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I am often asked how CrowdDD and the 506 Investor Group came to be.  I discovered equity crowdfunding from an article about Angel List in November of 2013.  I invested with a couple of syndicates on Angel.co and on FoundersClub as an angel investor.  I quickly learned I did not have to knowledge or skills for investing in startups.  ReaCrowd was listed as a startup on Angel List and liked the relative safety of investing in real estate. I turned my attention to crowdfunding real estate investing and made my first investment with Atlas Real Estate Partners on the Real Crowd platform in December of 2013. I recently initiated my 100th crowdfunding investment.

I signed up with Realtyshares, Patch of Land, Realty Mogul, and ifunding. I was looking at a deal on ifunding in February of 2014, a ground up development in Austin Texas. The listing noted that the sponsor was one of the most prolific posters on Bigger Pockets.  As part of my due diligence, I joined Bigger Pockets to learn more about developer, Mr. Hancock.  While researching Mr. Hancock, I discovered another crowdfunding investor, Mark K from NM.  I introduced myself and we began sharing our experiences with Real estate crowdfunding.  Coincidentally, he is also an investor in my first RealCrowd deal.

Over the next year, we shared due diligence and discussed hundreds of crowdfunding deals across the many platforms. iFunding changed the way they reported Net IRR after we complained, a RealCrowd investment was pulled after we discovered all the loan covenants were not disclosed.  That deal ended up on another platform and the SEC got involved over a year later.  At least four deals were changed or removed because of our due diligence.

With the knowledge that two investors could uncover these problems, how many problems could the internet as a hole Uncover? There was a need for an open and transparent website to share and discuss crowdfunding investments.  I decided to launch CrowdDD, the Yelp of crowdfunding investments. It took almost 6 months for it to get developed. The site was launched in Aug of 2014. The site ran into two obstacles: 1. Investments would fund in less than 24 hours. 2. Almost every 506b platform issued us a cease and desist order.  We had to remove most of the content.  The site floundered for 18 months.

Meanwhile, Mark K and I continued to discuss deals via email.  Mark K began to correspond with Robert C, another crowdfunding investor.  On June 25, 2015 Mark K, Robert C, Coty L, and Mark M formed a private Google Group to discuss passive investing.  Mark K introduced me to the group in July of 2015.  The group grew to about 30 members by October of 2016.  It was apparent from the group that the key to a successful real estate investment is a quality sponsor.  I decided to relaunch CrowdDD and focus only on real estate sponsors and platforms.

Robert and I decided to put an official name to our group. Its name became the 506 Investor Group on Jan 12, 2017.  One of our group members suggested the name. If it was not for the Jobs Act and the ability for sponsors to advertise using code 506c, we would not have access to the tremendous deal flow.  506 Investor Group seems a very fitting name.

CrowdDD 2.0 came out in Beta on Jan 24, 2017.  The site now has over 150 reviews and thousands of ratings.  As the site gained traction, the 506 Investor group has grown as well.  The 506 Investor Group now has over 160 members.  As a group, our net worth is over $500 million and we have invested over $126 million in either syndicated or crowdfunded real estate deals. The group saved over $35,000 in upfront fees on a single investment. The group’s goal is to research and discover high risk adjusted returns with quality sponsors.  We also strive to use our group’s buying power to negotiate lower fees and better terms for our members.

I  made many post over the years showing the yearly and quarterly results of my crowdfunding investments.  While that information is useful, the most important metric is the final results once an investment has gone full cycle.  I’ve invested online for over 3 years now and of the 95 real estate investments, 31 have gone full cycle.

IRR Returns for Investments going Full cycle

 

15 Debt Deals  -      Average IRR 11.56% - projected 11.50%

10 Hybrid Deals -   Average IRR 11.15% - projected 18.02%

6 Equity Deals  -     Average IRR 23.78%, projected 19.25%

 

Debt Investments

I had a 15 Debt deals go full cycle. Most were on Patch of Land and a few on Fund That Flip A lot had extensions etc. and some delays, but they all paid and I averaged about 11.56% over the past 3 years.

 

Hybrids Investments

 These deals that  have an "interest" payment a kicker at projects completion - I have 10 of these go full cycle and 80% of them missed projections (all IRR's ). The average return was 11.15%.  Almost all of these deals were single family fix and flips. A typical structure was 8% interest paid monthly and the a 9% kicker once the property sold. As you can see, many of the equity kickers did not materialize.

 

20% projected IRR at iFunding realized 10%

13% projected IRR at iFunding realized 13%

18% projected IRR at iFunding realized 14%

20% projected IRR at iFunding realized 16%

20% projected IRR at RealtyShares realized 0%

20% projected IRR at RealtyShares realized 13%

20% projected IRR at RealtyShares realized 15%

17% projected IRR at RealtyShares realized 12%

15% projected IRR at RealtyShares realized 3%

13% projected IRR at Fundrise realized 13%

By Platform iFunding  13.7% IRR, Fundrise averages a 13% IRR, , and Realty Shares 9.2% IRR.

 

Equity Investments

Six equity deals have gone full cycle and overall, they have outperformed. The weighted return for my equity investments was 23.7%.  The average term on my equity investments is 5 to 7 years.  I should have more data on the equity investments in the coming years.

 

21% projected at Realty Mogul self-storage realized 16%

28% projected at RealtyShares office realized 18%

18% projected at RealtyShares fund realized 20%

15% projected at RealCrowd MF realized 28%

20% projected at RealCrowd Industrial realized 29%

15% projected at RealtyShares retail realized 29%

 

RealCrowd returned a 28% IRR, Realty Mogul averaged 24% IRR, and Realty Shares averaged 21.5% IRR.

I have equity 3 investments under contract for a 25% to 30% IRR. 2 investments have returned all of my capital with a refinance, but I still own my portion of the asset.

I currently invest exclusively in straight equity and debt deals now. If you look at the sponsors with the worst ranking at CrowdDD, they are all did hybrid investments.

 

While the majority of this blog is about investing in real estate and other passive investments, I wanted to share a new passive “income” stream I just discovered. Over the last 2 months, 6 checks have appeared in my mailbox form $42 to $190.  I suspect I will get between $2,000 and $3,000 every year.

There is a catch, You or your spouse has to be an online shopper. That’s not a problem in my household. A lot of Chase and Citi credit cards offer a free service that will refund the difference on most purchases if the price drops within 90 days of purchase. The problem is you have to remember you have this benefit (who does?), track prices (uhgg) and then fill out paperwork (more uhgg’s) .  I’ve had this Credit care benefit for 10+ years and never once used it. Too big a pain in the behind.

I’ve invested in startups on Angel.co and a few months back I saw a new startup named Earny listed. You download their app, enter your email address and your credit card that has the price protection guarantee.  That’s the only thing you have to do.  They track your purchases, track prices, and then fill out the paperwork if a price drops.  Your job is to check your mailbox for checks from your credit card company.

I downloaded the app and pretty much forgot about it until the checks appeared. So why do they do this and how do they make money? The answer is 25%.  They take as a fee 25% of any money they make for you. Seems fair to me, they only get paid when you get a check.  I would never bother to track and fill out paperwork on all the stuff that shows up at my house, so I don’t see a downside.

I use Chase’s Sapphire Reserve credit card, it has the price protection benefit. When I signed up 5 months ago, you got a $1500 sign up bonus for any travel if you spent $4000 in the first 90 days.  I did and got a free roundtrip ticket to Scotland for this summer.  I think the bonus is only $750 now, but I would watch it and see if they bump it back to $1,500.

The Earny app will list all the Credit cards that have the price protection feature. Take 5 minutes and see for yourself what Earny can do.  I would also recommend that you install the Camelizer Chrome extension to your browser.  It adds a small icon to Chrome and when you shop at Amazon, it will shows a graph of the item’s price over the past 12 months. It will give you an idea of what Earny will make on that item.

Update - the Earny iphone app seems to have a glitch, its much easier to register from a PC or a mac.  The iphone app rejects all credit card numbers it seems.

As the 506 Investor group grows, the amount of email and post can get overwhelming for some members.  To help alleviate this and still grow our "buying power", we will offer new members two choices. The 506 Investor group is a private group that discusses and shares due diligence on crowdfunded real estate investments. All information shared is private and confidential and the public does not have access to our post.

1. Full members with full access and posting privileges. All current members are now full members

2. Abridge Members with access to our group via the web and no posting privileges. However, they would get access to our member spreadsheets. Abridged members would get weekly summaries of our discussion, invites to our member webinars, and detail on the group's investments with special terms or lower minimums.

Current member can also subscribe to the weekly 506 Investor Group Abridged newsletter if interested.

http://eepurl.com/cDaeVT

This will enable current members to refer friends and colleagues that may not be experienced in real estate investing, but they are interested in the potential of real estate investing. An abridged member can upgrade at anytime to a regular member.

