Oxstones Investment Club™By Andrew Blackman, WSJ,
Sites Offer Small Shares in Commercial Properties
Before last year, Ed Medley had never invested in commercial real estate. Now, he’s a part-owner of shopping malls, mobile-home parks and apartment buildings from Los Angeles to Tennessee
Dr. Medley’s springboard into real-estate investing was supplied by a process known as crowdfunding—the sale of shares in a venture, in this case real-estate projects, to hundreds or even thousands of individual investors. Dr. Medley, a consulting engineer and geologist in San Mateo, Calif., has invested in 15 properties, with a minimum of $5,000 in each.
“Being able to invest relatively small amounts of money into different real-estate ventures was appealing” as a way of limiting risk, he says.
Clearly, other real-estate investors feel the same way, with new websites springing up that allow individuals to buy stakes in everything from self-storage facilities to luxury hotels.
“The interest is huge,” says Scott Whaley, president of the National Real Estate Investors Association in Cincinnati. “There’s massive demand, both from entrepreneurs who want to get access to capital, and from people who want to invest capital.”
Focused Investments
Crowdfunding has caught on in a variety of industries, spurred in part by regulatory changes that make it easier for such businesses to look for investors. In real estate, Mr. Whaley says, the key advantages are the ability to access more deals, invest smaller sums and connect directly with developers to ask questions and research deals. Unlike real-estate investment trusts, crowdfunding also allows people to invest in particular buildings.
Prodigy Network is looking to raise $55 million for the 17 John hotel project in Manhattan. Prodigy Network
Dr. Medley found his opportunities on RealtyMogul.com, operated by Beverly Hills, Calif.-based Realty Mogul Co. When a property starts to earn rental income, he gets a share of that. Most pay 8% or 9% annually, and he has received a couple of thousand dollars so far. He’ll also receive a share of any profits when the buildings are sold.
Dr. Medley and his wife are in their mid-60s and semiretired, so the income stream is “attractive,” he says. He knows there’s risk involved, but says he isn’t too concerned. “The total position that we have in crowdfunding is a relatively small part of our portfolio.”
Most crowdfunding deals work in a similar way, with investors funding a project and receiving a share of the income when it’s up and running, plus a share of the proceeds when the property is sold. Jilliene Helman, co-founder and CEO of Realty Mogul, says that while returns vary and aren’t guaranteed, the company aims to provide investors with a 14% to 15% annual return, including quarterly payments and price appreciation.
Right now, most crowdfunding deals are limited to accredited investors, those with an annual income exceeding $200,000 or a net worth (excluding a primary residence) above $1 million. But the Securities and Exchange Commission is working on proposed rules to open crowdfunding to non-accredited investors as well.
Types of deals offered vary by site. Fundrise LLC of Washington, D.C., accepts investments as low as $100. “We’re focused on letting everyone invest in private real estate, not just high net worth individuals and institutional investors,” says Fundrise Co-Founder Ben Miller. The average investment is less than $10,000, compared with $60,000 at Realty Mogul.
Micah Lubens, 26 years old, has used Fundrise to put a total of $700 into two Washington, D.C., buildings under redevelopment. “I’ve lived in D.C. for the last seven years and I love it, so this was a way for me to own and be invested in the city,” he says.
For higher-end projects, some investors turn to New York-based Prodigy Network. The company has raised more than $200 million from 4,200 investors in Colombia to build that country’s tallest skyscraper, and $30 million for a luxury extended-stay residence in New York’s lower Manhattan. It’s now seeking to raise $55 million from individual investors for another luxury New York hotel project.
Do Your Homework
Experts caution that crowdfunding in real estate is a very new area, and that investors should do plenty of research before committing.
“By nature, [real-estate] crowdfunding is a high-risk asset class,” says Sherwood Neiss, co-founder of consulting firm Crowdfund Capital Advisors. He recommends starting with only a small portion of your overall portfolio, and focusing on the track record of the people running the projects. “Have they had prior successes? Who knows them? Look at all the disclosures. You can’t go into this thinking that just because the opportunity’s there, it’s a good investment,” Mr. Neiss says.
Prodigy Chief Executive Rodrigo Niño says investors should make sure any money they invest is handled by a third-party fund administrator and held in escrow until the project is fully funded. Ask for full disclosure about “related parties” in the transaction, too. “If I bring in my cousin to do the construction and my wife to be the hotel operator, that is shady,” Mr. Niño says. And be sure investors have equal rights. “You want to know that the sponsor is not making money if you’re not making money as well,” he adds.
Gary Spirer, CEO of technology firm DilogR LLC in Austin, Texas, and author of a book on crowdfunding, advises investors who are just starting out to become an expert in one type of property. “Look at a lot of deals,” he says. “Learn about the criteria for determining value, then weigh that against what’s being shown to you.”
And finally, investors should ask about the exit strategy, since some properties can take a long time to sell. Even if a promised yield is achieved, says Mr. Spirer, “there’s still a risk that you won’t get the cash out at the end.”
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