Realty Mogul Brings P2P Lending to Real Estate

Jilliene Helman is on a mission. She wants to make real estate investing simple and accessible to everyone. She wants investors to be able to share in the upside of real estate investing without the “hassle of dealing with tenants, toilets and trash” as she puts it.

Helman saw the success of the p2p lending model at Lending Club and Prosper and thought she could apply similar principles to real estate. Together with her co-founder, Justin Hughes, they recently went through the TechStars/Microsoft accelerator program, which helped them hit the ground running. They launched their site, www.realtymogul.com to the public just last week.

They have been running in beta for several months where they funded the first investment on their platform, a residential property in Los Angeles. Right now they have three properties available for investment..

How Does it Work?

There are two kinds of deals at Realty Mogul, equity deals and secured loans.

Equity deals are where the investors maintain a fractional ownership in a property. These investments have a longer time horizon and are higher risk but with higher potential reward.  Realty Mogul investors will be investing alongside a professional real estate investment company in this transaction type. It is an illiquid investment with an estimated 3-5 year term but investors can share in the potential upside as the building appreciates over that time. Also, rents will provide some income to investors in the meantime.

The secured loan deals are simply loans made to a real estate investor. These are typically short-term loans where the buyer is purchasing real estate with the intention of doing some simple renovations and then reselling. So the loan term is less than a year. Investors receive interest on their money and their principal will be paid back when the property is sold.

What are the Returns?

The returns for equity deals are unknown because they will depend on many factors, the most important of which is the health of the real estate market. Realty Mogul will strive for 12-14% estimated returns on equity transactions  but obviously the actual return will not be known until the property is sold several years down the road.

The secured loan deals are much more predictable. These are short-term loans that receive regular interest payments and then a balloon payment at the end when the property is sold. Both secured loans on the platform right now are offering 8% annualized returns.

Off and Running with $500,000 in Funding

Realty Mogul has received $500,000 in initial seed funding from a number of high profile angel investors. Since launching a week ago many people have registered on their site and made investments in one of the three offerings. As of this writing investors have made commitments of $170,000 of the $610,000 needed to fully fund each project. Today, I just committed $5,000 of my own money to the Single Family Rehab project in Washington.

The business model for Realty Mogul is to make money on the servicing side of the business with a small spread on the interest rates charged to the borrower. But Helman said that there is no standard approach here because every deal will have slightly different terms.

Right now, Realty Mogul is open to borrowers in California and Washington.  Unfortunately it is only open to accredited investors right now but eventually Helman said they would like to be open to a broader population of investors. They are watching the implementation of the JOBS Act carefully to see if that will allow them to expand beyond accredited investors.

Despite the recent housing crisis real estate remains a popular investment and Realty Mogul makes it very easy for investors to participate. I think 8% annual returns secured by real estate is a compelling proposition and a nice diversification away from unsecured p2p lending.

Their launch last week generated a ton of articles about the company. Here you can read coverage from Techcrunch, the Los Angeles Business Journal and The Verge.

Comments

  1. Andrew N says

    I’m so annoyed that this is only open to accredited investors. Are us non-rich folk just too dumb to be able to choose our own investments?

    • says

      You can blame the SEC for this one. Frankly, it is a ridiculous rule in my opinion. Anyone can dump their entire life savings into a penny stock and lose everything and the SEC is fine with that but they want to protect investors from alternative investments like this one. It makes no logical sense.

  2. says

    Great summary and write up! I, much like Andrew, am obviously disappointed in the offering being limited to accredited investors only. That being said, I think as time goes on, opportunities will open up for more people to get involved.

    Based on what you said, I am assuming you invested in the equity option? It will be interesting to see how this develops over the next three to five years.

    • says

      The hope is that the JOBS Act will open up investments like this one to every day investors, we will see when it is finally implemented sometime late this year I expect.

      As for my investment I invested in the secured loan with a 3-6 month payback. It is a lower return but I felt like it was a good way to get my feet wet.

  3. says

    How is this any different than what hard money investors have been doing for years?

    We have a local hard money firm that deploys cash into fix and flips and short term holds. They charge 15%, their investors earn 14% when the money is deployed. You don’t even have to be accredited. You can use your ira as well. Very common in the private lending industry.

