In a recent post, I discussed several different ways to invest in real estate. One of the real estate investments I discussed was investing in real estate projects through a Real Estate Crowdfunding platform. I concluded that investing in real estate through these platforms could be a good thing if a person wants to invest in specific real estate projects. You can see my post on Real Estate Crowdfunding platforms here.
In a subsequent post I wrote about three Real Estate Crowdfunding platforms I was going to join: CrowdStreet; RealtyMogul; and ArborCrowd. You can see that post here. Since then, I have joined those platforms and I have been evaluating different projects to invest in. I have probably reviewed a dozen projects since joining the platforms. I will write about my experience with the three platforms at a later date.
Today’s post will discuss my very first Real Estate Crowdfunding project that I am about to invest in through CrowdStreet. The deal is anticipated to close in March 2020.
My Initial Thoughts on CrowdStreet
The CrowdStreet Platform
First off, I have been impressed with CrowdStreet’s platform and the deals it has offered to investors through what it calls the “Marketplace.” Deals on the Marketplace are categorized by property type (e.g., multi-family, retail, storage, etc.), the type of project (e.g., is it a ground-up development project, an existing cash-flowing property where the sponsor wants to add some value and raise rents over time, etc.), estimated cash yields and total returns, and the targeted investment period. Filtering or sorting the deals based on these criteria is easy to do on CrowdStreet’s website.
Diligence Through CrowdStreet
On the CrowdStreet platform you can select a deal and gain access to certain information on the deal including:
- sponsor’s track record;
- sponsor’s performance-to-date on other deals it closed on CrowdStreet;
- property and location details;
- financial projections (details vary);
- information on comparable rents and sales (details vary); and
- Sponsor management bios.
One of the diligence features that I appreciated the most is the sponsor’s investment deck on the project and the Sponsor’s presentation on the project that also allowed potential investors to ask specific questions about the deal. This presentation is recorded and made available to CrowdStreet investors who cannot attend the live call.
You can also ask the Sponsor a question by email and they will respond directly to you.
My only reservation so far is not related to the diligence process itself but the fact that these deals seem to fill-up quickly which limits the amount of diligence you can do if you want to participate in a transaction.
My First Investment: A Multi-Family Property in North Carolina
My first investment through a Real Estate Crowdfunding platform will be to purchase a very small ownership interest in a company that owns a 250+ unit multifamily apartment community located in Charlotte, North Carolina. The goal of the project is to (i) capitalize on organic rent growth in an appreciating submarket; (ii) upgrade unit interiors and common areas to achieve rent premiums; (iii) maximize operating performance with improved property management; and (iv) prepare the property to be sold in approximately five (5) years.
The targeted returns are an average annual cash yield of a little over 7% and a total annual rate of approximately 14% during the five-year period.
Why This Project?
Here are the main reasons I choose to invest in this project:
The Deal Fits my Overall Investment Objectives
I am looking to invest in properties with existing cash flow that will see solid, but unspectacular, total returns through value-added activities that increase the cash flow and market value of the properties. I also want to invest in projects outside of California because the real estate I directly own is all concentrated in Southern California.
This project fits nicely into my investment objectives.
The Sponsor has a Good Track Record
I want to work with sponsors that have been around for a while and that have successfully completed projects using the investment model they are asking me to invest in.
The Sponsor for this deal has completed (meaning bought, improved and sold) 19 multi-family properties in different parts of the country since 2010. The Sponsor has not lost any investor principal since it was founded and actual investor returns on the Sponsor’s projects have generally met or exceed initial targeted returns. The principals themselves have also been through a complete market cycle so they should be able to manage this investment through a typical downturn.
In addition, the Sponsor’s performance with CrowdStreet has been good so far. The Sponsor has three other deals that it has previously offered through CrowdStreet and these deals are generally performing well. Two of these deals are in North Carolina.
The Sponsor is focused on Multi-Family Housing in North Carolina
The Sponsor owns over 1,200 apartment units across seven properties in North Carolina. The Sponsor will be using a value-add business plan that it has previously used to increase the value properties in its portfolio.
