Crowd Funding as a RE Investment? Your thoughts?

[John Arendsen]

I tend to be the crawl before I walk type when it comes to new opps and have been keeping my eyes wide open when it comes to CF investments and reading and learning while sitting on the sidelines. Were I ready to step into the fray next year does anyone have any thoughts on where, who, when and what to align myself with as a greenhorn CF investor?

I'm and accredited investor and by no means new to investing. I have an appreciable RE and stock portfolio but I'm just looking at other ways of diversifying for the near and long term future. I've been looking at doing a little more in the stock market (i.e. options, new IPO's, robotics, lithium, Marijuana related investments, etc) as I've done quite well during the past 6 to 7 years.

However, just about anyone who could fog a mirror and took the ride up couldn't help but make money in that upwardly mobile market. But those days are over for now and I see the market slowing down perhaps even dipping. So I'm looking for some other ways to build on my investment portfolio.

Although somewhat cautious on sticking my toes into the honey dew I can be somewhat of an adventurer and don't mind investing in more speculative opps in smaller $$$ increments to start with.

However, in that event I'd want to be more hands on. As @J Scott has intimated on another thread on this subject he sits on the board of some of his investments. I tend to lean that way as well and don't mind jumping into the trenches and getting my hands dirty as I'm also a general & manufactured home contractor, manufactured home dealer and developer, real estate broker, investor and property manager. Dooe anyone know how one would get involved with investments such as this?

[Laurence Samuels]

I only know of Fundrise.com

[Awen Thomas]

Hi,

Crowdfunding is not a new phenomenon and it makes big waves in the real estate industry that is beneficial for both real estate investors and real estate companies as well. There are various Crowdfunding platforms for real estate such as Realty Shares, Realty Mogul, founder, Patch of land and more, which makes real estate investment easier for investors and developers. I’m a real estate investor and I have used crowdfunding for real estate investment. As per my opinion, Crowdfunding is a perfect to invest in real estate because:-

1. You can easily access the real estate market

2. You can directly work with real estate developers

3. You have multiple options to access number of projects

For more detail about real estate crowdfunding, go through the following links ;-

http://www.investopedia.com/articles/investing/072514/real-estate-and-crowdfunding-new-path-investors.asp

http://crowdfunding.about.com/od/How-to-crowdfund/fl/What-is-Real-Estate-Crowdfunding-A-Guide-for-Investors.htm

http://crowdfund.co/real-estate/

http://www.fundraisingscript.com/blog/2015/08/03/g...

Hope it will be helpful for you. Thanks!!

[Sterling White]

Interesting thought process above @John Arendsen. In the RECF space it is mostly hands off for the investor and the day to day involvement of the project is done by the operator. 

Maybe taking a similar route as J. Scott will give you what you are looking for. Have you looked into that approach? 

[Ian Ippolito]

@John Arendsen, if I understand your posting, you're looking to invest in crowdfunding sites, but not as a typical investor but as someone who sits on the board.

There are about 20 sites that I would consider to be investment quality, and the remaining 80+ are fairly poor for one reason or another (in sufficient volume, none of experience, poor investor protection, etc.). 

Of these 20 sites, about eight have VC funding. For example, Realty Mogul has $45 million in funding. So to sit on the board of one of these top-tier sites, you would need pretty deep pockets to invest in them as a company (let alone before you started to invest in any real estate). And even if you did, it would only happen if they need to raise money, so it would be very difficult to pull off with the timing.

So what remains are some of the second-tier sites, which haven't attracted venture funding for one reason or another, but hopefully have something unique or compelling that you feel makes them more worthy of an investment. And again, you need to pull off some timing such that the owners were looking for an investment of that type.

Hope this helps.

[John Blackman]

Ian's site does a good job rating all of the existing crowd funding portals.  The space is also growing and evolving, so I expect crowd funding sites to become more robust over time as the industry grows especially as those key quality metrics become a well known standard to achieve.

Title 3 starts this year which is going to be very turbulent at first, but it will really stretch the capability of the portals to manage a higher volume of investors.

[John Arendsen]

@John Blackman Not familiar with Title 3.

