Some time between the end of 2020 and 2022, I should be receiving between $800,000 – $1,400,000 in gross capital back from 18 real estate crowdfunding investments. My plan is to reinvest 100% of these proceeds back into multiple non-coastal city real estate crowdfunding deals across two or three platforms, instead of just one platform.
My goal for real estate crowdfunding is to earn passive income, diversify my SF-heavy real estate exposure, take advantage of lower valuations and higher cap rates in the heartland of America, and to make as much money as possible in a risk-appropriate manner. As a result, I’ve been doing a lot of research.
One of the platforms I’ve zeroed in on is CrowdStreet, a Portland-based crowdfunding platform that just received its Series C round on November 6, 2019.
I recently met up with a handful of CrowdStreet personnel in Palo Alto for a couple of hours and was intrigued by their approach to business and real estate investing. To learn more, I’ve decided to partner up with them and send a series of questions to their founder and CEO, Tore Steen.
A Q&A With Tore Steen, Founder and CEO Of CrowdStreet
1) What differentiates CrowdStreet from other real estate crowdfunding platforms? What is CrowdStreet’s value proposition?
We started CrowdStreet to open up an industry that had long been available only to insiders and institutional investors. Our goal is to provide the broadest range of institutional-quality commercial real estate investment opportunities to individual investors. We wanted to make investing in commercial real estate as easy and as transparent as possible and bring the entire process online.
To date, we’ve had over 367 deals in 40 states on the CrowdStreet Marketplace, from a broad range of asset classes (multifamily, hotel, office, industrial, etc.) and investment profiles (core plus, value-add, opportunistic, etc.).
One thing that sets us apart from other online syndicators (aka crowdfunding platforms) is that we provide investors with direct access to the real estate sponsors and developers behind the deal. You invest directly into the equity stack of a deal, not into a special purpose vehicle managed by the platform. That means you can reach out to the sponsor and ask questions, hear from them on the live deal launch webinars, receive project updates like other equity investors, and more.
Our online platform makes investing easy–sort and compare individual deals, learn more about commercial real estate, and dig into the background of the sponsors. Once you’re invested in a deal, our platform makes tracking the performance of your investment straightforward and simple.
We are on track to raise $500MM this year (soon to cross $1B in total capital raised since we started in 2014), and the size and scale of our platform helps create a wide range of investment opportunities for our investors. As we grow, we attract more and more top-tier sponsors which ultimately means more investment opportunities for our investors.
2) In what regions of the country (states/cities) does CrowdStreet currently have projects? What cities do you think have the most promising upside opportunity?
Our platform is primarily focused on secondary metro markets, also known as 18-hour cities. 18-hour cities (recent success stories have been cities like Denver, Austin, and Nashville) tend to have above-average population and job growth and a lower cost of living relative to 24-hour cities like New York, San Francisco and LA.
Projects in these secondary markets can sometimes be overlooked by large institutional investors (creating equity gaps) and therefore create investment opportunities for individuals. Filling the equity gaps on institutional-quality real estate in growing secondary markets has become the hallmark of the CrowdStreet Marketplace.
Our research report, Market Views, explores why we think that Charleston has the best claim as the next big up-and-coming 18-hour city. One big point in the city’s favor is its economic growth–Charleston’s average five-year job growth of 2.9% is nearly double the national average of 1.6%. We recently raised over $5 million for a 50-key, luxury boutique hotel development in the French Quarter of Charleston.
3) How do CrowdStreet investments differ from specialty REITs?
One of the key distinctions is that our Marketplace offers direct investment opportunities in a specific property, whereas when you invest in a REIT you generally get broad exposure to a portfolio of assets. So rather than getting an equity stake in a specific multifamily project in Austin, for instance, a REIT investor might, for example, get exposure to a 100-property portfolio.
Even if the REIT only invests in one asset class, let’s say senior-housing, investors have no control over which individual properties are ultimately included in the REIT. With CrowdStreet, investors can pick and choose the exact projects and sponsors they want.
In addition to the “deal-by-deal” option, CrowdStreet is different from a REIT because of:
- Tax treatment: REITs issue 1099s while most of our deals issue K-1s.
- Average property value: REITs tend to be focused on larger deals, meaning they could have a bias toward major metros and deals that have more investor competition.
- Liquidity and price fluctuation: Depending on the specific structure, REITs may have more liquidity as many are traded on exchanges. This means they’re also exposed to more rapid price fluctuation and they’ll behave in many ways like overall equity markets.
