Real estate crowdfunding — online funding platforms that pool money from investors for the purchase of individual properties — has been gaining steam over the last few years, and that momentum isn’t showing any signs of abating.
RealtyShares, one of a number of real estate crowdfunders, recently closed a $20 million in a funding round led by Union Square Ventures.
In announcing the funding round, RealtyShares called attention to its plan to launch a diversified equity fund — a portfolio of investments spread across a range of properties — that targets institutional investors.
The fund highlights the ironic evolution of crowdfunders, bringing into focus their growing tendency to target large companies, not the crowd, and design investment vehicles that arguably aren’t so different from those that they originally wanted to disrupt.
But RealtyShares also said in a blog post that it’s thinking about trying to raise funds for real estate investments from nearly everyone, not just rich people. So the dream isn’t dead.
$130 million, 290 investments, 1,600 properties
RealtyShares says its platform has pooled over $130 million from investors and poured the funds into 290 investments in over 1,600 properties, putting it in the same league as industry leaders like Fundrise, which bagged $31 million in a Series A funding round in 2014, and RealtyMogul, which raised $35 million in a Series B funding round last year.
RealtyShares offers “fix-and-flip loans,” preferred equity and other “mezzanine financing products,” joint venture equity, and commercial loans alongside key institutional capital partners.
Those offerings fall into two basic types: debt and equity real estate deals.
In debt deals, a crowdfunder pools money from investors and lends the money to a “sponsor,” a real estate investor or developer, which uses the funds to purchase and rehab a property. RealtyShares investors then earn money from the monthly interest paid on the loan by the sponsor.
In equity deals, crowdfunders pool money from investors that is used by a sponsor to purchase property on behalf of the investors. Some equity deals also let investors collectively buy a slice of a property, rather the entire property.
Investors in equity deals essentially acquire partial ownership of a property through a limited liability company (LLC) and typically earn money through the rental revenue generated by the property and any appreciation realized when the property eventually sells. (They are not making loans, they are buying stakes in properties.)
“When Banks Don’t Get It, We Do,” reads RealtyShares’ information page explaining how to tap RealtyShares for residential property financing. RealtyShares tells prospective partners on its website that they can finance real estate projects in as little as 10 days.
Some of the most experimental crowdfunders, like Dwellxchange, are also trying to enable investors to buy stakes in owner-occupied homes, not just rental properties. That would provide an alternative to home equity lines of credit (HELOCs) or reverse mortgages for homeowners who want to tap their homes for cash.
Is RealtyShares really crowdfunding?
Like most real estate crowdfunders, RealtyShares lets only accredited investors — investors who are worth at least $1 million or have made at least $200,000 a year for the last two years — both view and invest in its deals.
But newly enacted regulation has opened the door for real estate crowdfunders to sustainably deliver on the promise of their name: to raise funds from the crowd, not just rich people and large companies. RealtyShare is thinking about taking a crack at this.
Fundrise, another real estate crowdfunder, already has. It recently launched what it dubbed an eREIT (REIT is short of real estate investment trust). The $50 million offering closely resembles a REIT (hence eREIT), a type of security that invests in properties or mortgages, and has long been available for purchase on stock exchanges.
But Fundrise says eREIT’s provide “radical accountability” by only collecting management fees if the eREIT delivers a 15 percent annualized return for the first two years. The downside of eREIT’s is that they’re less liquid than REITs and require a minimum investment ($1,000) that is much larger than the typical price of publicly traded REIT stocks.
Laced with irony
The advancement of real estate crowdfunding is laced with irony.
For one, real estate crowdfunders originally sought to make investments in individual properties, not investments in a collection of properties, available to a wider range of investors — essentially, to provide a distinct alternative to REITs. Now, some are creating investment vehicles that look a whole lot like REITs.
Second, real estate crowdfunders are increasingly targeting institutional investors, which are the opposite of the crowd. RealtyShares, for example, recently introduced a diversified equity fund tailor-made for institutional investors.
It will invest in “small-balance” commercial real estate, which includes properties valued at $50 million or below. RealtyMogul previously announced that it would funnel $73 million in loans from Direct Lending Investments to home flippers.
The growing focus on raising money from institutional investors may explain why it’s now difficult to find use of the word “crowdfunder” on the home pages of RealtyMogul and RealtyShares.
Athwal says he doesn’t see much irony in how real estate crowdfunding’s development.
RealtyShares did have to shelve its original vision of making real estate investments available to any investor and instead only offer them to accredited investors due to an uncertain regulatory environment, he said.
He also said RealtyShare’s new fund designed for institutional investors is far superior to a private REIT, a type of REIT that isn’t traded on a public stock exchange. See his explanation of why here.
With the funding round, RealtyShares will “continue our marketing outreach, our overall hiring efforts, and our technology development,” said RealtyShares CEO Nav Athwal in a statement.
Still, while there are many “data-driven opportunities” that the startup would like to address, the startup will continue to focus on sniffing out investment opportunities for non-institutional investors, according to Athwal.
