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Crowdfunding is sort of a misnomer. It describes a format by which investors can pool money with other investors and that capital can then be put to work in a group method to take down larger assets than the individuals alone could manage. The concept is better described as a private, technology enabled marketplace and almost like a wealth management platform
RealtyShares specifically is geared towards a high net worth investors and institutions. The company has changed the medium that capital uses to access deal flow from the old family-and-friends sourcing methodology – and that medium is the Web.
Investors, who historically may have had no access to real estate or limited access, now have access to a much broader set of deals located across different markets, different product types, different operators. These marketplaces are accessible for both investors to deploy capital across a broad diversified set of deals as well, as developers to raise capital at record speed through a network of investors they otherwise would not have had access to.
It used to be that either you knew somebody that was doing a deal, or maybe you might have gone to a local mortgage guy to find deals to invest in. Now we have basically taken this process and put it on the web. Before, an investor would have been compelled to put $100,000 to work in a single asset, single market, single operator with a lot of concentrated risk. And this presumes that the investor actually had the personal network to actually know an operator.
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Now, with the Web, the investor can take that same 100,000, and with RealtyShares’ minimums being as little as $5,000, put it across a much broader diversified pool of assets.
One thing that is a little unfortunate in real estate is that there is traditionally very little transparency. An investor investing in a country club deal is being charged certain fees to the project that they are investing in. They do not know if they are getting a good deal, a bad deal, what's market what's not market. Online this changes because investors can now see multiple deals alongside each other and compare relative fees. Indeed, RealtyShares has standardized the fees sponsors can charge, and have transparently disclosed those fees and structures to investors.
On the RealtyShares platform, developers go through an online digital application process to request financing – for both debt and equity, which sets RealtyShares apart in the market. Once a developer is prequalified as being eligible for financing they undergo a 20-point underwriting system. This involves data collection on the deal, a financial model, an appraisal if applicable, an environmental report and due diligence on the sponsor. Once the sponsor’s track record has been verified and market and deal numbers crunched, RealtyShares determines if, from a risk adjusted return perspective, it fits the marketplace and the appetite of the marketplace.
RealtyShares only select about 10 percent of deals that come to the marketplace. They seek best in class operators. Sometimes this might be a first-time operator who has done transactions a principal investor or to a larger shop and now who are now breaking away. Typically, underwriting standards require seven years’ minimum, although many have twenty years’ experience.
Deal preferences are for value add in core plus deals with the potential to generate yield quickly if not immediately, and in high growth primary or secondary markets. Tertiary markets are not liked as RealtyShares looks to certain population minimums and employment growth numbers to mitigage potential loss scenarios. So far, 80% of transactions have been in the multi-family sector and 20% have been across different commercial assets including hotel, retail, suburban, office, industrial, and self-storage.
Investors today are yield oriented. This is driven primarily because they are not getting yield anywhere else, not from the stock market, not getting it from the bond market, and certainly not getting it from bank deposits. On the RealtyShares platform, cash on cash returns are typically six to seven percent or higher, and on an IRR basis it can be kind of mid-teens.
To satisfy investor preference for yield, most RealtyShare deals are existing assets with in place cash flow, or fully entitled construction deals where prefs can be paid current, at least in part, and time to market is not going to be delayed by planning issues.
Deals are stress tested to determine what would happen if there was a drop in NOI, or increase in vacancy and a resulting drop in NOI, and benchmarked against the ability to meet debt service coverage. While there are no guarantees, these measures serve to mitigate the risk of technical default in the event that there is a market correction. The platform also ameliorates risk by offering one of the most diverse online marketplaces for real estate Investing, providing debt and equity options, and deals across both commercial and residential multifamily classes.
POST CLOSE ROLE
RealtyShares is a full cycle investment platform. Investors can monitor the performance of their deal portfolio via a dashboard where they can see how rehab is going, get earnings updates, updates on the asset, and robust quarterly updates directly from the developer. Tax and legal documents also are all available through the dashboard.
The platform actively tracks how deals are performing relative to budget and pro forma. The data this kind of analytics produces is valuable because it provides real time feedback on individual markets and asset classes which help with underwriting future deals.
In the event a debt deal goes bad, RealtyShares retains foreclosure or a deed in lieu rights. For equity deals, investors can select from preferred and common equity, there are triggering events like defaults or a failure to pay that will allow RealtyShares to take over the underlying entity. For common equity there is typically a management replacement right built in.
Being a tech company, not a real estate private equity company, RealtyShares does use third party vendors to do workouts when needed. Using third party vendors for these kinds of functions allows the platform to focus on their core strength which is really sourcing deals, underwriting deals and providing a very efficient marketplace to deploy capital in those deals.
BIGGEST HURDLES
The real estate crowd funding industry needs to better educate investors and developers like around what this is and how it actually creates value for both. This is a very nascent market and the concept of online capital formation and investing for real estate is novel to most people.
LONG TERM VIEW
Ultimtaely, Athwal is aiming to build a wealth management platform; an online wealth management platform or digital wealth management platform for the private real estate market. Part of that thesis is in giving investors options to invest in different types of vehicles. This might be through direct access to deals and the ability to pick the exact asset, the exact zip code, the exact sponsor, an investor wants to work with, but also through creating a programmatic access to deal flow through development of an index fund. In this case, instead of having to invest in every individual deal investors can get exposure to a diverse set of deals set by the platform. Strategies might include income or growth, debt versus equity. Ultimately the company’s vision and goal is to provide diversified vehicles for investors to get exposure to different types of investment options and the fund structure is just one kind of part of that evolution.
REAL ESTATE AS ALTERNATIVE TO STOCKS AND BONDS
One of the vision elements of RealtyShares is to build a global stock market for real estate: To put real estate as an asset class on even footing with stocks and bonds. Athwal is committed to bringing more transparency and trust in, and standardization and liquidity to, real estate. A key component in this will be creating a market for third party validation of deals and platforms that does not exist today in private real estate. There is still a lot to do to bring the level of analysis seen in other publicly traded securities like stocks and bonds and third-party validation is just one of those elements.