A Student of the Real Estate Game


My Thoughts on Real Estate Crowdfunding Part VII

Sep 2, 2016 | Innovation, Passive Investing, Technology

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 providing 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 includes 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 have 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.



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