Today ownership in single real estate deals or real estate portfolios are being offered directly to individual investors on websites commonly referred to as Real Estate Crowdfunding platforms. As I discussed in an earlier post, there are a lot of different ways to get involved with real estate but Real Estate Crowdfunding platforms are becoming an increasingly popular way for the average investor to directly invest in real estate projects. Billions of dollars have been invested by individual investors using these platforms.
Why Should You Use Real Estate Crowdfunding Platforms?
Most Real Estate Crowdfunding platforms point out that institutional investors have consistently outperformed public markets over the last 20 years by investing in alternative assets like private market real estate. These alternative assets, which were largely unavailable to the average investor, have become accessible through Real Estate Crowdfunding platforms. The pitch from these platforms is that the platforms make it possible for an average investor to invest directly in real estate deals that were largely unavailable to him/her in the past.
I will point out a few things:
- I am a big believer of diversifying your investments beyond stock and bond funds or ETFs. You can read about my reasons here. I also believe in generating passive income with your investments – see here. So, I do believe these platforms, if used to select quality real estate projects, can give investors the opportunity to invest into an asset class that generates passive income and whose performance is not highly correlated to the stock market.
- You should pick a quality platform that offers investing in the type of real estate projects you want to add to your investment portfolio. This post is going to focus on things to consider when choosing a platform to join.
- You need to do an appropriate level of diligence on the specific real estate projects or real estate portfolios you invest in through these platforms. As I will discuss below the platform’s interest may not always be perfectly aligned with that of the investor so you need to make sure you perform your own due diligence to reduce your risk of project failure, delayed cash distributions, and sub-optimal returns. I will post on this later.
Not All Real Estate Crowdfunding Platforms are Created Equal
Real Estate Crowdfunding platforms have been around for a little less than a decade so they have not weathered an economic downturn and they have already had a few failures.
Some Platforms are Largely Funded by Venture Capital
The big conceptual issue for me with of these platforms is that the corporate goal of growing a platform’s revenues and profits needs to be met by increasing the number of deals the platform offers and ultimately funds. However, the goal of growing revenues and profits can be inconsistent with making sure the platforms offer thoroughly vetted real estate projects to investors. Meeting revenue and profit targets as well as estimated returns for investors might be at odds with each other.
In fact, many of these Real Estate Crowdfunding platforms are financially backed by venture capital firms that require rapid growth in revenues as part of their investing model. Boards of some of these platform companies are filled with people from venture capital firms that have invested in the platform. Remember, with venture capital if a company does not grow its revenues/profits fast enough then it may not receive its next round of financing. These platforms will have a lot of pressure to keep growing.
These Platforms Have Only Been Around in a Strong Real Estate Market
Remember, these platforms were established during the early stages after the Great Recession, there has not been a downturn since, and commercial real estate values are in many locations at all-time highs. Today’s market conditions make it easier for real estate projects to meet projections and hide poor project-level due diligence. If platforms are too focused on growth to meet the demands of their venture capital partners instead of offering quality real estate deals based on fundamental diligence then these same platforms may struggle to meet investor expectations once the commercial real estate market suffers a slow-down. You need to perform your own diligence on each deal and if you are not comfortable with performing diligence on a real estate project you need to understand that you are relying on the diligence of the platform to protect your investment.
Realty Shares was one of the first Real Estate Crowdfunding platforms. It had invested over $800 million of investor money into over 1,100 projects when it shut its doors to new investors in late 2018. What was reason for the shut down? Realty Shares could not acquire new financing to continue to fund its growing operations. The press release from Realty Shares basically said it could not grow fast enough to continue to get venture capital funding. The platform had over $400 million in active real estate projects that it was managing for investors when it stopped accepting new projects and investors. The good news for Realty Shares investors is that it appears the projects are continuing to be managed and distributions are continuing to be made. But other platforms could shut down when the real estate market sees tougher times and the growth and venture funding stops. What will happen to those investors and projects?