[Timothy Li]

@John Arendsen

Glad you're thinking about diversifying your portfolio and potentially making an equity play at some of the crowdfunding platforms out there. I'm happy to answer any questions you might have.

Thanks

Tim

[Jim Groves]

Originally posted by @John Arendsen:

@John Blackman Not familiar with Title 3.

 It's the provision that allows for non-accredited investors to participate in crowdfunding investments.  Based on your prior posts, I'm assuming you're accredited so it won't apply to you.

[Jay Hinrichs]

@John Arendsen no mystery to CF on the debt side they are just HML and if you equate it to CA lending rules were your allowed to fractionlize DT's they are basically doing the same thing pooling investors into a debt instrument. . they get rewarded with the points and servicing fee's.

[John Arendsen]

@Timothy Li, Thanks for the HU. Do you know why, what and how your answer above was editied by an administrator? 

"Edited about an hour ago by Administrator"

[John Arendsen]

@Jim Groves, So are you saying that if I'm accredited I can't participate in CF?

[John Arendsen]

@Jay Hinrichs, So the folks that promote the CF deals are the ones getting the points and servicing fees?

[Jay Hinrichs]

@John Arendsen  nope he is saying the opposite up until title 3 most CF sites only dealt with acred's

I think the edit was probably some sort of advertising the mod thought they were doing but I don't really know  LOL

[Jay Hinrichs]

@John Arendsen  Exactly the portal owners generate their revenue basically exactly like any normal mortgage broker would.. I could be wrong but I don't believe any investors have to pay up front .. that all revenue for the portal comes from points servicing and in equity deals share of equity...

Jump on Realty Shares or Realty Mogul or Patch of Land  register and then you will see their deals in real time..

[Scott Trench]

Real Estate crowdfunding portals have taken a large amount of interest in BiggerPockets, especially with advertising, for obvious reasons. As such, I've worked with these portals quite often over the past two years.

What I've noticed is that the original goal seemed to be to get investors equity positions in large scale real estate projects - commercial high rises or 100+ unit apartment complexes.

While this has worked well for a few very large portals mentioned earlier here, the reality of the situation seems to be that many of the fledgling portals did not work out, grow to sufficient size, or build enough of a reputation quickly enough. 

They failed to attract the really great developers and commercial real estate pros that are needed to successful manage a project with complicated and relatively expensive financing solutions - these developers weren't crowdfunding in many cases until AFTER they had raised some private money, gotten some commercial loans, invested personally, and THEN raised the last chunk through the crowd.

It is therefore my opinion that the opportunity to enter this particular niche of crowdfunding will be difficult for new entrants.

Instead, it seems that crowdfunding portals are having much more success financing DEBT for real estate deals. Basically, portals are becoming hard money lenders. They work with local flippers and rehabbers in target markets around the country, and offer investors the opportunity to finance well-collateralized rehab projects at a scale acceptable to most investors that are interested in crowdfunding.

This was not what I expected to develop, but it seems to make a lot of sense for all the parties involved. Flippers and rehabbers get a stable source of funding that can scale (in theory) infinitely as they grow, and investors get a chance to earn stable, decently high returns - with limited downside in the case of well-collateralized land or development projects.

Just my observations of the industry so far.

[John Arendsen]

[Scott Trench]

@John Arendsen I think that this is the beauty of the crowdfunding industry - those rules don't necessarily apply. It's up to the portal, the investors, and the rehabber. I believe that if it is structured like a typical hard money deal, then yes.

Note - often, I believe that the portal will set up an entity for the transaction, of which the participants get an equity cut. That entity will be the one lending the money and dissolved upon the satisfaction of the terms of the loan... It might vary in specifics from portal to portal.

[John Arendsen]

Most HML's that I've been involved with collatoralize with the 1st trust deed so I'd have to assume that all the members of a CF would have the same benefit.

[Mark Robertson]

At this point you have to be accredited to invest.  There is a loophole that many investors are taking advantage of, but I predict it will be the downfall of many platforms in the future. 506b portals (ifunding, Realty Shares, Realty Mogul and Fundrise etc. ) allow investors to self certify.  506c portals (Real Crowd, Patch of Land, etc ) must use reasonable means to verify investor's accredited status before they can invest.   While the 506c  certification is a pain for all involved, it does allow the platforms to advertise and it does allow for the open discussion of the deals outside of the portals.

