A Student of the Real Estate Game


My Latest Thoughts on Crowdfunding Real Estate Part II

Mar 20, 2014 | Innovation, Passive Investing, Technology

Back in November I shared some of my thoughts on real estate crowdfunding. Over the past 5 months I’ve met with or had phone conversations with a least 10 new crowdfunding platforms, crowdfunded a portion of the equity on a new deal, and had countless conversations with real estate professions interested in the space. I wanted to share some thoughts based on those experiences. Crowdfunding touches so many pieces of the business and is still in its nascency, so bear with my disjointed thoughts.

Crowdfunding Revenue Models

Crowdfunding platforms have a variety of revenue models. Some take a fixed technology fee then an ongoing asset management fee for utilizing their online investor management platform, while others take a % of equity raised fee and cut into the returns of their investors. I don’t think crowdfunding platforms should control investors, but rather focus on bringing on high-quality sponsors with good access to deals and scaling the platform. If the deal is successful and investors/sponsors have a positive experience, they’ll come back. Groups that take a % of the equity raise and fee their investors are not too dissimilar to equity brokers and private equity shops. Crowdfunding is intended to remove the middle-man and provide investors the ability to invest directly into real estate.  

Real Estate Firms Need to Create Brand Equity

I recently posted my thoughts on how to build an online presence that resonates with potential investors and turns strangers into advocates and investors. As private real estate deals are moved online, it’s critical for sponsors to stand out to attract investment. Educated investors don’t base their decisions purely on projected returns. Instead, they want to relate to and establish a personal relationship with the sponsor.

Real Estate Crowdfunding is Getting Competitive

While a bunch of crowdfunding platforms have popped up and are riding the wave of publicity, only the best ones will survive. To be successful I think platforms will need a critical mass of deals from quality sponsors, be well-funded, and have a team that understands real estate, tech, and entrepreneurship. A few platforms are emerging as early leaders in the space, however it’s inevitable that major players get involved and shake-up the dynamic of the space. It’s just a matter of time.

The Technology is Important

A major value of real estate crowdfunding for sponsors is the use of their investor management technology. Managing 20, 50, or 100 investors in a deal is incredibly time-consuming, so the ability to sign docs, raise capital, provide reporting, and make distributions online is incredibly important. For investors, the ease of logging on to a secure portal to view deal-level returns, see real-time reporting, and download accounting documents is also important. If the tech is lousy, sponsors and investors alike won’t come back.

Platforms Need to Focus on Both Retail and Accredited Investors

For many reasons, platforms are almost exclusively focused on accredited investor. However, to create a sustainable model that generates recurring revenue, I think platforms must tap into the unaccredited investor (97% of the population). It’s likely we’ll see platforms broken into two segments; one for accredited investors and another for retail investors.

While it’s still incredibly early in the space, much of the real estate world is waking up to the massive impact that crowdfunding is going to have on the business. There’s a lot of hype around crowdfunding, however it’s going to continue to evolve over the next few years until we see a few major platforms emerge.

What do you think?