4) Are there any plans to create specialty funds to make it simpler for accredited investors to gain diversity and exposure?
We currently offer a vehicle designed to give investors diversified exposure to the CrowdStreet Marketplace. The CrowdStreet Blended Portfolio (CSBP) has a rules-based investment algorithm that identifies and invests into 25-35 projects (in the most recent series) from the CrowdStreet Marketplace.
CSBP has raised over $40 million in the first four series and a large portion of that capital came from first-time investors. CSBP gives our investors a level of diversification across asset class, risk profile, and geography.
Each investor in CSBP will receive a federal K-1 and multiple state K-1s based on where the deals are. However, we will seek to minimize the number of state K-1s through the use of composite returns where possible.
5) What is the quality-control process CrowdStreet performs before allowing a deal to be shared on your platform?
Our Capital Markets team declines around 75% potential sponsors through their initial screening process. If they approve a sponsor and their potential deal, it then goes to our Investments team where it is run through our quality-control process.
- Sponsor Screening: A look at the company’s track record, as well as the background of key employees, to ensure they have experience in projects like the one they are looking to get on the Marketplace.
- Deal Screening: We review the business plan to determine the feasibility of the project. And we make sure the project is the type of project our investors are looking for.
- Quality Control: Our Quality Control Manager reviews available documents to verify the key deal points.
In the end, approximately 5% of potential deals that enter our pipeline ultimately launch on the CrowdStreet Marketplace.
6) Do you have a rating system for sponsors to allow investors to get a better idea of who are the best sponsors?
We don’t rate sponsors against each other, but we do designate sponsors as emerging, seasoned, tenured or enterprise based on objective criteria relating to their firm and leadership profiles, years of experience, portfolio size, and more.
Individual investors can use our Marketplace to review the background of each sponsor, attend a live webinar where they can ask sponsors questions about the deal, comb through the project’s business plan, and more.
Most of our sponsors have been in business between 5-30 years and we put a lot of information about them on the deal details page–an intro to the leadership team, company track record, relevant case studies etc. All that information is public to any potential investor.
7) What are some of the things CrowdStreet does to help ensure the deal performs as expected?
We can’t control what a sponsor does once their project is funded, but we can control which sponsors we choose to work with and which investment opportunities we allow on the CrowdStreet Marketplace. That’s why a sponsor’s track record is a key part of our quality control process.
Our growing Asset Management team helps investors monitor the performance of their investments and build strong relationships with the sponsor during the lifecycle of their investment. Also, the Asset Management team helps CrowdStreet determine whether repeat sponsors are complying with their reporting obligations before they are allowed to post a new deal in the Marketplace.
8) What has been the overall platform performance over a 1, 3, 5 year period?
Since launching in 2014, CrowdStreet has published more than 367 deals on the Marketplace, raising over $919 million in capital. Individual investors have received over $94 million in distributions.
To date, 19 of these deals have fully realized, and only one of which has resulted in a loss of investor capital. These 19 deals have averaged a 29% IRR, with a 1.6 equity multiple over an average two-year holding period, and many of them exited early (in 1.8 years instead of the targeted four, for instance).
It is important to note, however, that most of the 367+ investments are still in their holding periods. The 19 fully realized deals represent a small portion of total deals on the Marketplace, and it may be more likely for deals that realized early to have experienced a high value exit and for deals that are not performing well to be delayed in their realization.
Accordingly, the performance information to date may not be an accurate indicator of overall Marketplace performance. Furthermore, CrowdStreet is not responsible for the performance of deals on the Marketplace, and past performance is not indicative of future results.
9) What percentage of an investor’s net worth would you recommend investing in real estate crowdfunding? What percentage of an investor’s real estate net worth would you recommend investing in real estate crowdfunding?
It’s important to note that real estate crowdfunding isn’t an asset class, it’s simply a way to invest in real estate. Real estate is the largest alternative asset class there is and thousands of accredited investors come to CrowdStreet to get access to commercial real estate investment opportunities. There is a lot of research that suggests that adding alternative investments to an already well-diversified portfolio can add risk-return benefits.
What’s in your portfolio is highly dependent on your financial goals, your appetite for risk, and your financial situation. The exact makeup of your portfolio should be something you decide with your wealth advisor or financial planner.