506b deals are easier to make the investment, but they do not allow any public discussion of due diligence materials and the portals will not even let web sites discuss returns after they are funded.  This lack of transparency is not good for the industry or investors.  In addition, once a few 506b deals go bad and it turns out there are non accredited investors in the deals, the SEC will come down HARD.

As far as crowdfunding investors being in first position, it depends. Every deal is different. Some are 1st position (typical HML) , some are in 2nd position (mezz debt) and some are in 3rd or 4th (equity deals). You have to look at each deal. In addition it gets more complicated because you invest in a LLC that then will invest into the deal. The LLC is in first position, not you per se.

[Bryan Hancock]

@John Arendsen

Transactions can be structured in many different ways.  What is typical is for the platform to work as an issuer and issue payment-dependent notes for debt projects (bridge loans, interim construction loans, rehab loans, etc.).  The legal here includes complicated indenture agreements and other standard items like an offering circular, subscription agreement, etc.  You want to make sure you do your diligence about how the legal is set up so you can make sure that the project you're investing in isn't coupled with the platform itself and whether or not they'll be around at the end of it.  I would also argue that the investor is better served by having the platform act on their behalf and on the behalf of the investors collectively in workout situations.  You should ask about the platform's legal procedures for this and how they'd deal with workouts if things don't go as planned.  The platform should have real estate people dealing with these sorts of issues and not solely lawyers or people that come from a technology or venture capital background.  

Equity investments are generally riskier, but potentially can deliver more upside.  Ground-up hotels or really any development project has much more that can go wrong in most instances than a hard money loan on a fully-developed project with a solid borrower.  You should demand a higher potential upside on these types of projects while being fully cognizant that the project may not deliver as expected.  The project may take longer than expected and the market may change.  Many other factors can influence the ultimate returns these projects generate.  

In the middle of 2016 projects under $1M will start to become available for non-accredited investors with federal securities exemptions.  Title III will be a game changer in the real estate space for smaller projects.  For larger projects with capital needs in excess of $1M the way to raise money probably won't change materially until the accredited investor revision is revised.  

Crowdfunding isn't really all that revolutionary from a real estate standpoint.  A good horse with a good jockey is still what you're looking for.  What has changed materially is for investors to gain access to direct placements in individual projects nationwide using technology and for operators and platforms to be able to advertise their offerings generally.  A savvy investor should seek a platform that specializes in a certain state or locale and truly has the staff and expertise to evaluate the risks of investing there.  Many of the platforms are trying to be all things to all people and are not doing anything very well.    

Regarding the comments about the Rube Goldberg Lamp NAL 506(b) Title II platforms above I fully agree.  In the long run something is going to go wrong and I wouldn't be surprised if The SEC makes an example out of those operating in the gray area of the law.  Self-certification comes back again under Title III so it is really a weird mix of regulations to me.  

Best of luck in your investing.  

[Joe Fairless]

@John Arendsen a couple that I have gotten to know really well are Patch of Land and Fund that Flip. They both sponsored my podcast but I also carefully looked at them before associating myself with their companies. 

For Patch of Land they used to only do short-term fix and flips but have evolved now to do commercial loans on large properties (ex. they recently did the financing for a hotel). 

For Fund that Flip they exclusively finance short term house flips. 

With all the crowdfunding platforms popping up, I believe 2016 will bring some consolidation to the industry as well as some of the current companies fading away. I would personally vouch for the people behind Patch of Land and Fund that Flip. 

As an accredited investor you could get in on financing part. @Mark Robertsonhas a really interesting site that looks at the different crowdfunding companies and their opportunities.

[John Arendsen]

@Joe Fairless, thanks for all the great info.

[Matt Rodak]

Hi @John Arendsen

J Scott is on our advisory board. Happy to find some time to speak with you and give you the ins-and-outs of how we operate, and more generally what we're seeing across the industry. Feel free to message me if you'd like to set up a call.

Thanks!