RealCrowd (YC S13) Rides The Crowdfunding Wave For Real Estate Investments | Hacker News Reader

RealCrowd (YC S13) Rides The Crowdfunding Wave For Real Estate Investments

techcrunch.com

59 pointsjconley24 comments

"While there are a ton of other real estate crowdfunding startups, Hooper says many are focused on residential real estate, not much larger and more high-profile commercial deals."

I was literally reading about Fundrise yesterday, and they are also focused on commercial deals. Just a reminder of how much reporting is going on in stories like this.

I'd like to see a real estate development swarm sourcing site that bootstraps a real estate dev deal from concept through site acquisition, design, build, and monetization (management if it's a rental / keeper and/or sales), so that it's basically super-interested parties collectively swarming around a chosen site until a fully crowd- (or as i prefer, swarm-) sourced building is realized. There are a lot of different ways I could see this going. I want to close the disconnect between designers/architects and financiers/developers, such that they operate together as a swarm to their collective benefit from concept through completion.

like some have already noted in this thread, this and other real estate crowdfunding concepts are limited to involving only accredited investors. there can be ways to get around this, i think. what if the organization is a non-profit educational / community improvement corp, and people participate as designers and as investors (truly a crowd/swarm of investors, where there are MANY MANY individuals giving very small amounts of money) and the money is given for "rewards" - like getting to stay for a night in one of the rooms for free after the, say, hotel! is finished being built. .. so that at least some of the investment capital -if not all of it - is coming in because people want to participate in building long lasting high value structures. this would be attractive to architects and designers and the general interested public more than as a way to make a killing in real estate - it would not be about that.

The accredited investors limitation will end in about 60 days due to a recent SEC ruling regarding the JOBS act

Advertising of the offerings will be opened up to all, but there will still be restrictions on allowing only accredited investors to participate.

The broader crowdfunding portion of the JOBS Act will hopefully be put in place towards the end of this year/first part of next (if the stars align...). There will still be some restrictions on income/amounts you can invest, but that will truly open up opportunities like we've never seen.

What you describe above is more of a "rewards" based kickstarter model, where there may not necessarily be actual "equity ownership" of the projects. In that case, you can do that today!

I think we're seeing the beginnings of the industry shifting closer to your model above. We're only limited to accredited investors due to SEC regulations that are (slowly) changing - true "crowdfunding" is on the horizon.

> Hooper says this is less than the fees an investor would pay to participate in a REIT, or real estate investment trust, where 15 percent might go toward fees before investing in the property.

It should be noted that he is almost certainly referring to non-traded REITs, which are very different beasts than publicly-traded REITs.

RealCrowd's FAQ states:

   RealCrowd is fundamentally different from a Real Estate Investment Trust (REIT) in that you are owning units of an LLC whose sole purpose is to own and operate one asset. Ownership of REIT shares are not physical ownership of real estate, more like a derivative of a real estate, since what you own is a piece of the company that owns real estate. Not only are you subject to the whims of that company, their strategy and the properties they choose to purchase, you are subject to the tremendous volatility of the stock market. By investing on RealCrowd, you are able to control your own portfolio, which assets you choose to invest in and ultimately own the real estate itself, not a financially engineered product that can be wiped out if the stock market goes into a tailspin.

This is somewhat confusing:

1. I fail to see how ownership of units of an LLC differs substantially from ownership of shares of stock of a REIT.

2. Each LLC will have a RealCrowd-controlled managing member which "will have the sole and exclusive right to manage, control and conduct the affairs of the LLC" so I fail to see how investors in a RealCrowd vehicle are any less subjected to the "whims" of a third party than investors in a REIT.

3. An investment in a single property may or may not be a good idea.

4. Non-traded REITs are not subject to the volatility of the stock market.

5. Referring to shares of stock in a traded REIT a "financially engineered product" seems a bit over the top. They're no more a "financially engineered product" than units of an LLC.

RealCrowd's approach is interesting, but I'm not sure it's drastically different from real estate investment vehicles already out there except in how it's being branded ("just add crowd!").

Hooper here, answers below:

1) REIT shares are ownership in the operating company that derives its income from owning real estate. With a single asset LLC you own that specific building and only that building for your investment

2) We are partnering with experts in their respective micro markets that know the ins and outs of their space better than anybody. You get to choose which buildings you invest in and understand the asset specific business plan before you invest. In a REIT, you have no control over how they invest your money, what buildings they buy or how your portfolio is built.

3) If you put all of your money into one deal, there could be concentration risk. However, that's what we're solving. The ability to diversify over multiple buildings with far lower minimum investment amounts

4) Correct, but you're paying 15% load off the top in most cases and are likely going to be subject to stock market volatility as the end goal is usually to convert to public

5) Up for debate :)

Where we're drastically different is in providing access for investors to institutional real estate that they would never have before. A typical deal gets funded by one institution or maybe 5-10 ultra high net worth investors, people don't have access to invest in the best real estate deals. We're changing that.

1. In a REIT, you have an ownership stake in a company that owns real estate. In a RealCrowd LLC, you have an ownership stake in a company that owns real estate. The number of properties owned by the company may differ, but that's no justification for implying that there's a real structural difference in what the investor actually owns.