Use the CrowdDD Contact Us form if you would like to be considered for inclusion in our group.

We hired new programmers and fixed most of the bugs at CrowdDD.  The Overall Rating sort is fixed. You can now see the number of ratings and reviews for each sponsor or platform.  In addition you can choose how may results to display per page.

We have more features coming this week including a Submit a sponsor page.  Use the contact us page if you see any bugs or have suggestions for added features that will make the site more useful.

We looked at quite a few deals over the past few weeks.

My rating scale

5 - Heck Yes 4 - Yes 3 - Maybe 2 - No 1 - Heck No

BroadMark Debt Fund I and Fund II.  I like the funds and would rate them a 4. We had a private webinar with the sponsor and 30 members invested over $1.6 million in the 2 funds.

There was a lot of interest in YieldStreets latest offering, Pre settlement Fund V.  I would rate it a 3, but members reported that it sold out in hours.

Buck Joffreys Belize Hilton Mahogany Bay I would rate a 2.  The risk of development in Belize is great. Presentation felt like a timeshare presentation. Yuck.

Logan Airport Self Storage sent by Deal Flow. I would rate this a 1.5. The worse self storage deal I have ever read. They actually based the projections on a 25 year hold. The sponsor gives itself equity and up to 10% of the offering can go to brokers etc.  That's before you read the PPM and the 3 classes of shares.

Taking a close look at Origins Fund this week. We have a private webinar set up to do some DD digging. 

Our Listing of the Top Crowdfunding platforms.

Two of my Realty Shares equity investments have now gone full cycle.  The first Chase condo conversion netted about an 18% IRR.  I suspect the project did much better, but the sponsor never gave a full accounting and may be in Mexico as far as I know.

The newest exit happened today. It was a retail cent in Las Vegas Nevada anchored by a Chipotle. Investors were forecasted to receive quarterly disbursements and are projected to yield a base case 11.7% average cash-on-cash return, a 15.0% IRR over a 5 year hold.  We only held the property for about 2 years and the final IRR was 28.5% after all Realty Share and sponsor fees. It returned about a 1.6x for the 23 month hold.  I am very pleased with this investment and hope to do another deal with Brad Management in the future. 

There has been an interesting discussion about asset protection for accredited investors inside the 506 Investor Group. Should investors use off shore accounts, special vehicle LLC’s from certain investor friendly stats, insurance policies etc..? The group members have varied backgrounds, but none are asset protection attorneys. While this discussion is very interesting, it is not legal advice.  From my perspective, the investors most worried about taken extreme asset protection measures are doctors.  They face life or death decisions every day that could open them up to a world of hurt from a malpractice lawsuit.

Do you need to lose sleep over Asset protection? Here is some of the discussion on asset protection from our members. You may learn a thing or two

Investor 1

I'm not a lawyer, but I have studied extensively into these matters many years ago.   Initially, I sought advice of lawyers, namely "asset protection" lawyers.  Bad move.  I spoke to like 10 different attorneys each recommending their own thing.  From off shore trusts to multi-layers of trusts, llc, limited partnerships, etc., costing 10's of thousands to set up and thousands to maintain.  Yes I even paid for a consultation with Garret Sutton himself.  It was all useless, because if you find an attorney that specializes in this, they will say "yes you need to do it".  Then they will regale you of nightmare scenarios of people that have lost their entire fortune...

So, I finally decided to learn it all myself.   

Bottom line: 

1) It's just legal theory, with very little "proof" that it works  

2) Ultimately, whether a person decides to do this or not depends on how risk averse they are and what will cause them to sleep at night.

3) Make sure you 1st understand the intricacies of operating within an LLC if you don't know already, you might decide having separate bank accounts, registration, taxes, bookkeeping, annual paperwork, etc just becomes too annoying year after year

4) If you have some other reason other than pure asset protection, such as estate planning, then it makes more sense to do so

About umbrella insurance:

IMO, if you are in this group (an accredited investor), then you probably should be carrying umbrella.  But umbrella only protects you from liability from home/auto/personal.  It does not cover you from professional or business liability.  For instance, since I'm still a practicing physician, it does not cover medical malpractice over and above my med mal insurance.  Hence, I do have another "plan" in place.

Investor 2

Whenever I see these assets protect guys, I just see guys making money overselling fear.  

In my life and career I have rarely if ever seen people have these nightmare scenarios - granted, I don't talk to a lot of dentists or doctors.

Investor 3

Disclaimer: I'm not a lawyer, so please do fact check me, and this is not legal advice.

I invest via an LLC for the following reasons (in no particular order):

1. My SSN is not visible to the end Sponsor, only the EIN of my LLC. If I invest with 20 sponsors at any one time and +/- 5 new ones per year that's a lot of Sponsors and their employees who have access to my sensitive information. Considering these Sponsors are experts in their field and not experts in security, things could go wrong with them storing my info in a non-secure manner.

2. I can gift away shares of my LLC every year to my children (after they turn 18) as a way to pass on my wealth and do it tax free.

3. I do keep things separate, separate bank account, separate credit card, separate accounting. And this makes it easier for me to keep track of my ROI and also any expenses because I charge them to the LLC credit card.

4. Protection that an LLC offers.

Yes, there are extra fees to having an LLC but those fees are all relevant to how much your returns are.

Investor 4

There's no such thing as a bulletproof plan.  A creditor with a lawyer that is dedicated enough can pretty much break through any asset protection plan.  Unless you truly give away your assets, but then they are not your assets anymore.


IMO however, it works generally like this (numbers completely made up):

Be a decent human being, treat people right, don't lie-cheat-steal, practice common sense like get insurance - 99% effective

Add on a LLC - 99.3% 

Add on a Trust - 99.5%

Establish offshore account - 99.8%

So I think too many people are focused on the less than 1% chance that some sue-happy litigant will take all our wealth.  In reality, the biggest wealth eroder is .... getting married (and then divorce, with divorce rate around 50%), but no one thinks about it that way.  

 On the other hand, it does matter how much wealth you have to protect.  If your net worth is in the 8 digits, then I would think you should get some sort of plan in place.

Everything's a tradeoff with asset protection.  The more protected you are, the more fees, the more headaches, the less tax efficient, the less control, the less return, etc.  

For instance, a lot of people are eager to pull their 401k from their employer into a solo self directed 401k to start investing in RE.  However, a 401k established by the employer falls under ERISA and is virtually untouchable by your creditors (with well-established precedence).  A solo SD 401k (as well as a SD IRA), is protected only up to $1MM and only if one files bankruptcy.  So by keeping your assets in your employer (or ex-employer's) 401k, it is safe.  But in exchange, you likely would earn less return than in the hands of an experienced real-estate investor. 

Most books about asset protection are essentially written advertisements by attorneys (Sutton has a few books that I've read and basically advertises his services).  If anyone's interested in learning more, the book that I recommend (and is not advertising for business) is Asset Protection by Jay Adkisson and Christopher Riser.

Investor 5

Fantastic perspectives across the spectrum, very helpful to hear the various opinions and experiences. It seems to me that, based on what you've set up, at least you don't appear to be an enticing target if attorneys have a choice in who to go after as "low hanging fruit", no matter how bullet-proof it is in the end.  I'm not in CA so I don't think the fees are quite as bad here in my state (or WY) for LLC's. 

Although I have an umbrella policy, I'm not sure I feel 100% comfortable with it given the 50+ pages in those typical insurance policies, most of which probably spells out all the circumstances in which they would not cover me.

We launched the real estate focused version of CrowdDD yesterday. We have some bugs and we are working to resolve them.  I am asking for any suggestions you may have to improve the site and make it more useful.  If you have any ideas, please use our Contact Us page.

Here is a list (will update as new suggestions come in) of the improvements or fixes for our developers:

1. Fixing Various Typos 
2. Fix the "Overall" Rating Sort
3. Adding number (the number of people that did a rating etc)  on the sponsor or platform pages.
4. Let users choose  the number of platforms or sponsor that are listed per page (5) (10) (20) or (all)
5. Fixing the  "Open Sponsor" buttons

Today we relaunched CrowdDD in Beta.  We are now solely focused on Real Estate investing. The site now allows members to rate and discuss both real estate sponsors as well as real estate crowdfunding platforms. We will only accept accredited investors with real estate investing experience.  We are manually approving new members to ensure the reliability and accuracy of our site’s ratings.

We listed 20 real estate platforms that our members have real world experience and entrusted them with our money.  Members have invested with all 38 of the sponsors that are listed at our launch. We think it is important that only users rate platforms and sponsors that have firsthand experience.  An Amazon review carries a lot more weight from a verified buyer. The same concept applies to investor experience. We use a 0 to 5 rating system, a 5 is a fantastic  investor experience and a 0 is a horrible investor experience.  

