Real estate crowdfunding trend presents new challenges, opportunities for financial advisers

The proliferation of digital platforms puts added emphasis on due diligence

Jul 13, 2015 @ 12:36 pm

By Jeff Benjamin

Financial advisers are shaping up to be the ideal target market for the quickly expanding marketplace of crowdfunding real estate investment platforms.

Whether or not advisers will take the bait and allocate client assets to the newest twist on real estate investing remains to be seen.

“I think it's a good way to invest in real estate, because it has opened up an amazing amount of opportunities, but that doesn't mean all real estate investments make money,” said Bruce Kirsch, founder and chief executive of Real Estate Financial Modeling, which analyzes various types of real estate investments.

By Mr. Kirsch's count, there are now at least 150 global investment platforms offering crowdfunding-style access to real estate. The marketplace has almost tripled over the past year, although there are no centralized tallies on total investments or the value of those investments.

The basic concept follows the crowdfunding model of collecting smaller amounts of money from lots of investors to finance something. In this case, the crowd's proceeds are used to purchase real investment properties.

Unlike a real estate investment trust, which involves investing in the REIT just like any other security on the major exchanges, real estate crowdfunding platforms enable shared but direct ownership in the underlying properties.

“I feel like there's an untapped pool of investors out there, people who want to be involved in real estate investing, but don't want to be involved in buying a duplex,” said Marshall Saunders, managing partner at Saunders Dailey Real Estate Investments.

Mr. Saunders launched his crowdfunding platform about a month ago and is soliciting investors to meet or exceed a $10,000 minimum for what he expects to be a portfolio of multifamily housing properties.

Most platforms pair the investor assets with about 50% leverage to finance the purchase of properties. But the platforms can be as unique and varied as the properties they might own.

For example, Mr. Saunders specializes in small residential housing properties, with everything financed on a 20-year amortization schedule, and his company holds all properties for between five and seven years.

The annual dividend return is expected to be between 5% and 7%, and he is targeting an ultimate return on equity of between 7% and 20% at the time of the sale of each property.

Wealth Migrate co-founder Scott Picken, meanwhile, represents a more developed and more institutionalized platform that did $30 million worth of business last year across four continents.

Wealth Migrate also sets its minimum at $10,000, but offers two different investment portfolios consisting of office buildings with price tags ranging between $1 million and $10 million.

The shorter-term growth project targets an 11% annualized return over the two-year investment period.

The longer-term income project targets an 8% annualized dividend income, in addition to whatever total return comes from ultimately selling the properties.

Mr. Picken formed his the company in 2009, but only started marketing to accredited U.S. investors in 2013, following the passage of the JOBS Act, which enables private investment funds to publicly market to qualified investors. Crowdfunding investments are now open to non-accredited investors as well, following actions taken by the Securities and Exchange Commission earlier this year.

“Over the last couple of years the legislation has changed and the technology has evolved to enable these kinds of platforms,” he said.

Just like there are no standard platform investment models, the fee structures also come in many flavors.

Mr. Saunders, for example, charges a 2% “acquisition fee” that is paid out of rental income over the first year, and there is also a 2% “disposition fee” charged as part of the closing cost when each property is sold.

Mr. Saunders' platform also takes a 10% ownership stake in each property.

Mr. Picken charges investors a proportionate amount of the due diligence and closing costs, which can range from $20,000 to $200,000, then takes a portion of the investment returns beyond a set hurdle rate.

As one might expect, the financial advice industry has been proceeding toward real estate crowdfunding with extreme caution, and a good bit of skepticism.

“The thing that people need to be concerned with is the relationship between return and risk,” said Chris Chen, owner of Insight Financial Strategists.

“It is worth noting that not all real estate goes up all the time, that it is an illiquid investment and that mortgages must be repaid,” he added. “In addition, the higher return that may be projected on a crowdfunding platform should remind us that return is linked to risk. The higher the return, the higher the risk, and the greater due diligence should be performed — something that most investors on crowdfunding platforms may or may not be equipped to do well.”

Even advisers who support the spirit of crowdfunding aren't necessarily ready to allocate client money to a platform that offers a direct ownership stake in real estate properties.

“Crowdfunding is definitely bringing lending down market,” said Thomas Balcom, founder of Custom Wealth Management.

“In regards to whether or not I would recommend clients put their money in these ventures, I would only suggest that they do so as a hobby and not with their serious money,” he added.


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