[Editor’s Note: This is a guest post from Matt Rodak, CEO of Fund That Flip, a major player in the real estate crowdfunding industry.]
Real Estate Finance is a multi-trillion dollar industry. Since the passage of the JOBS Act in 2013, this massive market has finally started to move its way “online”. Early Real Estate Crowdfunding (RECF) companies such as Fundrise, Realty Mogul and Patch of Land have pioneered new forms of online real estate syndication.
As someone who has been observing and participating in this space since 2012, before the JOBS Act become law, it’s been super interesting to watch the market evolve and take shape.
While there are many intriguing aspects of this evolving market, I’d like to highlight what I believe are some of the most interesting.
One of the biggest evolutions has been how different RECF companies are structuring their offerings to utilize the variety of new exemptions from the JOBS Act.
FundRise has perhaps been one of the most interesting. They launched their very first offering before the JOBS Act became law by raising capital via a rarely used (at the time) Regulation A exemption. Their thesis revolved around having community members be the investors in their own neighborhoods, therefore creating a vested interest in the success of the project and businesses that inhabited the properties.
Overtime, their model expanded to take advantage of the new Regulation D 506 exemptions, creating opportunities for Accredited Investors to own fractional shares of high-quality commercial real estate investments all over the country. Perhaps most notably, investors could participate in the debt offering at the new World Trade center building in New York City.
In their latest iteration, they’ve completely transitioned to an eREIT model whereby they use exemptions made possible by the new Regulation A+. This opens up investments to both accredited and non-accredited investors. However, instead of individually selecting investments, investors participate in a fund that invests in a diverse set of commercial real estate.
Debt versus Equity
When this industry first hatched, a good majority of the early players offered equity investments. This of course gave investors more upside, but also exposed the investment to much more risk.
As the industry has grown, there’s been a notable shift to more platforms focusing on debt investments. Debt tends to be a bit more straightforward. It provides more clarity around risk/return and in most cases is simpler to structure and secure.
I will say there is a demarcation on the asset type and offering size that is driving more of the decisions around debt versus equity. Larger commercial projects with longer hold periods and appreciation potential seem to fit better into the equity category. Short-term bridge financing on sub $1M projects seem to be funded by debt.
Focusing on a Niche
Another trend that is starting to materialize is that more and more platforms are carving out specialized niches. At the beginning, most platforms would fund a variety of types of real estate assets. For example, on Realty Mogul you could fund everything from fix-and-flip loans to equity in Hard Rock Hotel developments. They’ve since refocused their business on mid-market commercial properties and are innovating within that space by offering “full-stack” funding for their sponsors.
There are also sites like 1031 Crowdfunding that specializes in equity deals that qualify for 1031 Exchanges; Money 360 that specializes in commercial debt; and Fund That Flip where we specialize in short-term residential bridge loans.
Alternatively, sites like Patch of Land, which built their business on short-term residential bridge loans, is thoughtfully expanding their appetite with funding for commercial properties as well as mid-term loans on cash-flowing residential rental properties.
Another interesting developments is the robust ecosystem that is developing around the RECF industry. There are sites like AlphaFlow that allow investors to keep track of all of their investments across platforms on a single platform. They’ve also created two investment funds for investors that want exposure to this asset class but prefer to have an experienced fund manager choose the investments and achieve greater diversification.
Companies like Fund America have developed a complete backend system to support issuers with managing investors, KYC, AML, escrow and broker dealer functions. They even plug in directly with Verify Investor which specializes in verifying investor Accreditation Status.
A more recent development that I’m keeping a close eye on is the evolution of secondary markets. RECF investments, especially equity deals with longer hold periods, suffer from a severe lack of liquidity. CFX Investing recently launched a new exchange that proposes to create more liquidity in this market.
Pushing Out the Crowd
A core tenant of RECF has been allowing the average retail investor to access real estate investing previously reserved for the connected institutional investor. (i.e. Hedge Funds, Family Offices, Pension Funds, etc.)
As successful platforms have scaled up their origination capabilities, there’s been an increased demand from these traditional institutions to gain access to deal flow that they too had not been privy. Similarly, successful platforms that are sourcing and originating more than their retail investor base can support, have needed to strike deals with larger pools of capital to continue their growth.
The mix of retail to institutional capital has already taken a huge shift in the last year with several platforms announcing nine-figure forward-flow agreements with some of the biggest names in institutional finance.
It will be interesting to watch how this capital mix continues to evolve and whether or not RECF will abandon a core tenant in favor of “cheaper” and/or larger pools from the traditional institutional players. The formerly known “peer-to-peer”, now “market place” lenders have already established a precedent for transitioning from retail to institutional money. It seems like the RECF market might be headed in a similar direction, with many in the space dropping “crowdfunding” from their marketing in favor or “marketplace”.
In a very short amount of time (little over 3 years), the market has made huge leaps and bounds forward. When I launched Fund That Flip the skeptics all said “I’m not sure investing in real estate online will work.” That question has faded as the industry has proven some level of success. The question I get most often now is “How will you differentiate in such a crowded market?”
I take this change in questioning as a positive sign that this industry is here to stay. This seems to be further validated by the amount of venture capital behind the industry and the large institutions making serious funding commitments.
There are still many questions around regulations, market risk (the industry started in an up market), how many companies can exist in this space, how will the more traditional financing companies adapt to compete in this new online reality, and the list goes on.
I do, however, think it’s safe to say that Real Estate finance has finally moved “online” and for the moment we’re calling it Real Estate Crowdfunding. It’s evolving and adapting at a very rapid pace as companies are optimizing their product/market fit and innovating with technology like never seen before in the space.
I look forward to continuing to observe and participate in this very exciting time for real estate finance.
About the Author: Matt is the CEO of Fund That Flip, an online lender that provides short-term loans to experienced residential real estate redevelopers. Accredited Investors can invest in loans originated by Fund That Flip. Annual yields range from 10-14% over 6-12 month terms. You can learn more at www.fundthatflip.com/lender. Matt can be reached at Matt@fundthatflip.com