We deleted all previous ratings and discussions.  We are starting from scratch with only accredited and experienced investors rating real estate sponsors. Therefore, it may take a few weeks before every sponsor has a rating.

As our membership grows we will add other sponsors to our database.  However, we will not add any sponsor or platform until at least some of our members have investor experience with them.  In other words, you can no longer ask to have your company included on our site. Future request will come from within our community.

We expect to be in beta for a couple of months while we fix bugs and add new features. Meanwhile, please us the contact us link to give us feedback and suggestions for CrowdDD 2.0.

Working out the last few bugs on CrowdDD transition to real estate sponsor and platform reviews. It should be ready this month.  In the meantime, the private investor group I co-founded is planning its official launch.  The 506 Investor Group is an invite only group for accredited investors that discusses and shares due diligence on both crowdfunded and syndicated real estate investment opportunities.

As the 506 Investor Group, has grown, so has its “buying power”.  In the last couple of months, we have invested over $2 million into a single real estate fund. In addition, in less than 48 hours we took over 40% of a CrowdStreet motel deal while investing over $1 million. Our group members have discovered information during our due diligence that has resulted in four deals being removed from various real estate crowdfunding platforms. Further proof that the cumulative wisdom of a group is superior to going it alone. Our group has invested over $30 million into a variety of syndicated or crowdfunding deals.

The 506 Investment Group is also pooling our time and resources to developed a Sponsor Fee spreadsheet of every syndication or crowdfunding deal we have invested. As many of you know, it can be quite difficult to parse though the many varied fees a sponsor can bury in a PPM. A 1% asset management fee can be insignificant or massive depending on how its calculated. The latest fee I have grown to hate are fees on “committed” capital. It can take what appears to be an innocent 1.5% fee into a 7.5% bloodletting of your returns.

Our early research shows that sponsor fees vary widely. Total fees over the lifetime of an investment have a low of 1.39% to a high of 31% of equity raised. Some sponsor will make 30% of an equity raise no matter how the investment performs! I like to see sponsor/investor interest aligned a bit closer. Average yearly fees (total fees on a project dived by the life of the project) varied from .3% to 5.93% each year. Therefore, the deals with the worst fee structure must generate a 6% return before investors see a dime.  Ouch!

Eventually, we should have the data to know the median fees for each asset class as well as the range.  This will be a key component when evaluating future deals. The struggle is to somehow breakout and quantify the often byzantine fee structures sponsors put out.

As our database of fees grows, I will report back on some of the more interesting findings.

Our programmers have hit a few snag on changing the focus of CrowdDD 2.0 to evaluating real estate sponsors. Hopefully in a few weeks we will be ready for our re launch.

Meanwhile the private email group for accredited investors I co-founded is hitting on all cylinders and realizing the potential of crowd sourced due diligence. After steady growth the group seems to have hit critical mass.

t seems size does matter after all.....

As the group has grown so has the capital invested per deal. Our members invested over $2 million in one deal and $1 million in another. Some of the sponsors have taken notice and offered to reduce fees or drop minimum investment criteria to invest in certain investment classes. So what we perceive as a good deal gets even better.  Capitalism at its finest.  Good sponsors fund quickly and investors find good deals with better terms

Our group invested over $2 million in a mobil home park fund and they retroactively gave all group investors the best terms offered to any investor. Another fund we are investigating offered to waive certain fees if the group hit certain investment thresholds.  The crowd can have  influence and power after all.  

Here are some of my latest ratings on 506c investments: (5 is a no brainer...1, you should run away)

Real Crowd Ames Holiday Inn 4.5 Great location, 25% equity by sponsor, assuming debt (below market rates), high cash flow and another 5% a year in principle pay down.  Almost a no brainer except for the added risk of being a motel investment which is riskier than most other RE classes.   believe it sold out in less than a day of going public on RC.  Our investor group invested about $1 million into it.

Virtua High Growth Fund III

Putting a 4 rating on this fund. 15% preferred return and then a 50/50 split. Unique fund that rescues TIC'S and DST's that have 10 year loans coming due from the bubble of 2007. I am in fund II and pleased to date. A $100 million vulture fund that feeds on the mistakes of DST & TIC investors. One person's pain is another investor's gain.

CrowdSteet Fairfield Inn 3.5 rating.  Being in the oil patch brought this down a notch but numbers looked good.

CrowdSteet Courtyard 3 rating.  Same location as Fairfield but is underperforming the Fairfield for some reason,

As 2016 comes to a close, I thought I would recap where I placed new capital during the year.  I made 18 Real estate crowdfunding/syndicate investments. We are late in the cycle and I continue to invest defensively.

Breakdown by investment type:

Mobile Home Parks       49%

Self-Storage Facilities    15%

Real Estate Debt           9%

Medical Hospital             6%

Office                            5%

TIC Vulture Funds          5%

Hospitality                      4%

Multi-Family                    3%

Industrial                        3%

 

The following is the breakdown of where I invested.  You will note I had very few investments with the 506b platforms (Realty Mogul, RealtyShares. iFunding & Fundrise).  In fact, my last investment with a 506 b platform was in April of 2016. I use to justify the added 1-2% fees charged by 506b’s because of the curation and better due diligence and communication.  I no longer believe that deliver on these promises. Ask an investor in the Palm Springs Hard Rock Hotel how they like the 506b curation.  The key is finding exceptional and experienced sponsors.  As I come to trust sponsors, I am making fewer investments, but investing more on each deal.

Direct with Sponsors       7

CrowdStreet                  4

Real Crowd                    3

Realty Shares                 2

Peer Realty                     1

Alpha Flow                      1

The average projected IRR of the 18 investments was 22%. Here are my 2016 investments:

  1. Mobile home Park in Dallas, Texas direct with a sponsor.  Projected IRR 25%
  2. Mobil home Park in Rapid City, South Dakota direct with a sponsor. Projected IRR 25%
  3. 4 Self storage facilities in Alabama direct with a sponsor. Projected IRR 28%
  4. MHC America Mobile Home Park Fund direct with a sponsor. Projected IRR 20%
  5. Westerville, Ohio Business Park direct with a sponsor.  Projected IRR 20%
  6. Realty Shares Smartland Debt Fund.  Projected IRR 13%
  7. Real Crowd’s Stratford Extended Stay Motel.  Projected IRR 33%
  8. Peer Realty’s Chicagoland office building. Projected IRR 30%
  9. Realty Shares Philadelphia Debt Fund.  Projected IRR 15%
  10. Colonial Mortgage Fund II direct with Sponsor. Projected IRR 12%
  11. Louisiana Micro Hospital direct with Sponsor. Projected IRR 20%
  12. Real Crowd’s O’Donnell Industrial fund. Projected IRR 15%
  13. MLG Fund II direct with Sponso.r Projected IRR 15%
  14. Real Crowd’s San Dimas Mult-Family. Projected IRR 27%
  15. CrowdStreet’s  Virtua Fund II (TIC Vulture Fund). Projected IRR 30%
  16. CrowdStreet’s  Addison Center (TIC Vulture Investment). Projected IRR 35%
  17. CrowdStreet’s Fort Worth Muti-Family. Projected IRR 21%
  18. AlphaFund’s Diversification Fund III.  Projected IRR 9%

 

We are in the process of revamping and changing the focus of CrowdDD.cvom.  We built the site to be the internet’s resource for crowd sourced due diligence on Angel and real estate crowdfunding investing. However, for a variety of reason the site has not lived up to its potential. Sec rules, cease and desist letters form crowdfunding platforms also contributed to the sites stagnation.

I quickly learned that I do not have the network or expertise to become a successful angel investor and for the past 2 years have invested exclusively with real estate.  I’ve decided to focus on what I understand and pivot the site to the most important factor in any real estate deal, the sponsor.

The sites new focus will be for accredited investors to rate and discuss real estate developers and sponsors.  We will no longer post individual investments or startup investments.  To be fair to the sponsor and to have the most accurate ratings, we will only rate sponsors that members of CrowdDD have invested.

To make this happen we are making CrowdDD an invitation only membership site.  Our listings and information will be open to the public, but only members will be able to rate and discuss sponsors. In the coming months, we will purge our database of all current members.  Thereafter, the only members will be investors in a private email real estate discussion group.

The sites database will have over 50+ sponsors that our group has invited with over the last three years. Sponsors will be given the opportunity to invite their members to join CrowdDD and rate their experience. In addition, members will be able to invite  accredited investor that they may know.

