A few years ago, Crowdfunding Real Estate (CFRE) didn’t exist. Now companies engaged in some form of CFRE are popping up weekly, some focused on residential real estate investing, some on commercial and some offering both.
While each one of them owes their marketable existence to the same two pieces of legislation, Title II and Title III of the Jumpstart Our Business Startups (JOBS) Act, their individual approaches differ. Three broad categories seem to be emerging:
- Real Estate Funds Augmented by Crowdfunding Tech approach — Under this approach, the investment is structured as an LLC with their investors, which will in turn invest in another LLC that purchases the property (creating a fund of funds).
- Localized Crowdfunding approach — Another approach has been to “de-abstract” real estate assets for investors. These platforms present real estate investments as tangible property, on a real street, with real connections to the physical world and to the community it’s situated in. The selling point for this approach is that regular people who live in or near a community have insider intelligence about properties that non-locals don’t have access to.
- Platform approach — What this means is that the CFRE is providing the technology and forum that real estate sponsors and investors need to connect, administer, invest and transact. RealCrowd is a “pure” platform, meaning they are not broker/dealers, and they never take possession of customer funds or securities and receive no compensation in connection with the purchase or sale of the investment.
RealCrowd is headquartered in Palo Alto, California. The company was founded with an undisclosed amount of seed money and has since raised $4.5 million in venture capital. The company has done more than 70 real estate investment deals totaling $75 million since launching in late 2013.
The founders envisioned an open marketplace where sponsors and investors make connections, grow networks, carry out transactions and do deals without all the institutional intermediaries and encumbrances that existed in the pre-JOBS Act era.
As CEO and Co-Founder Adam Hooper explains, “Instead of inserting another layer of management — a source of overhead and justification for fees — our goal is to remove all possible inefficiencies in the relationship between operator and investor.”
According to Hooper, RealCrowd is distinguished as having set the largest raise of any crowdfunding opportunity where one of the funds on the platform raised of $13.5 million and they have brought their network of 15,000 members access to over $1.8 billion in real estate opportunities.
RealCrowd does not form intermediary LLCs and is not a registered broker/dealer, therefore it does not provide investment advice or recommendations. RealCrowd does screen sponsors using strict criteria to ensure deal quality for their investors. At an absolute minimum, the sponsor must have at least 10 years of principal level experience and a minimum of $50 million of transaction experience as a principal. “This doesn’t allow for a VP of some larger company to go out on their own and immediately start to begin raising money from the crowd,” according to Hooper. In addition to these minimums, RealCrowd reviews the sponsor track record (bankruptcies, foreclosures, litigation, etc.) and requires lender references. The average real estate sponsor on RealCrowd has over $800 million of transaction experience.
How RealCrowd Works
In any investment deal on RealCrowd, there are two parties: Sponsors, the real estate operating companies looking for funding, and Investors, who must be accredited.
Investors are given access to inspect and browse through offerings on real estate investment deals, including all materials, due diligence and legal documents.
The steps to getting started as an investor are relatively simple:
- Set up your free account and start browsing deals — Once your profile is finished you are able to begin viewing the latest investing tips and deals that are posted.
- Review investment deals — You’ll find both direct property investments and fund investments. The sponsors pay the advertising and technology licensing fees for the service.
- Choose your investment(s) — You can choose to invest in a specific property or in a fund on RealCrowd. Each investment opportunity is categorized according to projected risk versus return. You pick the one(s) that suit your personal goals and invest in them through the platform. All of the electronic signatures, communications, and document delivery and storage with your investment partner are handled by the dashboard on RealCrowd’s platform.
The commercial real estate opportunities hosted on RealCrowd fall into one of four categories that correspond to the risk and reward inherent in the different types of deals: Core, Core-Plus, Value Add and Opportunistic.
- Core: Lower Risk/Lower Return. The most conservative and lowest risk of the four classifications, core property investments utilize lower leverage and tend to generate predictable cash flows. The properties are often positioned in strong markets, like thriving metropolitan areas, and are easily financed. RealCrowd calls this category “the wheelhouse of conservative income seekers.”
- Core-Plus: Moderate Risk/Moderate Return. Core-Plus properties are also located in areas with a strong tenant base and generally have few to no issues with securing financing, The difference is found in a limited elevation of risk and potential for increased NOI, like upcoming lease rollover or light value-add opportunity.
- Value Add: Medium-to-High Risk/Medium-to-High Return. This class is characterized by the opportunity to improve the investment in some way. This improvement often comes in the form of enhancing the physical property itself or increasing the operational efficiency.
- Opportunistic/Development: Higher Risk/Higher Return. These properties require “enhancement” in order to generate the expected level of returns. Enhancement can range from ground-up development to redeployment of existing structures.
