I have been spending a lot of time reviewing potential real estate transactions to invest using different real estate crowdfunding platforms. So far, my favorite real estate crowdfunding platform is CrowdStreet. I continue to be impressed with the number of quality of deals it offers, the diligence it allows investors to perform, and the amount of communication it has with its members. Here are some of my initial real estate crowdfunding posts so you can get you up to speed with the investment opportunity through real estate crowdfunding:
Most real estate investments will have their challenges during the next few quarters. I’ve written about some of those issues:
That being said, low interest rates and increased money supply by the Federal Reserve tends to favor owning assets like real estate over the long-term. There will be some short-term disruption to lending, collection issues, and therefore some deals will not get done, real estate prices may suffer in the short term, and highly leveraged deals may suffer defaults and lose investor money. I continue to believe commercial real estate should be a good asset class to own in the long run.
The downside: Up until recently, I felt the only way I could own great properties was through a publicly traded REIT and REIT prices are volatile and have significant fees.
The new upside: With real estate crowdfunding, I feel I can own some great properties alongside some great real estate sponsors.
What deals am I choosing to invest in through real estate crowdfunding?
I am noticing that the real estate deals that are getting done on CrowdStreet are typically securing some long-term financing at very low interest rates. Right now, I am only investing in projects that have positive cash flow day one, relatively low amounts of leverage, and good financing terms. I have invested in multi-family, medical office buildings whose tenants operate in a recession resistant space, and mobile home parks (that have also proven to be very recession resistant.
Since the beginning of the year I have submitted funds to invest in five projects. Each of these projects is either a Core, Core-Plus, or Value-Add Project. What does this mean?
- Core commercial real estate investments are typically fully leased to quality tenants, have stabilized returns and require little to no major renovations. These properties are often in highly desirable locations in major markets and the properties are well-kept and require little to no improvements on behalf of the new owner. These investments typically have predictable cash flows but they tend to have the lowest annualized returns.
- Core-plus commercial real estate investments are combine growth and income with typically more emphasis on income. The cash flow is a little less predictable than core assets but they often result in a higher rate of return than core investments. These investments might use more leverage than core investments.
- Value-Add real estate investments usually have some kind of management or operational problems, require some physical improvements and/or suffer from capital constraints. The plan is usually to obtain higher rents over time by making physical improvements to the asset and to lower operating expenses with more efficient management. If everything goes to plan the sponsor can dramatically increase the net operating income at the property and increase the overall value of the property.
Significant Sponsor Experience
I am also only investing with sponsors that have significant experience and usually meet one of the following designations by CrowdStreet:
- Tenured: As defined by CrowdStreet, tenured Sponsors are proven multi-cycle industry veterans that have at least 10 years of investment activity at the entity level and meet additional criteria put in place by CrowdStreet.
- Enterprise: Enterprise Sponsors are large, established firms with nationwide platforms. They have at least 15 years of investment activity at the entity level, are currently ranked as a top 250 commercial real estate holder and meet additional criteria put in place by CrowdStreet.
I am also focusing on sponsors that have significant experience with the specific asset class and operating in the local market. I do not think it is a great time to invest with newbie sponsors.
Recession-Resistant with Upside
CrowdStreet has brought some really interesting deals to investors. I believe sponsors are bringing good deals to CrowdStreet because the platform is building a reputation that it can deliver capital to sponsors pretty quickly. This means good deals are likely to continue to flow to CrowdStreet in 2020 as certainty of closing will become more important for sellers. Here are the projects where I have submitted funds to invest in:
- Apartment Building in Charlotte: You can see my post on this investment here.
- Apartment Building in Washington D.C.: 100 unit Class A apartment building with a master lease in place with quality tent to rent all 100 units; cash flow positive.
- Apartment Building Portfolio Managed by a Strong Sponsor: Two Class A properties with 500+ units in two economically strong areas; cash flow positive.
- Portfolio of Medical Office Buildings: Dialysis centers with potential upside; cash flow positive.
- Manufactured Housing Portfolio: Multiple properties with 500+ units of affordable units; cash flow positive.
I will be writing more detailed posts on each of these transactions but this investments are targeted to have average annual cash yields in excess of 7% and average annual total returns in excess of 15%. The targeted investment period is 3-10 years.
Granted, these returns may not materialize but these sponsors have very good track records of generating positive returns for their investors. These returns are much better returns than what I could expect to achieve right now by buying something like a condo or single family home in my area.
I am now going to sit back and see how these investments perform over the next twelve months before investing much more in this platform. These are very illiquid investments so my investing in this platform will be incremental.
I understand that commercial real estate will have some challenges this year. That is why I am not investing in development projects at this exact moment, projects with insufficient existing cash flows to cover debt payments, and with sponsors that have less than 10 years of investing experience.
If you are looking to invest in real estate you should seriously consider real estate crowdfunding as an option to invest. Do your own diligence on the platform, the sponsor, and the investment but so far I am impressed with what I am seeing.
More to come from me on this opportunity in the coming months, quarters, and years.