We will rate sponsors on the following criteria:

1. Sponsor Fees

2. Track Record/Performance

3. Communication/Reporting

 

We will not allow the discussion of any 506b investment and the comment section of the site will be moderated and any unprofessional post will be removed.  We have sent out detail questionnaires to 50 plus sponsors and hope to have an accurate detailed information sheet on each sponsor.   Typical sponsor fees, tack records and experience will be noted for each sponsor.

 

We hope to have CrowdDD 2.0 launched by January of 2017.

New Rating an Investment:

CrowdStreet Township PE Fund I  Rating 1 (Heck NO)

Our group discovered this about the Township founder and brought it to the attention of the CrowdStreet. 

http://advisorhub.com/finra-teaches-ex-merrill-broker-lesson-high-cost-college/

http://brokercheck.finra.org/Individual/1872946

My last Blog post discussed my ratings based on the private email group.  Here is an example of our discussions.   While we are private, I wanted to share a discussion the group had about a potential investment.  This will give you an idea of the power and knowledge of a crowd when it comes to evaluating a deal.

 

Investor A:

Hello,

 I saw this company advertise on the web for investing 1st Lien CA trust Deed with return of 10-12%, sounds better than crowd funding, but not sure if it is trust worthy, has anyone dealt with it?

 Thanks,

 Following is the deal I see today:

 

AMERICAN PRIVATE MONEY GROUP

a FMC Lending Company (888)99LEND9

 

 

Investor B

I have never head of these guys.  If you are going to invest with individual hard money lenders like this make sure you talk to them in depth about how long they have been in business, who does their underwriting, who does their appraisals, what attorney did they have prepared their loan docs, etc...  Sit down in person with them if you are close by.   You want to take a very close look at the asset you are lending on too.  Look very closely at the comps.  Look at the condition of the property.  Look closely at the location (busy street, train tracks, bad neighborhood, etc...).  I rarely invest in 1st mortgages in cities that I don't know well.  If a borrower defaults and you have to take the loan to foreclosure, the ONLY thing you have protecting your capital is the equity cushion.  So the number one thing in making a hard money loan is nailing the appraisal value.  If you get the appraisal wrong up front and you have to foreclose, this is where you can lose principle.  I take a close look at the borrower too...credit score, cash in the bank, levels of debt, etc...

 

I think most people who invest in debt though crowdfunding do not do all this homework that I do.  They just hope and trust that the portal did the homework.  But the way I personally prefer to do it is I invest in local area mortgages and do a lot of due diligence on the asset and borrower.  I guess I'm just paranoid about losing money:)   Once I trust a hard money lender who is sourcing loans for me and have funded a lot of loans for them, I tend to do slightly less due diligence.  

 The other big thing of course is skin in the game.  The more of their own cash the borrower has into it, the more they will fight to work it out and not go BK or default.  It looks like this particular loan is a refi.  Be careful of lending on "cash out" refi's where the borrower is pulling out all their original cash they had into it and no longer has skin in the game other than appreciation equity.  It's much easier for the borrower to just walk away in the bad times if they have pulled all their cash back out of the property.

 

Investor C

I came across this company about 2 years ago. All their loans seemed attractive: rates 10-12%, all California properties, non-owner occupied, etc. So I called the number provided, and got xxxxx on the line. He's a great talker, salesman like. Anyways, when I decided to participate in some of the loans, he asked me to fill out a sheet of paper, fax or email that to him. With that, I thought have booked my slot, but the dubious thing is that in all those instances (and it must have been 10 or so), I never heard back from him. I then called again, and asked him what's the deal, and he was saying something about the loans got sold quickly. I had my doubts about that because I thought in several cases that I responded in less than 10 mins after receiving his email. He then sent me a deal that he said is off-line, only for me, just to get the relationship started, very special, blalblabla. I looked at it and felt like throwing up. To make it short: after about 3 months of trying, I ended up feeling very uncomfortable about the  guy and his company, so I asked him to take me off his email list, and when that didn't happen, I just used the spam filter to send it all to then junk folder.

 I'd be interested to see if anyone has done business with them, and came away with a better experience. 

 

Investor D

 fyi -he did the same thing to me on 3 loans last year, 

tied my $$$ up for 60 days ish, never used them, sold the loans off to other more "Pet" investors.

 

Investor E

 they are one of the worst at tieing up numerous investors on the same deal,

 funding it with the pet investors,then never getting back to the rest of us.

So they have all the investors set funds aside for the deal and then never use

our funds, hence zero yield to us for 60 days ish.

 I called them for updates on a couple of the deals that I committed to and they kept

saying that they are working on " a title issue", then they fund it with someone else

and never get back to me.

 One of my best friends is also a passive TD investor in CA, we share resource

and he had the exact same thing happen to him a couple of times too.

 

I finally gave up...

I am a member of a private email group that is realizing the potential of how I envisioned CrowdDD would help investors. I designed CrowdDD so accredited investors could share due diligence on crowdfunding deals and platforms.  The hope was the wisdom of the crowd would point investors to the deals that had the best chance for success. Privacy, legal, and SEC challenges have made the public exchange of information all but impossible. I have been threatened with lawsuits more times than you could possible imagine by crowdfunding platform and sponsors.

The good news is the private group model has been proven successful without the risk of lawsuits. The problem is this information is limited to our group and is not being shared with the accredited investing public.  I hope to use this blog to divulge the consensus of the group about the potential of specific 506c investments without sharing the private due diligence that is uncovered.

Based solely on my opinion and my interpretation of the groups post, I will assign a value to each investment that is discussed in our group.  I will use the following rating system:

5 – A “no brainer”. Very few concerns about the deal or the deals structure. Most investors in the group would invest if they had the capital. Less than 5% of the discussed deals have been 5’s.

4 - A very solid deal. A few issues/concerns are raised, but most the group believes the investment to be solid with a good risk/return structure.

3 - A solid deal but with issues with the structure or the sponsor that puts most investors on the fence.  You should truly believe the sponsor’s story to pull the trigger at the stage of the market.  We are late in the real estate cycle and a lot of solid deals on paper are being passed by the group because of timing.

2 - The consensus is this deal risk/reward structure is out of alignment for investors. Not necessarily a horrible deal, but with so many other investments in the market, why bother.

1 - Stay away. Run, don’t walk away from this investment.  Due diligence uncovers something that most everyone agrees makes this a bad investment.

I have invested in “3”, “4” and “5” deals.  Geographic and real estate class concentration in your personal portfolio will trump any rating system.  It’s never a good idea to have too much concentration with any one sponsor, any geographic region or any investment class.

Another interpretation of my ratings:

5 Hell Yes

4 Yes

3 Maybe

2 No

1 Hell No

 

Some of the 2016 deals discussed in the private group with my rating are below. RealtyMogul, RealtyShares and ifunding deals are not included because of SEC rules.  However, most of these deals would have received a “2” rating if I could disclose. During 2016, I’ve made 20 crowdfunding investments. One was made with RealtyShares, zero with Realty Mogul, and zero with iFunding.

 

Project and/or Platform                                               My Rating

CrowdStreet’s Virtua Addison                                          3

Lending Robot (Lending Club investment tool)                   2

Rich Uncles REIT                                                            3

YieldStreet                                                                     2

iFunding                                                                        1.5

RealCrowd’s Somerset Apts                                              2

CrowdSteeet’s Virtua 99th                                                 2

CrowdStreet’s Virtua High Growth FundII                            4

MHC America Fund (mobile Home parks)                            3.5

American Private Money Group                                           2

Alpha Flow Fund IV                                                            4

RealCrowd’s San Dimas                                                      3

RealCrowd’s MLG Fund II                                                    5

RealCrowd’s Origins Fund II                                                 3

Real Crowd O’Donnell Fund V                                               3

Atlas MIcro Hospital                                                             5

SBRE Colonial Impact Fund II                                             3.5

Real Crowd’s BroadMark Funds                                             4

Patch of Land                                                                      2

CrowdSteet’s IntellistayLima                                                  3

LendingHome                                                                       2

CFX Markets                                                                         2

Real Crowd’s WCCG Mississippi Self Storage                           1

Real Crowd Stratford Extended Stay                                      4

 

 

In the future, I will post my interpretation of our private discussion on live deals at Real Crowd, CrowdStreet and other 506C platforms.  These ratings are just my opinion and I have no idea which investments will be successful and which will tank. A "1" could outperform and and a "5" could go bankrupt. I am not, nor do I represent myself as a financial advisor.

In order to diversify and find better ways to invest, I test new sites and methods. Over the years I tried WealthFront and Betterment (Robo Advisors for securities) and lending sites Funding Circle and LendingClub.  Today I will discuss my LendingClub experience.

