In an environment where more activity in general has been forced online, investors are getting increasingly comfortable buying and selling commercial real estate that way as well, including in the small, but burgeoning world of crowdfunding.
Depending on the scope of their platforms, groups including Realty Mogul, ArborCrowd and Crowdstreet have raised hundreds of millions of dollars from both accredited investors and non-accredited investors since the start of the crisis caused by the coronavirus.
“We have experienced explosive growth over this pandemic,” says Adam Gower, founder of GowerCrowd. “Trends that had begun pre-COVID have accelerated due to the pandemic.”
Platforms like Realty Mogul and Fundrise allow individuals to make investments as small as a few thousand dollars in commercial real estate properties and apartment buildings through online marketplaces. Increasingly, there are a wider range of investment opportunities new markets and property types at varying minimum investment levels and in deals on both the debt and equity sides of the ledger.
“If you could legislate the perfect world to promote crowdfunding, you would tell everyone to stay at home and say you can’t meet anyone in person,” says Gower. “People are looking opportunities to invest online.”
These platforms are still a relatively small part of the $3.4 trillion world of multifamily finance and investment. Fundrise, for example, reports that it has closed $4 billion in deal over the last few years. “They are not massively big—but they do provide an alternative source of money,” says Dave Borsos, vice president of capital markets for the National Multifamily Housing Council, based in Washington, D.C.
These platforms have also come a long way from their humble beginnings.
“When it first got going, it was a way to let small investors get in the door,” says Borsos. “They’ve evolved to some pretty sophisticated funding sources… Now all these people have much more sophisticated underwriting and more straightforward deals.”
In the past, the crowdfunding platforms generally offered investors an opportunity to fund non-secured senior or mezzanine loans to small properties. If the property did not attract enough investment on the crowdfunding platform, the deal would often fall apart.
“When I first registered as an investor of these sites in 2015, some of the properties listed were as weird as some investment house in Austin, Texas,” says Boros. “It could be my neighbor.”
The largest crowdfunding platforms now give their investors a chance to help fund mezzanine debt or preferred equity to more substantial apartment properties, which are often able to qualify for senior financing from Freddie Mac or Fannie Mae.
Investments made on crowdfunding platforms are also now more likely to close. Platforms like Fundrise, Realty Mogul and Arbor Crowd now often use their own capital to buy apartment properties and then replace their equity investments with capital from crowdfunding investors. These platforms are also more selective of the properties they offer.
“It’s very hard to get listed on a marketplace,” says Gower. Many leading crowdfunding marketplaces only accept 1 percent of the deals the sponsors submit to them.
However, crowdfunding platforms still offer investors competitive yields. Nearly half (40 percent) of crowdfunding investments provide an 8 percent preferential return, according to Gower. Another 30 percent provide a 10 percent return.
Project sponsors have kept those yields high over the last few years to attract investors, even though crowdfunding platforms have gained great acceptance and more investors as they improved their underwriting of deals. Most investors choose the deals that they invest in based first on the yield provided by the investment, according to survey conducted by Gower.
New companies experiment with deal structures
New companies keep finding new twists on crowdfunding. For one example, RedSwan CRE Marketplace, a real estate company headquartered in Houston, uses blockchain, the technology behind the cryptocurrency Bitcoin, to trade equity shares in apartment properties on its crowdfunding website, which has already facilitated about $2.5 billion in deals since it launched in June 2019.
“In the pandemic, people are using more technology to make investment decisions than ever before,” says Ed Nwokedi, founder and CEO of RedSwan.
RedSwan, like many crowdfunding platforms, allows investors to buy equity stakes as small as just a few thousand dollars apiece in the properties on its platform. For each property, the total value of these investments adds up to millions of dollars. What makes RedSwan different is that its investors buy equity stakes in the properties on its platform in the form of blockchain “shares” that that they can easily traded and retraded.
“You have the ability to sell the shares anytime you want,” says Nwokedi. “In the typical real estate deal, you have to call the sponsor, who has an individual right of refusal.”
Another new marketplace, Gold Gate, allows investors to buy equity shares in super luxury condominium units and single-family homes. In this case, the shares take the form of months of time. When the Gold Gate marketplace opens in 2021, buyers will have the right to live in their mansion or penthouse condominium unit during the months of the year that they buy, in addition to owning an equity stake in the property.
“We are starting to reach out to brokers for these penthouses in New York City,” says Dalton Skach, CEO and founder of Gold Gate, based in Austin, Texas. “This is for brokers or owners hoping to liquidate a property in a creative way.”
For more, check out our recent seven-part series on crowdfunding.