A few years ago, it would have been difficult to imagine a real estate developer raising millions of dollars from unknown investors in minutes — site unseen, no questions asked. Now, it happens every day through numerous online real estate crowdfunding investment platforms.
To give you a sense of the power of these platforms, consider this: Earlier in 2019, our private real estate firm raised $6 million in 45 minutes on one of them for one of our recent hotel acquisitions and syndication opportunities. Three years ago, it would have taken over a month to raise that.
Thanks to a strong U.S. economy and growing appetite for alternative investments, real estate crowdfunding has grown into a multibillion-dollar industry, with platforms reporting annual volume doubling and tripling each year. While crowdfunding still represents about $5 billion out of a total commercial real estate market valued at approximately $16 trillion, according to NAREIT, all evidence suggests it remains in its infancy and will continue expanding in the years ahead.
From our perspective as a sponsor, the cost-efficiency and velocity of online fundraising provide a compelling proposition that benefits both sponsor and investor. Crowdfunding platforms do more than provide access to deals; they excel at disseminating critical information investors need. Some of the platforms even offer interactive webinars educating potential investors about a deal’s structure, investment thesis, fees and returns (along with offering memorandums, investment teasers and subscription agreements) through an investor portal.
As the real estate crowdfunding space evolves, here are three trends we are watching closely this year and how investors can make the most out of online investing.
Better Deals, Bigger Investments
In its infancy, real estate crowdfunding focused on smaller deals with lower minimum investment thresholds. As the industry has matured and demonstrated its value, crowdfunding platforms have begun to introduce larger, institutional-quality offerings from more qualified sponsors. Quality over quantity is the general trend.
While crowdfunding makes investing easier, investors still need to do their homework in selecting the right platform.
Begin the due diligence process by looking at the platform’s goals, management and track record. Does it focus solely on real estate or handle multiple asset classes? Find out how long the platform has been in operation, how many deals it has facilitated, how they have performed and what kind of due diligence is done in selecting sponsor(s).
Review the credentials of the sponsor and management team to verify their real estate experience, as well as their funding sources for the company and platform. Things that you should be looking for include the team’s track record, how much “skin in the game” they have in their investments, the hold time or exit strategy and whether they have an investor relations department providing reporting (at minimum, this should be quarterly).
Finally, send an email or text to schedule a call with the investment manager or representative. This opens a communication channel and builds a personal relationship that can be helpful in resolving issues.
The Rise Of Institutional Capital
Accredited investors have been the target audience for crowdfunding platforms, but institutional investors seeking to insulate themselves from stock market volatility have begun gravitating to this, too. In addition to high net worth individuals and family offices, we’ve seen small institutional investors become more comfortable in the hotel space as a direct result of crowdfunding platforms.
This is a game-changer. Whereas typical accredited investors might invest $50,000 to $100,000 in a deal, ultra-high net worth individuals and institutional investors could bring millions to the table.
Because the stakes are higher and because of fiduciary duties, institutional investors will pay closer attention to the market fundamentals of the deals. Some questions they will ask — and that all investors should ask — are: Do the market fundamentals and financial pro forma make sense? What is the time horizon of the investment? Will this be a long-term hold? What does the capital stack look like? What are the debt terms and what is the debt coverage ratio? Finally, what is the pipeline of projects that may be built in the future and could compete with the project?
The legal structure being used — a C Corp, S Corp, limited partnership (LP) or a limited liability company (LLC) — also matters when maximizing tax benefits.
Mergers And Acquisitions
The rise in crowdfunding coincided with a booming real estate market, resulting in more than 100 real estate crowdfunding platforms with various specializations. However, it is unlikely more than a handful of these will survive over the next decade in the U.S. For one, the business is operationally intensive; it requires many people to build partnerships, market deals, close investments and run day-to-day operations. Secondly, should the U.S. economy take a downward turn — which most experts anticipate — deal volume would decline, and only the strongest platforms would survive.
These will be the ones with a solid track record, repeat investors and attractive deals from reputable, high-quality sponsors. Platforms that appeal to a diverse mix of capital sources will have the upper hand should institutional capital or retail investors pull back.
If you’re considering real estate crowdfunding in 2020, be sure to:
• Find a platform that provides a good fit for your goals and strategy and does an excellent job of selecting high-quality sponsors.
• Work with an experienced sponsor rather than taking risks associated with a sponsor who is new.
• Diversify by allocating investments in different asset classes. Crowdfunding makes this easy and you should take advantage of it.
• Do your due diligence and be sure the deal fundamentals are sound.
Looking forward, real estate crowdfunding should continue to be a dynamic industry benefitting investors through unprecedented transparency (including fees), budget optionality from $10,000 to over $25 million and the flexibility to choose which deals and sponsors are worthy of private investment capital. The outlook for this industry is promising, and it will be interesting to see how it adapts in the face of market headwinds to better serve clients.