    I know of many real estate investors who pool together many small sums of money to buy and hold property and fix and flip. These loans are almost always secured by the property. Its what I do with my money after I build it up p2p. A 2nd mortgage returns can easily exceed 20% and often exceed 40%.

    Picture buying a nonperforming 20,000 2nd mortgage for 5,000 and then having the borrower pay you off at 10k. Or take their payment from $500/mo to $300/mo. Its very much a win win. If they fail to pay, you can always foreclose on it and buy out the first mortgage. The world of Note investing is very large and can be far more profitable than p2p.

    Jason

    • says

      For someone like myself who has little to no experience in real estate investing I like that Realty Mogul makes it easy. I can’t speak to the differences between this and hard money lending, I am hoping Jilliene can chime in here and provide some perspective.

    • says

      It’s called a reformulated product. Very creatively presented and very well timed.

      In this case the reformulated product is syndicated equity that now is being offered through individually branded crowd funding sites playing on the fad appeal of online democratized investing. Fees to these Newest Age Woodstock love in sponsors as well as priority distributions, waterfalls mechanisms and capital calls will be the devil in the details. Animated powerpoint stick figures in the promo pitches don’t go into the bummer stuff.

  4. says

    Thanks for the great article and the great comments! I’m the Founder and happy to answer any additional questions.

    @Bilgefisher – you are spot on. What we are doing is private lending. The difference from what you describe is that we are only interested in performing loans and only in 1st position. We’re introducing note investing to a group of investors who historically did not have access and doing our best to make it incredibly simple. With a minimum investment of only $5,000, we also hope investors can get broader diversification.

    @writing2reality – We’re waiting on changes in legislation as a result of the JOBS act that will let us open this up. Stay tuned.

    @AndrewN – Our sentiments exactly! We hope the changes are coming!!

  5. Kowser says

    YES!!!!!! I love it! It is so awesome how this type of investing “technology” is spreading so quickly! I was just thinking about this type of system about 1-2 months ago, wondering how I can buy a part of the rental market either through an index fund, or from selling out shares of a giant rental company. Fabulous!

    Thanks for your work Peter. Some of your articles really brighten my day!

      • says

        Yes, I own some REITs as well. But REITs do not provide access to the residential home market, they focus on commercial properties or large apartment complexes. Realty Mogul gives you access to the residential home market without having to buy the properties yourself.

        • says

          There was an article over the weekend about two REITs that have already filed to go public that are focused on the residential home market. You can access investments in single family homes as rental now via PE funds (Colony Capital, Blackstone) and many more REITs you will see popping up in the coming months as investors continue to starve for yield, yet demand liquidity. The expected returns for these qill be in the 10-12% range after reading their prospectuses.

    • says

      I know about Fundrise and they do seem to have a similar model. The difference as I see it is that the focus at Fundrise is very much on the community aspect – investing where you live. Whereas Realty Mogul is more about the investment as a new asset class. That is the main reason I chose to feature Realty Mogul first.

  6. says

    @heath – They are doing something similar. The main differences from our perspective is that we are not doing our own acquisitions. They are raising money for their own transactions where we work with best in class operating partners. This allows us to give our investors access to more markets working with operating partners who have local experience.

    We also focus heavily on cash flow and will look to provide quarterly distributions to our investors starting in the first quarter. Hence, we do not focus on development projects like they do. At http://www.realtymogul.com, it’s all about cash flow!

    Hope that helps,
    Jilliene

    • Craig says

      I would expect that the equity investors can claim deductions for property taxes and depreciation.

  7. says

    Very interesting concept. @Jilliene is correct that Fundrise funds their own projects focused on their own community. They are only allowed to solicit to investors from their own particular region where they have registered their own securities. It is extremely costly to do this and difficult to scale.

    @seeya While I also can’t give tax advice I can say that all special purpose vehicles that we use on our platform are pass through entities. While there is no tax at the corporate level, individual investors are taxed based on their ordinary income.

    Our company, iFunding, was created to focus on institutional quality income producing assets. Institutional quality assets have a less than 0.36% default rate compared to the residential/flip market which only a fraction of projects are successful. Institutional quality assets have credit tenants with a Moody’s or S&P rating of ‘BBB’ or above. To learn more, you can go here http://www.investopedia.com/terms/i/investmentgrade.asp

    Our team has completed over $3B of real estate transactions. Please feel free to visit http://www.ifunding.co to learn more.

    Hope this helps!!!!!

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