My Thoughts on Real Estate Crowdfunding

My Thoughts on Real Estate Crowdfunding Part VII

Joe Stampone Featured, Innovation/Technology, Invest Passively 9 Comments

It’s been over 15 months since I shared my thoughts on the real estate crowdfunding business and boy has a lot changed. It’s been fun going back and reading through the previous posts realizing how rapidly the real estate crowdfunding space has evolved (here are parts I, II, III, IV, V, and VI which serve as a timeline for the evolution of real estate crowdfunding from 2013 through today).

On one hand, the distinction between many real estate crowdfunding companies and real estate companies has begun to blur. However, on the other, real estate crowdfunding marketplaces have established themselves as technology companies and new innovative crowdfunding models have emerged entirely. One thing is certain, real estate crowdfunding companies have set a new standard for innovation/technology in real estate.

Real Estate Crowdfunding Companies are Real Estate Companies

Back in May 2014, in part III of this series, I talked about revenue models and the need for real estate crowdfunding platforms to scale to be profitable and meet the expectations of their investors. Unable to scale the middleman/deal-by-deal model, several early entrants in the space have transitioned their model and become real estate companies.

Most notably, Fundrise and Realty Mogul launched private non-listed REITs. Fundrise has transitioned exclusively to the non-listed REIT model whereas Realty Mogul has launched a REIT, but not indicated what they plan to do with their crowdfunding business. The move is further evidence that project-by-project crowdfunding is very difficult to scale toward profitability. Both of these companies are tapping into their greatest resource (direct access to 50,000+ registered investors) to raise money more efficiently outside of the traditional broker/dealer environment.

From an investor perspective, this does nothing more than provide access to investments at lower fees (which, don’t get me wrong, is game-changing). However, these online platforms are now real estate companies competing directly with non-listed REITs run by institutional firms such as Blackstone.

These companies were designed as technology companies with a focus on the real estate business and now they’re real estate companies with good technology and branding, a challenging transition.

The other subset of real estate crowdfunding platforms operating as more traditional real estate companies include RealtyShares, PeerStreet, Patch of Land, Lending Home, and Fund that Flip. These companies are real estate lenders disrupting the hard money lending space while providing access to accredited investors. These platforms provide short-term debt investment opportunities previously unavailable to HNW investors, however I’ve spoken with several investors about deals that have gone bad. While these companies were built as technology companies they must also have the infrastructure and expertise to act as a traditional real estate lender while bringing innovation to a previously fragmented sector.

Real Estate Crowdfunding Marketplaces

As some real estate crowdfunding companies accept their new identity as real estate companies, a few remain focused on being middlemen, connecting accredited investors with quality real estate deals. RealCrowd, CrowdStreet, and Acquire Real Estate have maintained their focus on being marketplaces. These platforms serve a useful purpose, however it’s evident that it’s hard to make the business model work. While some companies shift from this model, CrowdStreet has created a white-label software product, enabling real estate syndicators to build their own internal crowdfunding platform. These ancillary products provide a diversified revenue stream.

Companies such as Origin Investments, RealOp Investments, and Trion Properties are building their brand, organically attracting investors, and enabling them to invest directly into live offerings through their websites. I mentioned this shift back in part IV of the series, but the trend presents direct competition to the real estate marketplaces.

Crowdfunding Innovation: Fund of Funds

Platforms are emerging that invest in real estate deals across other crowdfunding platforms. AlphaFlow, founded by former RealtyShares co-founder Ray Sturm, successfully raised two funds to invest in short-term debt and is in the process of raising fund III. Investors make one investment and AlphaFlow builds them a diversified portfolio.

I’m surprised we haven’t seen more of this. Smart real estate professionals will launch platforms and raise a fund to invest across real estate equity deals. Rather than investing deal-by-deal, the blind pool fund will invest directly with high-quality real estate syndicators and through platforms such as CrowdStreet and RealCrowd.

The Emergence of Investment Opportunities for Non-Accredited Investors

The biggest beneficiaries of new regulation has been non-accredited investors. As I discussed in a recent blog post, non-accredited investors now have access to real estate deals previously only available to wealthy investors. Whether it be the Fundrise and Realty Mogul REITs, innovative marketplace lending companies such as Groundfloor, or platforms utilizing Reg A+ offerings, everyone now has the ability to add direct real estate investment to their investment portfolio.

Cautious Optimism

It’s been a lot of fun witnessing the evolution over the past 3 years, however I remain concerned about the real estate crowdfunding space. Many companies aren’t equipped to be real estate companies and I’ve heard several stories of poor operations and deals gone bad. Other platforms, incentivized to grow as quickly as possible, risk doing deals outside their target profile, and still others may fizzle out, unable to build a profitable company.

One thing is for sure, innovation will continue to push the real estate crowdfunding business forward and over the long-term investors and the real estate business will be better off. I can’t wait to see what part VIII has in store.

  • Very thought provoking Joe. Do you see these new platforms, especially those targeting non-accrediteds pushing up demand and keeping cap rates lower 4 longer?

  • @Giovanni_Isaksen:disqus that’s a tough question. Given the limited quality of dollars I don’t see it having a major impact. However, I do expect it to bring more competition to the small balance space (deals sub-$5M) and additional capital to the highly fragmented aspect of the business. Thanks, as always, for your support!

  • Jason

    Thanks for sharing your thoughts, as an individual investor I preferred to vet individual projects and their management track records. With less great opportunities on these crowdfunding sites in the last 12 months, I have resorted to emailing individual real estate companies with proven track records to get notified directly of investment opportunities. The problem is that most of them do not have their own investor platform for reporting.

  • Jason, I’d love to connect by email to learn more about this approach. I know many of the high-quality sponsors who raise money from individual accredited investors.

    By ‘investor platform’ do you mean online portal similar to what the crowdfunding companies offer? Is that a deal-breaker?

  • Paul Sparks

    Joe,

    Thank you for the RealOp Investments mention. You know we always value your insight and advice. Let’s get together soon.

    Paul Sparks
    Managing Principal
    RealOp Investments

  • @disqus_COTlgqXG7u:disqus thanks for always leading by example. Keep innovating and let’s find a way to get some deals done together!

  • Matt

    Thanks for your thoughts Joe and I apologize for the late comment! I currently work at a REPE firm and I am wondering if you know of any established RE firms that are leveraging or trying to build out proprietary technology platforms to raise capital? The institutional investor fundraising process generally adheres towards a more sophisticated investor group, but I would assume there could be benefits in creating an easy to use platform breaking out past deals and performance metrics as well as some sensitivity analysis tables on future investments. I could be wrong, but I could also see an investment consultant like Cambridge Associates appreciating something along these lines. I appreciate your input.

  • @disqus_yAiiIVZGaw:disqus We should chat. Can you shoot me an email at joe@asotreg.com?

    There are a few groups utilizing the space and building proprietary software or utilizing white-label software to more efficiently raise capital from HNW investors. You should also check out Cadre – https://cadre.com/

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