Since the passage of Title II of the Jumpstart Our Business Startups, or “JOBS,” Act in 2012, dozens of online real estate investing marketplaces have emerged. Online real estate investing is essentially “syndication” — a pooling of individuals to invest jointly into something few individuals could afford to invest in alone.
Syndication has existed offline for centuries. Prior to the passage of the JOBS Act, U.S. securities regulations mandated that syndication be conducted privately pursuant to Section 506(b) of Regulation D. Now that it can be conducted publicly and can occur online, technology companies like CrowdStreet can make it more efficient, scalable and transparent.
Benefits of Real Estate Crowdfunding
Through technology, crowdfunding real estate companies offer features and benefits previously unavailable to mainstream investors, including:
- The opportunity to directly invest in commercial real estate — Rather than buying into a publicly traded real estate company that owns dozens of properties or a mutual fund that includes an assortment of different real estate companies, investors can buy a stake in specific properties they choose.
Online convenience — Access to institutional-quality commercial real estate offerings in real time.
National access — Access to deals investors would otherwise have no knowledge of or ability to invest in. Investors aren’t limited to investing locally. They can select the specific property type, the location and the sponsor that best suits their investment strategy and objectives, anywhere in the nation. At the same time, sponsors can now just as easily accept an investor from across the country as from across town, which has spurred sponsor interest in developing a national, rather than regional, investor base.
The ability to compare and contrast multiple investments — Many platforms allow you to easily and quickly compare and contrast competing offerings to find projects that fit your investment criteria.
Lower minimum investment — In the past, the ability to invest in a real estate private offering usually came with a minimum investment amount of $100,000 or greater. Through online crowdfunding platforms, investors can access institutional-quality real estate offerings for as little as $5,000 or $10,000.
Diversification — Rather than sinking $100,000 into a single property and waiting for it to reach maturity, investors can now choose to invest $10,000 into 10 different deals that vary by geographic regions, sponsors, investment structures, asset classes, risk profiles and holding periods.
The CrowdStreet Difference
Headquartered in Portland, Oregon, and founded in 2013, CrowdStreet provides commercial real estate investment opportunities. What differentiates CrowdStreet from the many other real estate crowdfunding companies that have sprung up since Congress passed the JOBS Act?
In addition to hosting their own crowdfunded real estate platform connecting sponsors (real estate operators and developers) and investors, CrowdStreet offers Sponsor Direct, a private white-label product platform for sponsors who want to provide real estate fundraising and investor management capabilities directly on their existing branded website for their existing and future investors.
Through this platform, which uses the same technology that powers the CrowdStreet Marketplace, sponsors can post content, images and documents that enable investors to make informed decisions, as well as manage the workflow of the deals and track investment performance.
Additionally, most of the marketplaces that have launched since Title II began have been “indirect” model marketplaces, where the marketplace created a special purpose vehicle, typically a limited liability company (LLC), into which investors pool money and which then cuts a single check to the sponsor. CrowdStreet is one of only two major direct-to-investor marketplaces in the United States, in which investors invest directly with the sponsor instead of through an intermediary company.
CEO Tore Steen believes “the economy is strengthened when real estate developers and operators are less dependent upon traditional capital markets to fund projects, have greater access to capital and spread investment opportunities and risk across a larger pool of investors.”
CrowdStreet’s vetting and screening process includes vetting the sponsor, the specific real estate property and the sponsor’s specific offer. It works like this:
- The sponsor’s background and track record are assessed and assigned a corresponding designation as:
- Emerging — 2–5 years’ experience with portfolio activity up to $100M, experience in both geographical region and proposed asset class.
- Seasoned — 5+ years’ experience with portfolio activity over $100M, with existing network of repeat investors and established banking relationships.
- Tenured — 10+ years’ experience with portfolio activity of $250M+, with principals who have invested together through multiple real estate cycles, and the company has a dedicated staff for investor relations and accounting.
- After the sponsor meets the criteria, the asset they’re funding is screened based on the business plan, market data, operating statements, pro formas, appraisals and other due diligence documents.