How to Choose a Platform
If you want to move forward with investing in real estate through a Real Estate Crowdfunding platform I suggest using the following criteria to evaluate which platform to use:
- Do I need to be an accredited investor and what are the minimums? Some platforms are only available to accredited investors. For example, CrowdStreet and ArborCrowd, two of my favorite platforms, only offer investments to accredited investors. Investors need to meet certain income or net worth requirements to be considered “accredited investors.” If you don’t make at least $200,000 or have a net worth of at least $1 million (excluding your home) then you are probably not an accredited investor. In that case, you should limit your search to those platforms that offer investments to non-accredited investors. RealtyMogul and Fundrise are two platforms that offer products to non-accredited investors. Also, you should make sure your investment goals and the minimum investment requirements of a platform are compatible. I am an accredited investor and am okay with larger minimums so these initial criteria will not be a limiting factor in my review of possible platforms to join.
- Does the platform offer the kind of real estate you want to invest in? This is really the first real screening criteria you should use when determining what platform to join. I think you should decide whether you want to invest in real estate debt or equity (e.g. do you want to own the debt secured by the property or do you want to own the actual property), what type of real estate properties do you want to invest in (e.g., apartment buildings versus commercial office space), and what geographic areas are you looking to invest in (e.g., California versus the Midwest)? You should also determine if the platform offers investments in single properties or only through a fund or REIT. For me, I already own real estate debt investments, all of the real estate that I directly own is in California, and I hold several REITs. Therefore, I want to focus on investing in specific real estate equity projects outside of California.
- How much due diligence does the platform perform on its deals and how do you perform your own diligence? Most of these platforms do some level of diligence on all of the deals they offer to investors but I like to look at how a platform describes the diligence it does on a deal and what diligence materials it will provide to investors to perform their own diligence. For example, RealtyMogul walks you through the exact due diligence process they perform on each investment, which includes reviewing the history and experience of the developers, understanding the local market conditions where the project is located, reviewing the property itself (which includes a site visit) and negotiating the investment structure. Some other platforms, such as ArborCrowd, use their family of companies with over 30 years of experience to conduct diligence and the diligence materials they provide to an investor appear extensive (samples are on its website). Also some platforms allow you to talk directly with the developers while others do not. I like platforms that explain in some detail the diligence they perform.
- What is the track record of the Platform, in terms results? You should really look at the quantity and quality of deals that have been offered through the platform. If there are not enough deals offered for investment then it may become challenging to find the right deal to invest in through a single platform. Some platforms, like CrowdStreet and RealtyMogul, have ample volume. Others, like ArborCrowd, appear to have less than a dozen deals offered to investors since inception. However, quantity is not a disqualifying criterion for me if the results of realized deals have been solid. Platforms should provide you with the results of completed projects so you can see what the actual results versus targeted performance were for investors. As an example, I like how CrowdStreet provides on its website performance details on every realized deal.
My Selected Platforms
I reviewed about a dozen Real Estate Crowdfunding platforms using the above criteria. Based on my review, I chose three platforms to join to use to evaluate real estate projects to invest in.
- CrowdStreet – I like the volume of deals, its access to diversified deals in terms of type of real estate and geographic location, how it categorizes the deals for investors on its website, and the transparency it provides on the performance of completed deals. I’ll be writing a separate post on my review of CrowdStreet.
- RealtyMogul – I like the volume of deals it has completed, its focus on cash flow positive properties and the due diligence process it uses on the deals it reviews, and how the platform seems less reliant on venture capital money than other platforms (it has not raised any additional venture capital money since 2015). I’ll be writing a separate post on my review of RealtyMogul.
- ArborCrowd – I do not like the limited deal flow from this platform but I like how it does not rely on venture capital (which means it can be more selective on the deals it offers to investors), it has ties to a family of successful real estate companies, and it has the experience and resources through these family of companies to conduct thorough diligence on each project. If it likes a project it uses its own funds to pre-fund each deal which again supports the fact that this platform likely thoroughly vets each deal it offers to investors. I’ll be interested to see how many investment opportunities I get to review through this platform. I’ll be writing a separate post on my review of ArborCrowd.
I will be joining these platforms over the next few weeks and I will be providing periodic updates on how I like each platform and any investments I make with them.