2. Every REIT will tell you the same thing about their managers.

3. I'm not sure that's solving anything. You're asking your investors to perform the same function as experienced professionals who get paid to manage real estate investments. Might some of your investors do well with this approach? Sure, but there are plenty of individual traders who handily beat hedge fund managers too (not hard these days). But that doesn't mean it's a good idea for the average investor to become an active trader.

4. The goal is not always to go public and not all non-traded REITs are successful in going public even if they want to, but it should be noted that recent liquidity events for non-traded REITs have generally been boons for the investors. Even so, at the end of the day, unless you're buying and managing property on your own, you should feel confident that the people managing your investment are going to do what's best for your investment or you shouldn't invest. Generally speaking, the more options they have, the better. I could easily argue that a vehicle with no option to entertain a public listing is potentially disadvantaged.

5. Fair enough, but calling shares in a REIT a "financially engineered product" is an odd angle for a company targeting investors who are likely to be more sophisticated than average. REITs are not exotic financial instruments so in my humble opinion, this description is over-the-top and doesn't help your positioning.

At the end of the day, both are viable investment alternatives, right? REITs provide liquidity, but you pay for that liquidity through lower returns and less control over those investments.

Our structure provides you the control to choose which assets you invest in, can provide substantially higher cash returns than REIT yields and allows the investor control over where they put their money.

In addition, our structure requires a substantial amount of money co-invested by the real estate operator so their interests are financially aligned to maximize the value of that asset as well. The better the asset performs, the better we all do.

-ah

I think item (3) is the key here. When investing in RealCrowd, you are choosing a single property in which to invest.

In REITs, you are investing in a management team which will use your money to trade in and out of many different properties.

The "manager" of the RealCrowd LLC's has one job, to maintain and manage a singe piece of property and the business structure.

The manager of a REIT is also responsible for choosing when, how, and where to invest the money in the found. This additional responsibility is the "whim" in which they are referring.

As you said, one is not better than the other. You may be better able to deploy a small amount of capital into a limited number of deals. Or, a professional manager managing millions or billions of dollars may be better able to find profitable real estate investment.

Options are almost always good.

Partial property ownership sounds exciting from a marketing perspective because I feel like it's such a core foundation of the "American dream" (we'll debate whether this was good or bad on another thread in light of the market implosion) to own property.

Also, the first thing that came to my mind was this is real-life Monopoly. Many of us remembered spending hours acquiring real estate and charging rents and collecting more properties.

As a commercial appraiser and developer/founder, I've always found the crowdfunding CRE idea very interesting, but quite difficult. Also checkout cre-apps.com - the leading CRE tech blog. Not the same end user, but interesting non-the-less.

Good luck, guys!

The article mentions having to be an accredited investor. Does that mean $1MM net worth or $200k/year income? If so, that's too bad... hopefully that will be changed once the JOBS act is fully in effect.

That's correct. Accredited only for now. Sign up to stay informed about future offerings. :)

So your hypothesis is that accredited investors will throw around $10,000 with a a few mouse clicks? From what I've seen though, getting people who know what they're doing to invest in properties is a relationship business. There's a lot of trust that an investor has to put in a developer to execute right and with integrity when they invest with them and a flashy website might not be enough to get people to invest serious money.

We are building close relationships with our investors until we prove ourselves and earn trust, such that they will feel comfortable investing in the future with a click. There is also a significant amount of information available on each property for investors to do their diligence.

How do you handle basic agency issues?

In a lot of larger deals developers expense what are arguably personal expenses. A lot of the work that institutional asset managers do who manager real estate is based on dealing with those agency issues.

Further, how do you compete with a large real estate asset manager. I'm not talking about REITs, I'm talking about managers for pension funds and accredited investors?

Thanks for the questions, a big part of our role is to handle exactly what you describe above. Making sure that the operating partner/developer is acting as they should! We have provisions in our documents to remove them if they're not behaving.

As far as competing with larger RE fund managers, our focus initially is on deals that require $2MM-$10MM of equity, below where the big institutions will look (>$10MM typically), but beyond where most operators can raise on their own.

You know, the funny thing about commercial real estate is that there's no one right way to do it and the right way to do it is often a matter of gut marketing feel. Sure there's a triple-net lease McDonalds but everything else is pretty subjective.

"RealCrowd members are accredited investors"

can someone define what accredited investor means ? I would love to invest in stuff like this but how do I know if I am an accredited investor ?

Accredited investors must meet one of the following criteria:

-a minimum net worth of $1,000,000 (excluding primary residence)

-annual income of $200,000 for the prior two years and anticipation of the same in the current year if filing individually

-annual income of $300,000 for the prior two years and anticipation of the same going forward if filing jointly

For now, we're limited to accredited investors only, but as the JOBS act continues to roll out, we'll see how the SEC/FINRA craft their rules and hopefully open it up to all investors.

You basically need to have more than a million dollars in assets not including your house, or have a salary higher than 200k a year or something around that

Nice work!

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