In January of 2016 I made a $15,000 investment into Lending Club loans to test the automated selection site LendingRobot. LendingRobot uses algorithms to select the best loans for your portfolio of $25 loans.  They charge a yearly fee of .45% and promise higher returns than picking your own loans.  I selected a middle of the road rate of return of about 8.5%. LendingRobot uses your targeted return rate to choose your specific loans.

I suspected this may not work out within 90 days.  Six of the loans stopped payment after the first payment. Zilch, nada, nothing.  To me that smells of pure fraud by the borrowers and poor underwriting by LendingClub. By August, I had earned about $1100 dollars in interest, but LendingClub had written off $530 in loans.  My adjusted Net Annualized return as of today per LendingClub is 5.59%.  I am not confident in this calculation.

Based on the poor performance and bad press LendingClub received, I cancelled my subscription to LendingRobot and stopped buying new notes at LendingClub on August 15.  As of October 19 I have received $1349 in interest. They have charged off $225, $25 is in default, $625 is 31-120 days late, $100 is 16 to 30 days late and $200 is in the grace period.  I have $14,780 of outstanding principle and have withdrawn $1,283. Lending club says my account total after adjustments is now $14,246.  That plus the $1283 that I have withdrawn means that I have made $529 in nine months on my $15,000 investment.

If your curious as to what grade of notes Lending Robot selected, here is the breakdown:

32% A

9% B

5% C

21% D

19% E

8% F

5% G

This resulted in a 15.17% blended interest rate. 78% were 36 month loans and 22% were 60 month loans

Imagine how bad my return would be in a recession?  I am running for the doors and sticking to loans on real estate.  I suspect that by the time my last note is paid back, I will have earned a negative interest rate.  When loans go bad with hard money loans, you still have the collateral of the real estate.  I prefer that security.  Based on my nine-month experiment I cannot recommend either LendingRobot or LendingClub.

This is the fourth on my investment status through the first half of 2016. The three post were about my Real Crowd, Realty Share and direct investments. Today’s update is from my investments on the other platforms. 

I have five investments outstanding with Realty Mogul, two with iFunding and one with Fundrise. Investments with these platforms represent less than 10% of my crowdfunding portfolio.

Realty Mogul

San Antonio Retail Plaza –This deal from January of 2014.  The original plan was a 4 to 5 year hold and a 17% IRR.  They were able to refinance the property in less than a year and return 100% of my invested capital.  Distributions for the first two quarters were 5%.  However, there will be no distributions for the next 2 quarters because a fitness center tenant broke their lease and left in the middle of the night.  Management is working to lease the area and hope to continue distributions within 6 months.

 

Melbourne Self Storage –   Investment from October of 2014.  This is the same self-storage sponsor from three of my direct investments.  The cash on cash was projected to be 9.5%% for the second year and have an IRR of 22%. They paid a 9.2% distribution so far in 2016. Net income for the property is 20% above budget so far in 2016 and the estimated value of the property is $5 million higher than the purchase price. ($14 mm vs $9 mm)

 

Memphis Hotel  This investment fund from June of 2015. They plan on renovating this 96 room motel in Memphis. The cash on cash was projected between 11%-16% with a 20% IRR.  Terms are 9% preferred with a 60/40 split. Cash on cash returns have been at 7.6% so far this year. Sales are about 10% under projections. They are having issues transitioning off a railroad contract that accounts for about 50% of revenue. Jury is still out on this investment.

Washington State Apartments –  This military apartment complex in Washington State. from July of 2015. The forecasted IRR is 18% and the cash on cash ranges from 12% to 14%. The terms were 9% preferred and a 70/30 split to 16% IRR then 60/40. Rents so far are higher than projected and occupancy is higher. Cash distributions are 13.6% so far. This investment is beating expectations.

 

Gulfport MS Apartments  – Investment from October of 2015. The cash on cash yield was projected a 11%-13% and an IRR of 17%. Terms are 8% preferred with a 75/25 split.  Distributions have been 7.6% to date. This investment has started off on a very rough note. The sponsor has hired attorneys and forensic accountants. The attorney has taken the case on a contingency basis and believes after review of the forensic accountants work that the case has substantial damages with the strong chance of victory. They are accusing the seller of Fraud.  Occupancy was 8% lower than seller represented.

As you can see two out of the five are having issues. Litigation within 6 months of purchasing a property is never a good thing.

iFunding

Milwaukee Flip – iFunding is the now sponsor on this 6 month Milwaukee fix and flip deal from June of 2014. Terms are 12% preferred, 64/36 split and a 24.3% IRR. iFunding took over this project over a year ago and is renting the property.  It is paying about a 10% cash on cash return.  The property is listed for sale $30,000 under the amount ifunding provided in equity. The CEO of ifunding has promised to make investors whole on this deal. I hope he keeps his word.

Denver Condo Conversion – Condo redevelopment project in Denver from January of 2015. Terms of the deal are 10% preferred in year one and then the return of capital in months 11-14.   After capital is returned profits on construction of new condos are split 25/75 with a projected IRR of 28.3%.  The sponsor made the 10% distribution and returned 85% of the equity by month 14.  They appear to be on schedule with the construction of new condos and over half are presold.

Fundrise

Fundrise Growth Portfolio I -  Fundrise is the sponsor on this seven asset fund from October of 2015.  Current income is reduced and total IRR increased in this fund’s structure.  IRR is forecasted to be 18% with cash on cash under 2% on this 48-month deal.  Reports on the funds seven assets show that they are all meeting or beating expectations.  Cash on cash returns have been about 1% as expected.

This is the third on my investment status through the first half of 2016. The first post two post were about my Realty Share and direct investments. Today’s update is from my Real Crowd investments.  Again, my investment breakdown over the different crowdfunding sites or methods:

 

Investment Platform/Method          Real Estate Portfolio %

Private Investment Group                          27%

Direct with Sponsors                                  22%

Real Crowd                                                21%

Realty Shares                                             10%

Realty Mogul                                                7%

Fund That Flip                                             5%

Crowd Street                                                 2%

Patch of Land                                               2%

Fundrise                                                        2%

Peer Realty                                                   1%

iFunding                                                        1%

 

I made 11 investments with Real Crowd since December of 2013. Overall, Real Crowd has established sponsors with above average track records. In fact, my very first real estate crowdfunding investment was with Real Crowd’s Fort Davis Center.

Washington DC Office/Retail Center –  My first Real Crowd Investment from December of 2013.  This is an office retail center in Washington DC.  The cash on cash was projected to be 12% for the first 5 years and have an IRR of 18%. Fort Davis has paid a 10% distribution each quarter until the Q 4 of 2015. A 3000 sq. foot area became vacant and they leased it $10 a foot above proforma, but required a $250k tenant improvement package. They suspended distributions for two quarters for the TI, but they are now 100% leased at rates above proforma.  I anticipate higher cash flows in the future and the property should be expectations.

Denver CO Apartments – This multifamily in Denver, CO from January of 2014.Cash flows were projected between 8-10% with an IRR of 17%. Terms are 8% preferred and a 75/25 split. 71% of the property has been renovated since the purchase. Cash on cash distributions in 2015 were 14% after a q4 bonus.  Distributions for the first two quarters of 2016 have been 10.5%. Rental rates have beat expectations and occupancy is meeting expectations on this property. Virtu appears to be beating projections.

Wisconsin Fund  – This investment fund from February of 2014. This diversified fund has a high concentration of multifamily. The cash on cash was projected between 7%-10% with a 15% IRR using low leverage.  Terms are 8% preferred with a 70/30 split. The fund is current on its 8% preferred return. The fund is rather unique in that it returns all investor capital before they take any promote. Over 30% of the fund capital has been returned from one property that produced over a 100% ROI. All of the fund’s assets are meeting or beating budgets and a FL MF deal closed last month with a ROI over 50%. This should result in more capital being returned. They expect 2 or 3 more profitable exits in the next 12 months.

LA Industrial – This ground up industrial building in CA from May of 2015. The forecasted IRR was 18-20% and the terms were 8% preferred and a 60/40 split. The building was sold in July of 2015 with a 1.35x return and a 29% IRR. This investment soundly beat expectations. 

Jacksonville, FL Apartments – Apartment investment from Sept of 2014. The cash on cash yield was projected a 10.75% and an IRR of 15%. Terms are 8% preferred with a 70/30 split. The property was under contract earlier this year for $7.2 million that would have resulted in a 35% IRR.  That sell fell through, but they sold the property last month at an IRR of about 25%. This properties NOI has exceeded budget by over 25%. This property beat the sponsors expectations.

 Retail Income Fund – The sponsor on this retail fund that primarily develops ground up NNN retail properties. Terms are 7% preferred, 80/20 to a 15% IRR and then a 70/30 split. This investment from February of 2015 has cash calls and has requested only 50% of the pledged capital. Its projected cash on cash is 5% with a 15% IRR. There first distribution was 5% in Q1 of 2016. They do appraise their holdings each quarter and the IRR to date on 10 projects in the fund is estimated to be 29.5% gross and 19.7% net to investors. They appear to be beating projections.

