Crowdfunding firms focusing on the real estate sector appear to be gaining momentum in their online fundraising. The question investors have is whether or not they are also delivering results on targeted returns.
Crowdfunding is still a relatively new phenomenon in the real estate arena. Most of the firms have less than a year or two under their belts. Arguably, the current leader in the sector is Los Angeles-based Realty Mogul. Since closing its first crowdfunding deal in April 2013, the company has raised more than $50 million and provided either debt or equity financing to some 178 residential and commercial properties.
On the debt side, Realty Mogul provides bridge loans for both commercial and residential projects that are being repositioned, such as “fix and flip” homes. On the equity side, Realty Mogul raises capital for cash-flowing commercial real estate. So far, the company has returned about $6.6 million to its investors, including both principal and cash flow returns.
It’s a lot easier to quickly assess the performance on the debt side, because the borrowers or sponsors either pay their interest rate or they don’t. On the equity side, it will take five to seven years, until some of the equity transactions start to roll over, to see whether or not they are hitting their initial targeted returns. “We, today, are returning as expected on all of our debt transactions,” says Jilliene Helman, CEO of Realty Mogul. Realty Mogul’s typical returns on debt financing for commercial and residential properties is between 8 and 10 percent annual returns paid out monthly.
By now, investors have been placing investment dollars in real estate via crowdfunding platforms for over a year, and there is a track record being established in terms of performance, notes Darren Powderly, co-founder and vice president of real estate at CrowdStreet in Portland. Since the company launched its first deal in May 2014, it has raised just under $4 million in capital from individual accredited investors. CrowdStreet expects to close on its fifth deal in late January and currently has three additional investments that it is actively marketing.
Powderly has invested his own money in a couple of CrowdStreet deals, and he is receiving his quarterly statements and distribution checks just like any other accredited investor. “It is achieving what we set out to do,” he says.
Crowdfunding has made it possible for individual investors to get access to institutional quality deals, and to have full transparency into the deal, Powderly notes. With all of that information at their fingertips, investors are able to make their own decisions on whether or not they want to invest, he adds.
At CrowdStreet, projected returns for equity investors range between 14 and 19 percent total IRR, depending on the individual property, while mezzanine deals typically deliver an annual return of 10.5 percent. For example, CrowdStreet recently raised $700,000 to provide mezzanine financing for 30 Knightsbridge Road, a four-building office project in Piscataway, N.J. The deal has a target annual yield of 10.5 percent over five years. “It is an attractive investment in today’s market, where interest rates are where they are,” says Powderly.
It’s still a little too early to tell whether or not returns on equity deals will hit targeted goals because those deals generally have a five- to 10-year investment horizon. Yet that hasn’t slowed fundraising efforts. Some of the leading crowdfunding firms, such as Fundrise, Realty Mogul and CrowdStreet, are gaining momentum with more deals and more fundraising success.
“Our anticipation is to grow pretty astronomically this year, both in terms of the size of our team and the amount of our originations,” says Helman.
“We have a lot of confidence in 2015,” notes Powderly. CrowdStreet anticipates a significant jump in deal volume in the year ahead, with the potential to raise some $20 million to $21 million. A key catalyst for the surge in fundraising could be the addition of the company’s first private equity real estate fund opportunity. In January, CrowdStreet introduced the offering for Olympus Property Fund IV, an apartment investment fund that is sponsored by Pantego, Texas-based Olympus Property. CrowdStreet’s goal is to help raise $18.4 million in equity for the fund.
“I also think you will see some very big and well-known real estate companies jumping into the crowdfunding arena,” says Powderly. “So not only will there be more volume across the board, but at the upper end of the marketplace, you will see some of the leading brands in the country announce that they have a new crowdfunding offering.”