Accredited Investor — Right now, you must be accredited (over $1 million in assets or making more than $200,000 for the last three years). RealCrowd works with a third-party verification service to provide the SEC-required letter and attorney attestation regarding the individuals accreditation status and provides it directly to the sponsor for approval or rejection prior to completing the investment process.
$5,000 Minimum Investment — Most properties on the site right now require $25,000 or $50,000 minimum, but $5,000 and $10,000 deals are also available when the sponsor is approved.
IRA Option — It’s possible to invest via a self-directed IRA with RealCrowd.
Investment Liquidity Terms — RealCrowd opportunities typically range from 3 years to 5 years.
Funds or Specific Properties — On RealCrowd, you’ll find both offerings to choose among.
No Fees for Investors — Fees are never charged to investors. The real estate sponsors pay RealCrowd a fee to be listed on their platform.
Security — The RealCrowd platform runs via the Windows Azure platform, judged to be among the most secure and leading cloud-based services on the entire Internet with applications and data physically located in multiple secure data centers. RealCrowd utilizes Windows Azure and Amazon Web Services for hosting. Both environments are compliant with numerous security certifications, including SOC 1/SSAE 16/ISAE 3402 (formerly SAS70). Personal and financial information is encrypted in all transmissions and while stored in their database. (You can see a diagram of RealCrowd’s security set up here: https://www.realcrowd.com/about/security.)
Customer Service — RealCrowd sends a series of 8 educational emails that teach you the process and skills of crowdfunding real estate as soon as you join. The website also features helpful articles, and you can reach out to a team member with specific questions via email, phone, and contact form support.
- Invest directly in specific properties — Investing directly means that all of your money goes entirely into the investment, and all of the returns associated with it go back into your pocket. RealCrowd is not a middleman, but provides the marketplace for you to have direct access to established real estate deals without adding a management level and fees.
- Transparency and direct access — RealCrowd is very transparent about each deal. You can readily call and talk with the deal sponsor directly and have your specific questions answered and concerns addressed. All the documents that you need to perform due diligence, electronically sign deals and file related taxes are online and accessible 24/7.
- Ready access to a wide selection of deals — Many competing sites are only a few offerings per month. RealCrowd seems to have a larger selection of offerings in various sectors on an ongoing basis. They aim to have between 6 and 10 available at any given time to provide ample opportunities to diversify your investments.
- Service is free — RealCrowd charges technology access fees for the operating partners’ use of the service. Investors are not charged asset management fees, upfront fees, carried interest fees or any other fee.
- No 30-day “cooling off” period — Many CFREs require that you wait 30 days after registering on their site before you invest. Since offerings on RealCrowd are structured in a way that allows for general solicitations or public advertising, there is no SEC imposed mandatory waiting period.
- High underwriting standards for sponsors — You won’t find any “fix and flip” individuals using crowdfunding as a “capital of last resort”. While all the real estate crowdfunding platforms tout high standards, the caliber of sponsors on RealCrowd seems to be the big guys (funding $150 million to $4-5 billion properties) that are well-capitalized with experience and favorable track records in the particular properties they’re fun.
- Accredited investors only — You cannot invest via RealCrowd’s platform unless you’ve been approved/verified as an accredited investor.
- No secondary market — Not unlike other CFREs, there is no secondary market for RealCrowd investments. If you invest, you are in it for the duration of the agreed-to term.
- Deals are not pre-funded — Like most other sites, RealCrowd doesn’t give the money to the sponsor until enough investors pony up to fill the offering. That means you have to wait until the deal is successfully sold to every investor. If the offering doesn’t get filled, you won’t be able to invest, even after waiting.
RealCrowd has a lot to offer, especially considering that investors pay no fees to participate and use their platform. (Other CFRE platforms charge upfront fees, 1-2% annually for asset management and may even take a percentage of the profits when the deal is complete.) RealCrowd makes investing in commercial real estate easy by automating every aspect of the deal that you enter in with the business partner. They offer a high level of transparency — you are able to speak with the owner of the business who is raising the funds to ask your questions directly from the source.
CFRE is a brand-new industry that just started in 2013. Many of the 85+ companies in this space just got started in 2014 and 2015. In this infancy phase, there are no standardized risk ratings and industry best practices are still being worked out.
There’s a reason the SEC requires that only accredited investors may participate. Industry critics caution that, at this point in time, most CFRE investments are speculative unless:
- You’re already a real estate professional and know how to do proper due diligence on each deal.
- You have enough money to diversify your real estate holdings against geographic, regional, tenant and property risk.
- Be careful that you’re not speculating with a core holding of your investment portfolio. The industry will evolve and improve rapidly over the next several years and investing will get easier, safer and perhaps more liquid as secondary markets start to appear.