Birmingham Ground Up – This two tenant ground up development in Alabama from July of 2015. Terms of the deal are 12% preferred and a 90/10 split. Cash flow is projected between 3%-9% with an IRR of 15%.  Both buildings are fully leased at the proforma projections and construction will be complete during the 3rd quarter of 2016.  No distributions have been made but the project seems to be on track.

Houston Apartment -  The Houston apartment investment from September of 2015.Cash on cash was projected at 11% and an IRR of 18%.  Terms are 10% preferred with an 75/25 split. The property is 95% leased and YTD cash flows have exceeded budget by $161,000. Rents are 8% above proforma and they are paying a 10.5% cash on cash distribution so far in 2016. This project appears to be beating expectations.

Phoenix Industrial Building - This Phoenix industrial building is from December of 2015.  Targeted cash on cash is 6% and an IRR of 27% on this 2-year hold.  Terms are 9% preferred with an 85/15 split. The deal had a lease expiration in 2017 and the returns were contingent on a new lease signed at market rents. An LOI was recently signed with terms close to expectations.  The property should be sold after a one year hold at an IRR very close to projections.

Spokane Washington Extended Stay Hotel – This extended stay motel in Spokane, WA from April of 2016. Cash on cash returns are projected at 19% with a 25% IRR. Terms are 10% preferred with 70/30 split. Investors owned the property for less than 2 months of the second quarter of 2016. The cash on cash was 19.6% for the quarter and net income beat budget by over $100,000. (125k vs 18k) It’s very early, but so far the sponsor is far exceeding expectations.

 

Industrial Opportunity Fund  – The industrial building investment fund from July of 2016.  Returns are estimated at 15% and the terms are 10% preferred with an 80/20 split. The fund’s track record has an IRR in excess of 25%.  It’s too early to know how this investment if performing.

In addition to these 11 investment I made one with a Crowd Street a similar platform to Real Crowd. They are a listing platform and take no fees from investors.

 High Growth Fund  – The fund that buys distressed 1031 and TIC properties from August of 2016. Terms are 15% preferred then a 50/50 split. The targeted IRR is 30% over the 3-year term of the investment. There are a large number of TIC loans maturing over the next 24 months that make this unique investment alluring.  It’s too early to evaluate this investment progress.

As you can see all of my Real Crowd investments are meeting or beating expectations. I have been very pleased with the quality of the sponsors and investments on this platform. The fact that investors can discuss these deals openly (they use SEC rule 506C) is another reason to choose Real Crowd investments over the 506b platforms that charge annual investor fees and do not allow discussion. (Realty Mogul, Realty Shares and iFunding)

Jeremy Roll with the Jeremy Roll investment group wrote an excellent article about the 10 steps when reviewing a passive Real estate opportunity. Here is a summary of the article and you can read the entire post here

 

  1. Make sure the risk profile of the investment meets your criteria
  2. Make sure the manager has plenty of experience
  3. Only invest if the deal has a preferred return (The investor gets paid first)
  4. Review that the profit splits are fair
  5. Make sure the Pro Forma has conservative projections
  6. Understand and believe in the business plan and overall strategy
  7. Research the location and make sure it’s a good fit for the investment
  8. Call the sponsor and get comfortable with them
  9. Perform background checks on the sponsors
  10. Reviews the PPM to make sure there are not any hidden anti investor provisions.

This is the second blog post on my investment status through the first half of 2016. The first post was on my 10 investments at Realty Shares. Today’s update is from my direct investments and investments through a Private Investment Group.  I also thought it might be helpful to see my investment breakdown over the different crowdfunding sites or methods:

 

Investment Platform/Method          Real Estate Portfolio %

Private Investment Group                         27%

Direct with Sponsors                                 23%

Real Crowd                                              22%

Realty Shares                                          10%

Realty Mogul                                             7%

Fund That Flip                                            5%

Patch of Land                                             2%

Fundrise                                                    2%

Peer Realty                                                1%

iFunding                                                     1%

 

I made larger investments in my deals with the private investment group and my direct investment because I have more confidence in the sponsors, the fees are lower than platform deals, and there is no platform risk. 50% of my real estate capital is in 13 deals with the private investment group group or direct with the sponsor. The direct investments were either with repeat sponsors or syndicate deals discovered in in email group for accredited investors that I participate in.

Mobile Home Fund 4 from the private investment group. The first of 3 Mobile home park funds that I invested in after an introduction from the private investment group from March of 2014.  This fund invests in parks primarily in the Midwest and terms are 10% preferred with a 50/50 split. It is current on their 10% cash on cash preferred return through the 2nd quarter of 2016.  They expect either an IPO or a preferred equity buyout by the end of 2016.  It should meet or exceed the projected 20%+ IRR returns.

Houston Retail from the private investment  group. This class B+ retail Center in Houston TX from August of 2014. Cash flows were projected to start at 11% and average 12% with an IRR of 20%. The investment has paid its 8% preferred return every quarter until Q2 of 2016. Long story short is they loss a couple of tenants, but as of the most recent update they are 100% leased and at rates above projections. The cash on cash returns have been lower for lease up cost and commissions, but should beat expectation starting in Q3 of 2016.

Mobil Home Fund 5 from the private investment group. This fund is from October of 2014. Very similar to Fund 4. They are also current on the preferred return and should have the same exit in the next 6 months.  It should also meet or beat the 205+ IRR expectations.

Rockledge Self Storage from the private investment group. This property in Rockledge, Fl. is from February of 2015. Terms are 8% preferred with an 80/20 split.  Cash flows were projected to start at 11% in year 1 and average 14% and an IRR of 24%.  Cash flows have been 10.5% for the first 2 quarters of 2016 and NOI has beat budget for the past 4 quarters. The property was purchased at an 8.25 cap rate and the 24% IRR was based on a 8 cap exit.  I have worked with Reliant looking for a self-storage opportunity over the past 6 months and cap rates in this area are now below 6%.  NOI for the first 6 months of 2016 is 50% above budget. This investment appears to be exceeding expectations.

Naples Self Storage from the private investment group. This self-storage property in Naples, Fl. is from March of 2015. Terms are 8% preferred with an 80/20 split. Cash flows were projected to start at 11% in year 1 and average 15% and an IRR of 25%.  Cash flows have been 10% for the first 2 quarters of 2016 and NOI has beat budget for the past 4 quarters. NOI for the first 6 months of 2016 beat budget by 16%. Similar to Rockledge, cap rates are now sub 6% and the 25% IRR was based on an 8 Cap exit. This investment appears to be exceeding expectations.

Spring Hill Self Storage from the private investment group. This self-storage property in Spring Hill, Fl. is from June of 2015. Cash flows were projected to start at 10% in year 1 and average 13% and an IRR of 25%.  Terms are 8% preferred with an 80/20 split. This property was purchased at a 7.5 cap rate and current cap rates are below 6%. Cash on cash returns for 2016 have been 9.5%.  NOI missed projections by 30% for the first 6 months of 2016. Sponsor blames on site management issue for the shortfall and  they say the problem is corrected. They also report that July beat projections.  This one is not meeting expectations, but does not appear to be in trouble since the self-storage market is strong.

Houston Multifamily from our email group.  This Houston Texas apartment building is from July of 2015.  Terms are 8% preferred with a 70/30 split to 12% IRR, then 60/40 split to 15% and then 50/50 split. IRR is forecasted to be 21% with year 1 cash flow forecasted at 1%, year 2 at 4% and raising to 39% with a year 3 refi. NOI has been above projections since the purchase. A fire destroyed one building, but loss of business insurance when received will further put cash flow ahead of expectations. The project appears to be on track.

Mobil Home Fund 6 from the private investment group. This fund from September of 2015. Very similar to Fund 4. They are current on the 10% preferred returns after a catch up payment in Q2. It’s very early, but with the projected exit later this year, I expect the investment to beat projections.

LA Industrial Opportunity from repeat sponsor. This is my second investment with this sponsor  My first investment was the LA  ground up investment from Real Crowd that had over a 35% IRR. This is a similar ground up industrial development that has a projected 23% IRR over 3 years with an 8% preferred 60/40 split from September of 2015.  So far the project is on time and on budget with no cash flow to date as expected.  This investment appears to be meeting expectations.

Columbus Ohio Business Park from the private investment group. The business park in Columbus, Ohio from is May of 2016. Year one cash flow is projected to be 10% and the average cash flow is 11% and an IRR of 17%. The property is being acquired at a 9.9% cap rate on year 1 proforma and is 87% leased. Terms are 8% preferred with a 75/25 split. Too early to assess its progress.

