It’s been over 5 months since I shared my thoughts on the real estate crowdfunding business. I’ve alluded to this in previous write-ups (parts I, II, III, IV, V, VI, and VII can be seen here), but I dislike using “real estate crowdfunding” as a general term for the industry. Real estate crowdfunding is simply raising capital (typically in smaller amounts online) from a group of individuals made possible by regulatory changes and more efficient through technology. This capital raising process is being applied to various sectors of the real estate industry and it’s attributed to major improvements to the industry at-large.
Here’s how crowdfunding has improved aspects of the real estate business:
- Bringing transparency and efficiency to private middle-market real estate deals. For Sponsors, it’s opened up a channel to connect directly with investors.
- Revolutionized the public non-traded REIT space. It’s significantly reduced the upfront fees, added features such as quarterly redemptions, and brought transparency into the business model.
- Bringing transparency and efficiency to private lending. Originators are utilizing technology to more efficiently underwrite loans and their direct access to investors has lowered the cost of capital.
- Creating investment new opportunities for both accredited and non-accredited individuals; direct investing, eREITs, diversified equity funds, portfolios of loans etc. are all now available to the retail investor.
- Bringing general attention to the merits of real estate investing to the investing community.
Each of the companies lumped into the ‘real estate crowdfunding’ business has a different focus, business model, and impact on the real estate business.
Companies such as Fundrise and RealtyMogul are very different from RealCrowd and CrowdStreet which are different then PeerStreet which is different then RealtyShares and Patch of Land, all of which are different from AlphaFlow and Cadre. In this post, I break down the real estate crowdfunding business models and share what I find most interesting about the space today.
Real Estate Crowdfunding Marketplaces (RealCrowd and CrowdStreet)
Real estate crowdfunding marketplaces are primarily technology companies, connecting investors with private deals (though they are qualifying the Sponsors and deals which requires real estate expertise). RealCrowd and CrowdStreet have each established themselves as the dominant players in this space. Their investor bases have grown significantly (~20,000+ accredited investors), enabling them to raise larger amounts of capital quickly and execute more deals. Here are a few things I’m thinking about with regards to these marketplaces.
- CrowdStreet Launches Sponsor Direct: Through its legacy crowdfunding business, CrowdStreet recognized the need for private sponsors to utilize technology to more efficiently raise capital and improve their investor relations process. CrowdStreet Sponsor Direct is licensable software which enables sponsors to harness the power of software for investment promotion and management. How will this product impact the crowdfunding aspect of their business and vice-a-versa? Can the Crowdstreet product compete with other purpose-build investor management software solutions?
- Will these marketplaces attract institutional capital seeking access to the most inefficient aspects of the real estate business? If so, will these platforms morph into real estate private equity companies powered by technology? With enough capital, investor trust, and brand equity, these companies can scale by writing larger equity checks and moving quickly.
- When will these marketplaces offer deals that are utilizing RegA+, making them open to non-accredited investors?
- RealCrowd launched their own podcast. This is a great medium to connect directly with potential investors and real estate participants and further establish themselves as experts in the space.
- RealtyShares also plays in the equity space, although they invest across a fund as opposed to individual deals. They completed their initial close of their diversified marketplace equity fund. Each portfolio is made up of 10-20 investments.
The New Public Non-Traded REITs (Fundrise and RealtyMogul)
Several companies which started as real estate crowdfunding marketplaces (i.e. technology companies) evolved their business model and restructured as public non-traded REITs, utilizing new securities laws. They recognized their primary competitive advantage is their ability to raise capital from a lot of individuals directly online and sought to maximize this by structuring as a public non-traded REIT.
Fundrise deserves a lot of credit for drastically improving the public non-traded REIT format. They’ve improved it by building features of traditional private REITs: lower asset management fee and granting quarterly redemptions. And unlike a private REIT, Fundrise has made the eREIT available to non-accredited investors. That said, their business is only as good as the deals they’re doing.
I’ve spoken with several traditional real estate syndicators who are considering restructuring their business as public non-traded REITs. This is particularly interesting because these firms have the real estate infrastructure; access to deals, track record, operations etc. and are now offering their platform directly to unaccredited investors. The challenge I see with them is just how efficiently and cost-effectively they’ll be able to raise capital.
Bringing Efficiency to the Private Lending Space (Peer Street / RealtyShares / Patch of Land / ShareEstates / Fund that Flip)
There are several firms focused on disrupting the inefficient and opaque private lending market. Firms such as RealtyShares, Patch of Land, and ShareEstates are originating ‘hard money’ loans. By utilizing technology to more efficiently underwrite deals and raise capital they’re able to close quickly, while limiting risk, and offering superior terms.
Other firms such as PeerStreet partner with private lenders (over 50 originators) and utilize their proprietary algorithm and data science to select loans that fit their parameters. Investors have the ability to set their own investment parameters and PeerStreet will create a tailored portfolio. Think of it as the Welathfront for real estate.
PeerStreet has grown quickly, scaling to $165 million in originated loans in a little over a year. They have an impressive team and a unique distribution model that allows them to leverage existing lending networks to lower loss rates, and grow without direct marketing.
Crowdfunding Fund of Funds
AlphaFlow has created a fund of funds to enable accredited investors to access deals across the various real estate crowdfunding platforms. They utilize their own set of parameters to pick and choose assets that fit their investor’s goals.
Rather than investing in a single debt deal or single equity deal or with a platform that spreads your investment across debt or equity deals, AlphaFlow invests across platforms. While some investors want to curate their own diversified portfolio, AlphaFlow appeals to investors who want to set their real estate investing goals and let AlphaFlow take care of the rest.
By the Numbers
There’s been a lot of stats thrown around about the industry that I found interesting:
- Fundrise has 123,000 members and has raised $119M across their 4 eREITs
- In 2015 Fundrise had a net loss of $3.7M and through the first half of 2016, had net losses of $1.4m ($3.5M of revenue)
- RealtyShares reached $300M of capital raised
- RealtyMogul has raised over $250M in capital
- PeerStreet close a $15M Series A round led by A16Z.
I’m a big supporter of opening up the real estate investing world to retail investors, however I remain concerned. I’m hearing of deals going bad, undisciplined underwriting, and unfavorable structures for investors. The real estate crowdfunding space is growing rapidly, but it’s yet to experience a major test.
What happens when a crowdfunded real estate deal has its first big loss or there is a case of fraud? How resilient is the market? Only time will tell.