One way for investors to answer this question for themselves is to look to how pensions, endowments, and family offices allocate commercial real estate within their portfolios. The range is usually something like:
|Institution||Typical Allocation Range (% of total assets)|
10) If you had $100,000 to invest on the CrowdStreet platform, what would be your process for investing?
From an investment strategy perspective you have to ask yourself–what are my goals for that $100k? How much diversification do you want to capture for that investment? Most of our deals have a $25,000 investment minimum, so you could theoretically choose up to four individual deals or leverage a portfolio vehicle like CSBP.
You can use our Marketplace (including sponsor provided offering materials) to review and evaluate potential investment opportunities. Do any of those opportunities align with your investment strategy? Once you find a deal you want to invest in, you simply submit your offer and follow the instructions as prompted:
- Submit your offer
- Submit closing documents
- Verify your accreditation status
- Submit your funds
After you fund your investment, you can monitor the performance of your investment in your Investor Room via your Portfolio Summary. That’s where you’ll receive key communications and documentation from the sponsor.
11) How do you expect real estate crowdfunding to perform in a recession and what type of deals should investors look for in a recession?
We’re constantly evaluating what a recession could mean for commercial real estate investments and investors, and how it could impact the kind of products we choose to launch in the future. But I would argue that crowdfunded real estate should perform similar to any other commercial real estate would perform in a downturn since, at least in the case of CrowdStreet, it is the same thing.
Generally speaking, these are a few things to think through when evaluating how well a deal might do during a recession:
- Debt levels: When markets are strong, extra leverage can generate greater returns. However, in a downturn, excess leverage can expose a property to unforeseen shocks, such as a spike in vacancy.
- Debt maturity: Not only is the level of debt on a property a major consideration but its maturity date is equally important to consider. An asset with fixed rate long-term debt in place (7-10 years) may be able to maintain that debt through a recessionary period, which may allow the sponsor to hold onto the property until selling it in a stronger market down the road.
- Duration and creditworthiness of leases: Since losing income is an easy way for a property to get into hot water, one thing to look at is the average duration of the leases for the property, as well as who is on those leases. For example, even if a recession does occur, a Fortune 500 tenant may be more likely to continue to pay its office rent, providing a more stable base of income.
- Countercyclical asset classes: Certain commercial real estate asset classes tend to be more recession resistant than others. For instance, if people downsize during a recession to save money, there might be an uptick in demand for self-storage properties. Or data centers, which are essentially a niche warehouse, driven by our increasingly cyber-based economy. Even in a downturn, we will still need data centers to handle our digital information.
- Strength of sponsorship: Many sponsors are capable of executing business plans when times are good, but it’s often when a market shifts unexpectedly that the elite separate themselves from the rest of the pack.
12) What type of fees does CrowdStreet charge?
We don’t charge investors a fee to register for our platform or to make investments in the individual deals and funds offered by our sponsors.
However, sponsors pay a fee to CrowdStreet in order to be on the Marketplace and many sponsors pass that fee onto the individual deals and funds (and, indirectly, to the investors in the deal). Sponsors charge fees that vary widely and are dependent on a variety of factors, but those fees are disclosed on the offering detail page and other offering documents.
We also offer investment products and services through our CrowdStreet Advisors and CrowdStreet Investments entities and charge fees on these services and investment products. Those fees generally range from .5% to 2.5% of invested capital on an annual basis.
Invest With CrowdStreet
I’m looking forward to working with CrowdStreet over the next several years to strategically reinvest my real estate crowdfunding capital. As the industry evolves and becomes more mature, I think there will be more attractive real estate opportunities for retail investors.
Thanks, Tore and team for answering all of my questions. If you have any additional questions, please free to ask in the comments section below.
You can sign up for CrowdStreet here and explore their platform for free. I really like how they’re focused on the 18-hour cities. That’s inline with my thesis on investing in the heartland thanks to the growth of technology, remote work, freelance work, and demographic migration to lower cost areas of the country.
CrowdStreet, Inc. (“CrowdStreet”) uses “partner affiliates” (e.g. bloggers and content websites) to market the CrowdStreet Marketplace. Such partner affiliates are generally compensated a fixed amount for each investor that registers on the marketplace as an accredited investor.
FinancialSamurai.com is a partner affiliate of CrowdStreet. This article was written by an employee of CrowdStreet and has been prepared solely for informational purposes. CrowdStreet is not a registered broker-dealer or investment adviser. Nothing herein should be construed as an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.