance to investors, who now have their investments handled by an independent trustee.
With its headquarters in Palo Alto in the heart of Silicon Valley, RealCrowd is another platform utilizing Rule 506(c) “open” offerings. The company has focused on equity transactions that revolve around its “no investor fees” model, where it derives revenue from payments made by sponsoring real estate companies for access to its investor network. Investors are referred directly to sponsor real estate companies, who are then free to set minimum investment amounts and deal directly with investors. RealCrowd has landed some respectable partner real estate companies and was recently named as one of AlwaysOn’s “Companies to Watch” for 2015.
This relatively new entrant on the scene has attacked the market for business-purpose residential loans with gusto, originating more than $100 million of loans in a little over a year. It has a large staff based in San Francisco, and to a significant extent, utilizes institutional capital to help finance its loans. The company is another recent beneficiary of the Chinese investment firm Renren, reportedly garnering, in the spring of 2015, nearly $70 million — among the largest financings of any industry player.
Based in Los Angeles, Realty Mogul was one of the early pioneers in the space, and its young CEO, Jilliene Helman, is known for her dynamic personality. As of July 2015, the company had completed over $80 million in fundings, and recently itself garnered a sizable $35 million of financing in a round led by Sorenson Capital. Observers like the company for its having taken an early lead in industry compliance efforts; it was one of the first in the industry to align itself with a broker-dealer. The company has worked with several top-grade sponsors, and recently made a push into loans on larger commercial properties. If you would like to get a free $150 Amazon gift card (and give one to me), when you sign-up put in “JamesD” as your referral code. (Deal limited to first 6 who open an account- you don't even have to fund it.)
[Editor's Note: I met Jilliene at FinCon a few years ago, which eventually led to them advertising with WCI and to me making a small investment ($10K equity position in an apartment building in Indianapolis) with them a little less than a year ago. It's too early to really know how it will do. On the date I edited this post, there were two investments available on the platform, one debt (10%, 12 months, $5K minimum) and one equity (14-16 years, 5 years, $30K minimum.)]
This New York-based company specializes in equity offerings and has taken tentative steps toward establishing a foothold in Asia. It has also created a mobile app that allows visibility into some of its website features from investors’ smart phones. The company was in the news recently for its consulting relationship with former New York governor David Paterson, and recently “crowdfunded itself” by raising $2 million through the site Crowdfunder. Its East Coast base may give it a leg up in dealing with New York-based institutional financing sources.
Most of these platforms feature current cash flow as their primary attraction, although some have also gotten involved in riskier “ground-up” development projects. All are currently focused primarily on accredited investors. The business models vary widely – some are tied strictly to an eBay-like transaction fee stream, while others charge an annual investor fee, and still others utilize fees charged to both the sponsoring real estate company as well as to investors.
Real estate crowdfunding is a relatively new model for financing commercial real estate, and we haven’t seen a recent recession cycle to see who might potentially fall out. As the aggregation of online capital continues to rise, time (and results) will tell which of the companies is garnering the most investor support and have the most sustainable business models.
[Editor's Note: I hope you found that overview helpful. If you have invested with one of these firms, readers would love to hear your experience in the comments section. This is obviously a very new area for investing, so tread carefully. Fees are dramatically higher than you would pay in an index fund, both for the crowdfunding site and for those actually doing each deal. There are no guarantees that any of these investments will work out well, or even that these practically brand new crowdfunding sites will stay in business. That said, I think there is a lot of potential here. My approach thus far has been to utilize multiple sites, since there are so few options available on any given site. When I have some money available that I'd like to invest this way, I go to the sites to see what is currently available, then choose what looks best to me from the available options. I'm still working out how these investments will mesh with the remainder of my portfolio (in the past I've generally excluded my relatively small real estate holdings from my asset allocation, aside from REITs.)]
What do you think? Have you invested through a crowdfunding real estate site? Why or why not? If so, which one? How has your experience been so far? Comment below!