The crowdfunding trend – where people pool their money to back everything from arts projects to new gadgets – has hit home. Literally. Investors are now pooling their money online to buy real estate. And the first crowdfunded real estate transaction just took place in Dallas.
A group of 46 investors now own a 267-unit apartment complex in Mesquite. The complex, called Trinity Place, will soon be re-branded “Park Centre,” that’s centre, c-e-n-t-r-e.
New playgrounds are going in, barbecue grills, exterior kitchens, and an upgraded duck pond.
The renovations will drive higher rental rates, and higher returns for the new investors. And those new investors, they’re not part of your typical private equity group, they found each other through an online equity crowdfunding platform for real estate called Realty Mogul.
The concept of crowdfunding in real estate has existed a long time, but the exponential growth of online platforms and the passage of the JOBS Act have boosted its exposure and activity. Before 2012, developers were restricted from marketing projects to the public. That meant buying real estate was mostly reserved for high net worth investors.
Now, for the first time developers can advertise and market their projects to so-called, “accredited investors” — people with a net worth of $1 million dollars or an annual income of at least $200,000.
That means people like Bob Gujavarty, of Austin, can buy properties for as little as $5,000 dollars.
“The biggest thing you can do in investment is be diversified,” Gujavarty says.
Before, Gujavarty says, being diversified in real estate meant big investments – buying a house in Colorado, a condo in Boston, or buying shares of a real estate investment trust, or REIT.
A REIT is a professionally managed portfolio of funds you can buy and sell a lot easier than property. And while REITs are popular, investors like Gujavarty, who want the control of picking which properties they invest in, and can tie up their money for years at a time – they’re gravitating towards crowdfunding sites.
“You get diversification and better returns through Realty Mogul, and I think that’s a good tradeoff,” Gujavarty says.
Open For The Masses
“We open up a world that investors historically didn’t have access to,” says Jilliene Hellman, CEO of Realty Mogul.
“We’re allowing them to invest in geographies where they might not have known a real estate company or anything about the underlying and different property types,” Helman says “Simply through the idea of crowdfunding and idea of using the internet to find transactions to invest in.”
Since it started in 2013, Realty Mogul has crowdfunded more than ten million dollars, funded 27 properties and returned more than one million dollars to its investors.
“And the thought is this is going to open up to every single investor in the United States regardless of their income or net worth,” Helman says.
Hmmm, real life monopoly for the masses? The pitch sounds great. By cutting out advisors and intermediaries, you can get higher returns. Gujavarty says his REITS give him a cash return of less than 5 percent, he expects his investments in crowdfunded projects to turn 8 or 9 percent. He’s not alone. More than a dozen online platforms for crowdfunding real estate have launched in the past few years – each one offering local residents and professionals the chance to get involved in commercial real estate.
Peter Chinloy is a professor of real estate and finance at American University’s Kogod School of Business. He says the flood of new internet crowdfunding real estate sites is “a good thing if you know what you’re doing and it’s a bad thing if you don’t.”
“Certainly one of the good things,” Chinloy says, “is that some of the transaction cost that these people extract are removed but the bad thing is you are on your own. So this is really a buyer beware type of investment.”
Most of the investors in that apartment complex in Mesquite have never physically seen it. Bob Gujavarty in Austin says he scoured the prospectus online, even called up the founder, but didn’t drive up to inspect the property.
“Realty mogul could have been a total scam,” Gujavarty says. “My take is every investment is to some extent a leap of faith and I did what due diligence I could.”
Gujavarty has already invested in another Texas property, and RealtyMogul CEO Jillene Helman says you can count on more offerings in the Lone Star State this year.
Still, she admits crowdfunding can be a risky game.
“Fundamentally, crowdfunding is a bad idea. And I am a CEO of a crowdfunding company,” she says. “There are going to be thousands of crowdfunidng companies that come up, and they’re not all going to survive.”
Her advice: if you’re going to invest in crowdfunding you need to be comfortable with the management team, and that they’re well-capitalized. And remember, there are no guaranteed returns.