Distressed Note  Fund II from our email group. This fund that buys distressed notes and was founded by Eddie Speed of the NoteSchool. This fund has a 9.5% preferred and a 50/50 split and has a 2 year lock out before shares can be redeemed. Returns from Q2 were 12.2% and returns since inception are 14%. Investment was made during Q3 2016 and it too soon to report on returns.

Lake Charles Micro Hospital from repeat sponsor.  This ground up micro hospital in Lake Charles, LA from July of 2016. The average cash on cash is 17% and the IRR is estimated a 20% on this NNN lease. They expect to build the facility at an effective 13% cap rate. The terms are 8% preferred then a 65/35 split to a 18% IRR, then a 50/50 split. The investment recently closed and there had been no feedback from the sponsor.

Wisconsin Fund II from repeat Sponsor. The fund and funds were in invested in August of 2016.  I previously invested in Fund I and Northwood Apartments. Fund I made a distribution of 30% of the fund from a multifamily investment that comprised only15% of the fund.  Northwood is schedule to close this month with a estimated 20% IRR.  Fund II is also invested in Fund I which has many assets that have appreciated back to 2014.  This low leverage fund terms are 8% preferred 70/30 split with a 15% expected IRR. Too soon to determine returns on this investment, but since we are buying in with a built in gain the future seems bright.

If you would like information on our email group for accredited investors, please use our contact us page at CrowdDD.com.

I learned a valuable lesson this week.  Don’t assume all fees are created equal and read the fee section of a PPM very, very carefully.

Let me preface this blog post by saying Real Crowd is one of my favorite platforms and my investments there have outperformed investments on every other platform.  In addition, when I brought to their attention some disclosure shortcomings, they corrected it across the entire platform within 48 hours.

I made about 80 real estate crowdfunding/syndicate investments over the past three years and I have looked over 500+ deals during that time. Every sponsor structures their deals differently, but most charge a small acquisition fee (1% or so), a disposition fee (1% or so) and an asset management fee (0%-2%). Most have a preferred return to investors and a promote. The average deal is 8% preferred and a 70/30 split.  I’ve seen a preferred return in the range of 6%-12% and the promote range from 10% to 50%.  As far as I recall every “asset management fee” was based on equity raised or yearly revenue.  If a deal raised $1 million and took on $3 million in debt on a $4 million project, a 1% asset management fee was $10,000 a year (1% of $1 million). A fair fee to keep track of accounting and distributions etc.  It would represent 1% of my investment each year.

Here are some of my recent Real Crowd investment and their terms:

Westmount at Summer Cove Asset Management Fee -  1.5% Annual, 10% preferred 75/25 split to 17% IRR, then 50/50 split

O’Donnell Fund V   Asset Management Fee -  1% Annual, 10% preferred 80/20 split

Stratford Suites   Asset Management Fee -  1% Annual, 10% preferred 70/30 split

South Landing   Asset Management Fee - 0% Annual, 12% preferred 90/10 Split

Here is an example of how Real Crowd listed asset management fees (before 8/25/2016) on their investment pages:

 

Asset Management

    1.50 %

    Annual

 If you were making your investment decisions solely based on fees, South Landing and O’Donnell Fund would be no brainers. However, it turns out asset management fee can be based on at least one of 3 things: equity raised, yearly revenue, or total assets.  Looking under fees on Real Crowd’s investment pages, you would have no idea what is based on.  Westmount raised $6.5 million, its total assets are $25 million, and Yearly revenue is $3.3 million. Therefore, their yearly management fee would be either:  $49.5k (revenue), $97.5K (equity), or $375k (assets).  The asset management fee based on revenue is 7.5 times larger than the fee based on total assets.

It turns out Westmount and Stratford asset management fee was based on the properties revenue and the O’Donnell’s fee was based on total assets. I never knew sponsors charged an asset management fee based on total assets. In my experience the worst case scenario on a 1 % asset management fee was 1% of my investment (less than 1% if the fee was based on revenue).  However, with LTV of 75% total assets could be 4 times that of equity.  Instead of a 1% yearly fee, it would be 4% each year.

It turns out O’Donnell has always structured his deals this way and his PPM clearly stated the fees. They take a smaller cut of the backend than the typical deal to compensate for this higher upfront annual fee.  However, Real Crowd’s investment pages list all asset management fees the same.  Just the percentage and that it was annual. The typical investor probably has no idea that the fee could vary so wildly. It’s the duty and obligation of the platforms to clearly disclose these difference.

 

After pointing out this issue to Real Crowd, they were quick to address it.  Now the investment page clearly states how the fee is calculated.  Here is a current example:

Asset Management

   1.00 % of gross purchase price of all owned assets   

 Annual

 I still wonder if a new investor would know that the described above fee could be 7 times higher than an asset management fee that is 1% fee of gross revenue.  Hmmm. There may still be more work to be done on disclosure.

The O’Donnell fund has a fantastic track record and what appeared to be a no brainer fee structure. I am still happy with my investment decision, but wish I had known the actual fee structure before making my decision. I would have known, if I had carefully read the PPM and that is an investor’s responsibility.  I hope all the real estate platforms will strive to clearly state all the investment fees and highlight any fees that are abnormal or unusual. In the future I will look over the fee section of each investments PPM with a fine tooth comb.  Lesson Learned!

I took a break from the CrowdDD blog over the past six months while I navigated my way through a very complicated 1031 transaction.  I wanted to update our readers on the performance of my real estate crowdfunding investments for the first 6 months of 2016.  I will highlight the results from: my direct investments, Real Crowd, Realty Shares, Realty Mogul and Patch of Land.  I also have two investments or less with iFunding, Fundrise, and Peer Realty.  I will report on those investments in a single blog post. Over the last 3 years I made 77 real estate crowdfunding investments and 25 have been fully repaid. I lost money on none of my investments and broke even on one.

I also want to point out over the past 12 months, the vast majority of my investments have been either though Real Crowd or direct with sponsors via direct relationship or though Jeremy Roll (he has an email investment group and you invest directly with the sponsor).  I have pulled back from investing with platforms that pool investor money and invest via an LLC.  By investing direct with the sponsor, I remove the platform risk, and the added fees platforms charge for administration.  In addition, it seems a lot of second tier sponsors show up on these platforms and the majority of my underperforming investments have been on platforms that pool money and invest via an LLC.

I currently have ten investments with one such pooling platform, Realty Shares and will report on those results below.  Over the last 18 months I made only 4 new investments via RS.  They are all Fix and Flip funds.  My most successful investment on RS was my 2014 investment in  Fix and Flip Fund II.  This fund returned over a 20% IRR from July of 2014 until October of 2015. All 4 new funds are current and paying their promised interest rate.  I invested in the  Capital Fix Flip Fund I in April of 2015 and is current on it's projected 14% cash on cash distributions.  It will mature 4/30/2017.  I invested in the New England High Fund II in November of 2015. This is a 12 month hold that paying 8% currently with a 9% bonus at maturity.  My third new fund is the Single Family Home Fund from March of 2016.  This fund is paying 13% and matures in September of 2018 and uses no leverage. My final new investment was in April 2016 into the 36 month term  Philadelphia Multifamily Fund I that pays 8% currently and has a 6.5% bonus at maturity. These four funds are meeting expectations.

My oldest investment (March 2014 and at the minimum) at Realty Shares is Safeway Retail Center in Phoenix.  Its projected cash on cash was 9% on a 3 to 5 year hold.  Over the past 30 months, distributions have totaled 7.5% or about 3% per year.  I have little if any confidence in this group.  I was in another investment with this group (Chase Condo) and communication was horrible. Realty Shares and I both reached out over 30 times to get answers to anomalies without a single call back or answered email. The last 5 times I called the voice mailbox was full.  The last update on Safeway says:  “The sponsor advised that the distribution was less than they would like but cash flow is not sufficient to send more. The sponsor is looking for operating cost savings and to increase collections to improve cash flow. However, the sponsor stated that they do not expect to be able to materially increase the distributions throughout 2016.” This is my last investment with this sponsor. The last two distribution checks were for a 2% annualized return.

 Retail in New Orleans was my next investment from October of 2014. The 3-4 year hold was projected to have a 11% cash on cash return and a 19% IRR. At last report occupancy was at 85%. The first seven distributions have average about 7% from the sponsor  versus the projected cash flow of 10% year 1, 12% year 2 and 14% year 3. This investment is not meeting expectations, but does not seem to be in trouble.

Medical Center Plaza is a medical center investment from November of 2014.  It was projecting a 12% cash on cash and an 19% IRR over a 5 year hold. This project is a 96% occupancy and paid out over 13% in 2015.  So far in 2016 distributions have averaged 12.5%. This investment is beating expectations.

