Thoughts on Working for RE Crowdfunding Investment Platform
Monkeys,
I am just curious about your thoughts on working for crowdfunding RE platforms (Fundrise, RealtyMogul, CrowdStreet).
Do you guys think it will disrupt the traditional PE? Some of the platfoms have insane deal flows (deal sizes are smaller) and these deals get subscribed relatively fast with low fees. I personally really like the idea of crowdfunding and investment management. I believe institutional investments should be made available to retail investors.
I have no thoughts to offer on working for those platforms.
Not sure how they would disrupt the private equity space. But they can certainly play a role in providing some new options for retail investors.
I would think that if they are good deals...institutional investors would be eager to fund them. My understanding is sponsors seek out those platforms because they cannot otherwise obtain funding. Granted...I suspect in some cases this might not be due to potential returns but a lack of a sponsor experience.
Overall...I think more time needs to pass before completely gauging the impact/performance of these platforms. I would also disagree on the fee aspect. I remember looking at some of the offerings and found them loaded with fees...although this might vary from one platform to the next.
Real estate crowd funding exists because developers could not obtain reasonable loans from banks, and did not have the scale to finance with equity/pref equity. The platforms are generally highly illiquid, and typically you will have to wait at least a quarter to see investor reports of any kind.
Just go invest in REITS directly on a separate market. The fed cutting rates again is causing REITs to look even more attractive than before.
Might be true in the past, but the big players are using crowdfunding more often now. Sure it's a nightmare to deal with thousands of investors, but most of the time the promote is just much better compared to institutional LP's.
I don't disagree.
I think the benefit of choosing a crowdfunding platform vs a REIT is that the flexibility you have (i.e single asset vs portfolio). In addition, because most of the offering is single asset based, the DD material is more detailed than a REIT can offer on its portfolio assets. The demand from retail investors is there. Just my 2cents.
I feel like crowdfunding is a way for players to circumvent the high returns desired by sophisticated LP’s. Mom and Pop investors are fine to take a 7% return and pay fees on top, while that wouldn’t fly for the large private funding groups.
I am also curious to see how crowdfunding platforms will perform when we are heading into a recession/slower economic growth.
RE crowdfunding's biggest issue is that the target demographic is retail investors who aren't necessarily as strong of underwriters or re investors in general. Even if they are, an re deal rests upon the sponsor's ability to execute. To invest with enough confidence means that you have enough faith in the sponsor--and how would you trust them if the first time you've heard of them is through an online platform?
Another obstacle for RE equity crowdfunding is the difficulty of underwriting these deals, as aforementioned. If you've worked in RE for some time, you know how much DD goes into the process. As a retail investor, you don't necessarily understand how this process works, and you are expected to assume the sponsor has done everything right. What if their comps weren't as high quality? What if the area has little to no comps, and their assumptions (no matter how reasonable it seems) actually were totally off? What if they didn't bid out the right contractors and construction costs are actually much higher? What if there is turbulence in market regulations that retail investors aren't aware of? I heard recently that a mutual connection developer's asset went from a 7 cap to a 10 cap overnight because of the rent stabilization laws in NYC. That's a 30% drop in asset values literally overnight. Retail investors get shafted, because they are high up on the capital stack.
If anything, the play on RE crowdsourcing was always on the debt side. But it's got problems too, especially as the sponsors using these platforms are only on there because they can't find legitimate lenders. These guys are probably levered up to the neck and seeking mezz/bridge/pref equity loans with sky high interest rates. The platforms market these to the retail investors for a lower return and take the spread, mitigating the risk for the platform and having the investors bear the burden instead. It's a scary business because these investors have no right to the asset if shit hits the fan. These are not asset-backed securities lol. As a platform, it's great--you make a shit load of money with basically no risk. As the retail investor, you're shit out of luck if the deal goes south, and it most certainly will if the market goes soft.
That's my 2c on RE crowdsourcing. RE assets are not cookie cutter deals that can be underwritten the same way for each asset. Each deal is unique, has its own difficulties and issues, and its success rests upon the sponsor's ability and experience. If you don't understand real estate and you want to invest on these platforms, Godspeed, because you're literally going in blind if you haven't seen or underwritten the asset yourself.
Working for these kinds of companies... I don't know. If and when the market turns, the deals on these platforms will crash and burn. Investors will be very unhappy to say the least, and I have a strong feeling that these crowdsourcing companies will have a very hard time staying afloat.
Multiple RE crowdfunding platforms have went under. ifunding is gone, then realtyshares got taken over by some servicers since it could not sustain the model. I dont see it lasting long except a few players might stay for an extended period such as realtymogul. However if you look at all the platforms there have been less and less deals coming. Even fundrise has now switched to a reit like model which doesnt make sense since I'd be better of just buying a public reit that I can liquidate easily. The industry has already matured and multiple players have begun dying out.
Interesting,
How do you look at RE Debt crowdfunding like VCWannable metnioned above? Part of me thinks that with increasing market volatility, people are more willing to put money into private sector (such as non-traded REIT). I personally hate to see movements in my investments due to interest rate/T-Bill changes. You just don't know which direction it will go with trade war and other macro events.
Crowdfunding is the land of the small balance transaction. I've never met a larger sponsor that has entertained the idea of crowdfunding. There is so much capital available, debt and equity, that crowdfunding is not needed.
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