Finally, the terms of the sponsor’s specific offer are vetted and evaluated resulting in a classification of:
- Common equity;
- Preferred equity; or
- Mezzanine or 2nd position.
According to Marshall Clark, VP of marketing, “CrowdStreet only lists institutional-quality commercial real estate investment offerings, unlike competing marketplaces which may list CRE alongside single-family homes and fix and flips of varying quality.”
CrowdStreet stats to date seem to reflect this success and commitment in the commercial real estate crowdfunding industry:
|Total Project Value on Marketplace as of October 13, 2016||$2,117,179,159|
|Total Successful Commercial Offerings||69|
|Average Project Value per Offering||$30,683,756|
|Average Equity per Offering||$10,593,804|
|Average Target Internal Rate of Return||18.5%|
|Average Annual Cash Yield||8.1%|
|Average Member Investment per Offering||$50,473|
|Fees to Investors||zero|
|Offering Types||Debt, Equity, Preferred Equity|
Deal transparency — Like most other real estate crowdfunding sites, CrowdStreet provides comprehensive information and documents on each project before and during the process. This allows investors to perform their own due diligence, as well as receive ongoing support, information and updates prior to and after investing.
IRA accessibility — If you have a self-directed IRA, you can invest in CrowdStreet deals.
Terms — Current investment opportunities at the time of this writing range between three and 10 years.
Investments are pre-screened — Every investment opportunity applying for inclusion to the CrowdStreet Marketplace is subjected to a rigorous, objective vetting process. Only 2% of all applicants successfully pass this process and appear on CrowdStreet’s marketplace.
Direct Sponsor Investment — CrowdStreet is one of only two major marketplaces to operate under a direct-to-investor model, where investors are able to directly invest with the sponsor instead of through a special purpose vehicle. The direct-to-investor model may result in lower overall risk to the investor, as it removes the platform risk of a marketplace insolvency and any associated disruption to the administration of funds contained in special purpose vehicles.
- No investor fees — All fees are paid by the sponsors; there is no fee at all for participating investors.
- Only institutional-quality commercial real estate — Unlike other marketplaces that mix single family home fix-and-flips with commercial real estate offerings, CrowdStreet is 100% focused on the commercial real estate market, and this shows in the quality of the investment offerings available on the site.
- Passive investment — Unlike owning commercial real estate outright, CrowdStreet investments are truly passive.
- Deal access — Access to deals investors would otherwise have no knowledge of or ability to invest in.
- Easy to compare opportunities — CrowdStreet puts all of its offering information and documents into the same format. This makes it easy for investors to compare and contrast numerous deals that meet their investment criteria.
- Dashboard tools — A key feature of online crowdfunding platforms is the use of technology to make real estate investing more efficient, transparent and scalable through online dashboard tools. CrowdStreet is continually improving their dashboard to include helpful projection and deal comparison tools. Its latest iteration includes comprehensive portfolio analytics.
- Deal notifications — Investors can register to receive notifications when new offerings that match their criteria become available with CrowdStreet.
- Minimum investment — CrowdStreet has recently lowered its minimum investment to $10,000 from $25,000, which is a huge improvement. For many other real estate crowdfunding sites, the minimum per deal is just $5,000, some even as low as $1,000.
- Accredited investors only — Like many real estate crowdfunding opportunities, you must be an accredited investor.
- Investment liquidity — Like most real estate investments and crowdfunding platforms, once you make an investment, you are pretty much committed to the investment for the term. There is currently no secondary market to sell your investment to others.
In any market, when efficiency, scalability and choice arrive, consumers typically win. As the online real estate investing market continues to grow, the quality of investment choices and terms available will likely continue to improve as more investors enter online marketplaces and more sponsors enter and compete to attract them.
Providing access to deals previously unavailable to the individual investor is a huge benefit of crowdfunding platforms. CrowdStreet offers access to a large volume of vetted commercial real estate deals, both equity and debt, and a totally fee-free platform for investors.