To me, the Sponsor’s significant presence in the Charlotte market supports the Sponsor’s ability to perform effective due diligence and gives it an ability to optimize its cost structure in the market.
The Sponsor Provided Realistic Projections
The Sponsor’s previous total annual returns on similar projects have exceeded 20% in the past. However, the Sponsor is only targeting a 14% total annual return for this project. When asked why it is projecting lower returns for this investment the Sponsor highlighted how commercial real estate is getting closer to the end of its growth cycle and they believed it was prudent to lower targeted returns because of it. I appreciated the transparency regarding lower future returns due to the stage of the market cycle we are in.
The Deal’s Capital Structure is Reasonable
I am currently staying away from ground-up development that might get caught in the beginning of a down cycle. I want to invest in properties that are supported by cash flow and have supportable debt structures.
The deal is supported by a Loan-to-Value (LTV) ratio of 60% and a 10 year loan that is interest only the first five years and them amortized over 30 years for the second five years. This LTV is much lower than many of the other deals that I have seen where LTV ratios are 70-75%. The deal is also expected to be cash flow positive in the first year, before rent increases are estimated to take place, which provides further downside protection in the event rent increases take longer to materialize.
The Sponsor has some (but not enough) Skin in the Game
I actually wish the Sponsor had more of its personal money invested in this specific project. The Sponsor is only investing a little over $550,000 into the investment which is a little over 1.2% of the capital for the deal. I would like to see 5-10% of deal capital be directly from the Sponsor’s principals.
However, I gained additional comfort in the Sponsor’s confidence in this geographic region because it is currently invested in seven properties in North Carolina and therefore its “collective” skin in the game for the area is much higher than just this one investment.
We will see if this is something I regret in the future.
The Deal’s Expected Cash Yield and Overall Investment Horizon
I am seeking at least a 5% average cash yield on any investment I make through Real Estate Crowdfunding with a specific deal period of 3-5 years. I want a property I invest in to have positive cash flow from Day 1 and I do not want to invest in projects with targeted investment periods that exceed 5 years. We are in a later stage of the commercial real estate cycle and long holding periods seem riskier to me.
This deal meets my criteria with its targeted cash yield and holding period. Also, the Sponsor has historically realized a shorter than expected holding period for its investments. I will not rely on this historical trend but it was nice to see that the holding periods for the Sponsor’s previous projects have almost always been less than 5 years.
My Own Limited Diligence Checks Out
I spent a few hours conducting some of my own due diligence, including:
- Calling apartment homes in the area to check availability and pricing;
- reviewing online reviews of the investment property and the competitive properties;
- searching Google to research Charlotte’s housing market and 2-3 year employment and demographic forecasts; and
- researching the backgrounds of the Sponsor principals.
I did not find anything that was inconsistent with the information provided by the Sponsor. I think the biggest risk for this investment is whether the economy and commercial real estate market cycles stay positive enough over the next several years to support the rent increases forecasted by the Sponsor and the eventual sale of the property to another investor at the forecasted cap rate. The downside protection for this investment is that even with today’s rents the investment should see positive cash flow.
Do Your Own Diligence on the Sponsor and the Deal
I will keep you posted on how this investment progresses but in the meantime you I recommend you think about including the criteria I used above when you diligence a real estate investment offered by any Real Estate Crowdfunding platform:
- Understand the History and Experience of the Sponsor Regarding the Investment Model and Geographic Area
- Validate the Deal Itself – Do Some of Your Own Diligence
- Understand the Investment Hold Period, the Exit Opportunities and the Downside Protection
- Check to See if the Sponsor has Skin in the game
Accredited Investors Only
Most of the deals being offered on CrowdStreet are available to accredited investors only and the minimum investment for this transaction was $25,000. This means not everyone has access to these investments.
However, a few other platforms provide non-accredited investors to have access to their deals and the minimum investment is much lower. I will eventually be evaluating platforms for non-accredited investors to consider.