South Union Street is a Fix and Flip investment from November of 2014 . This hybrid model was projected to pay 9% current and an 8.3% bonus on its 5/12/2016 estimated close date. The investment is current on its 9% interest payments, but the property’s sale fell through in July at a price that would have paid its estimated returns.  Now the property is listed for $30,000 less than the underwritten exit price and the 8.3% bonus is in jeopardy and potentially some principle. Another RS investment not meeting expectations.

 

Ichabod Lane is a 12 month fix and flip investment from February 2015 in Orinda, Ca . This hybrid model was projected to pay 11% current and an 8% bonus at close. The sponsor made the 11% payments until April of 2016.  They never got there plans approved by the city and decided to sale before the rehab even began.  They supposedly had a buyer at $1.1 million ( the raise was $1 million form RS and they paid $935k for the property )  It has not closed because they are still waiting on approval of their plans.  RS has offered to provide resources to get the plans approved. “The sponsor has not said if they will utilize these additional resources”. There is a good chance I could lose money on this deal and it is NOT meeting expectations.

Las Vegas Retail  is a retail investment in Las Vegas from March of 2015 . It had a 12% projected cash on cash and a 15% IRR on a 3-5 year hold. The lease up has gone well and at the 1st quarter update they planned on putting the property up for sale during the 2nd quarter of 2016. They have paid the 8% preferred return each quarter with an additional bonus at the end of 2015. This investment seems to be ahead of expectations.

In summary, It seems my four fund investments are doing well.  I have 6 individual investments left at RS. Two are doing well and three are not meeting expectations and one appears to be in trouble. It is interesting to note that two of my closed investments (Twi-west flip deals) last year were also Hybrid model that paid a current interest and a bonus once the flip was sold. One deal broke even. The other did not pay the bonus and only earned its projected interest.  I have two current hybrid deals and I don’t expect them to earn proforma returns. I am not sure when I will invest on this platform again and will stay away from hybrid deals in general. Another note of interest, I am in RS fifth deal and 191st deal.

I asked for feedback from our readers on their experiences with real estate crowdfunding.  We received quite a bit of feedback and over 95% of it was positive.  Most projects have performed as expected and no one has reported the loss of principle.  There are a few troubled projects on almost every platform and the platforms are working to resolve all of the issues.  As one would expect (since the industry is so new) most of the problems investments have been short term debt deals.  It is crucial for all debt investors to only invest in low loan to value deals.  The advantage to investing in real estate debt is the underlying real estate is used as collateral and the foreclosure of that property is what should ensure most investors do not lose equity.  The platforms have stepped up on every bad deal and are being proactive in taking over the collateral.

I personally started to invest in real estate crowdfunding deals in January of 2014.  2015 is the first year I was fully invested and I now have diverse data on how my investments are performing. Over the next few months, I will give detailed reports on my investments from each of the real estate crowdfunding platforms.   I thought it would be helpful to our readers to see my actual cash on cash returns from both my equity and debt crowdfunding investments from 2015.

In 2015 I had 20 different debt investments outstanding for at least part of the year.  My debt cash on cash yield was 12.38% for the year.  For reporting purposed I time weighted my investments.  For example, if I had a $10,000 investment that was paid off after 6 months, I counted that as a $5000 investment for the year.  If it paid $600 in interest, the yield would be 12% (600/5000).  The yield ranged from 0% to 25%. One Realty shares loan only paid back principle and two Realty shares loans paid an interest bonus at close if they hit certain goals. This resulted in their time weighted return to exceed 20%.

I had one Fundrise Brooklyn debt investment and it yielded 14%.  All eleven of Patch of Land loans paid on time each month and my yield was 12.4%.  A number of the loans asked for extensions and paid extra points for the privilege which were passed along to investors.  My two iFunding debt investments yielded 12.55%.  WI  came in at 11.76% and Almonaster at 14.58%. My six Realty Shares debt investments yielded 12.77%.  Normandie’s 0% yield was boosted by Pullman’s 25% yield and the Fix & Flip Fund 2 yield of 23%.

On the equity side, I had 34 investments outstanding during 2015.  My portfolio’s cash on cash return from equity distributions was 10.01%.  Eight of the investments had no distributions in 2015 as projected.  My overall returns were boosted from 5 investments that yielded over 20% each.  Here is a summary of all my equity investments.  Again they are time weighted.  If a $20,000 investment was outstanding for only 3 months, it was considered a $5000 investment for the year.

 

Investment Name

% of Portfolio %

Cash Yield Type   

Platform

Mobile Home Fund IV

10.46%

10.00%

Mhp

Private Syn

Mobile Home Fund V

10.46%

9.25%

Mhp

Private Syn

Self-Storage Rockledge FL

9.53%

10.22%

Self-store

Private Syn

Houston Retail center

7.84%

7.90%

Retail

Private Syn

Northbrook apt

5.23%

8.32%

MF

Real Crowd

Houston apt

4.71%

0.00%

MF

DIRECT

FL Self storage

4.18%

8.36%

Self-store

R Mogul

Cadence Fund

3.82%

0.00%

Retail

Real Crowd

WI Fund

3.66%

10.17%

Fund

Real Crowd

Self-Storage Spring FL

3.05%

8.14%

Self-store

Private Syn

Chase building

2.61%

29.89%

Office

R Shares

Hillcrest Apt

2.61%

13.91%

MF

Real Crowd

American Mini Storage

2.61%

25.19%

Self-store

R Mogul

Self-Storage Naples FL

2.54%

9.40%

Self-store

Private Syn

 Ferry med center

2.41%

12.17%

Medical

R Shares

 Slausson

2.20%

50.76%

Groundup

Real Crowd

 Chapel Hill

2.09%

0.00%

Office

Fundrise

Mobile Home Fund 3

2.09%

7.84%

MHP

R Mogul

Cottage Grove

1.78%

22.95%

Groundup

iFunding

Manhattan Strip mall

1.67%

7.03%

Retail

R Shares

AL Ground UP

1.57%

0.00%

Retail

Real Crowd

Safeway

1.57%

4.21%

Retail

R Shares

Las Vegas Chipotle Retail

1.57%

7.69%

Retail

R Shares

Oak Harbor apt

1.50%

12.10%

MF

R Mogul

Mobile Home Fund 6

1.31%

0.00%

MHP

Private Syn

Memphis Marriott

1.31%

9.01%

Hotel

R Mogul

LA Industrial

1.09%

0.00%

Groundup

DIRECT

Fort Davis office

1.05%

7.20%

Office

Real Crowd

Linden Austin TX

1.05%

19.67%

Groundup

iFunding

Palms Multi Family

0.86%

0.00%

MF

R Mogul

Westmount apt

0.68%

8.66%

MF

Real Crowd

Equity fund

0.50%

0.99%

Fund

Fundrise

Phoenix Industrial

0.19%

0.00%

Industrial

Real Crowd

Westpark plaza (equity returned)

0.00%

100%+

Retail

R Mogul

Total

100%

10.01%

 You can discover, rate, and review patch of Land investments at CrowdDD.com.

With the stock market in a virtual free fall and the drumbeat of a recession that is long overdue, what is a real estate crowdfunding investor to do?  The short answer is to be cautious, but do not panic.  Our economy has always been very cyclical and real estate in particular has always had very distinct cycles.  The last 6 years have been highlighted by a very slow and steady recovery from our 2009 lows, but all good things must come to an end and we as investors must be prepared.

No one knows exactly when the next recession will hit, but we do know it will hit. We are over due.  I suspect it will not be as severe as the “Great Recession”, but there will be significant pain for investors if they do not proceed cautiously. Over the last 6 months, I have changed my investment philosophy and criteria for both equity and debt investments.

On the real estate debt side I have pulled back quite a bit.  I still invest with Patch of Land, but I am now very picky on which loans I pick up.   I no longer invest in homes that will sell for over $500,000.  The high end will be the first to go south in a slowdown.  Most of my high dollar fix and flip loans from 2014 took well over a year to sell and some sold for 75% of the projected ARV.  All my Patch of Land investments paid on time and I had no defaults.  One high end loan on Realty shares returned all of the principle, but did not pay any interest.  My new loan criteria is an LTV of 65% or less with an ARV of between $125,000 and $400,000.  Ie house selling close to the median price.  The very cheap houses in the “ghetto” are also way too risky at this stage of the cycle.  Invest in properties that will have the most buyers when complete.

On the corporate debt side, I redeemed my investment in the Broadmark commercial debt fund, I turned off auto investing with Funding circle, and I am no longer investing with Bolstr.  I recently wrote a blog post about my reservations with Bolstr and may invest again in the future if they revamp their due diligence process.

On the equity side, it’s also time to be a bit cautious.  I am staying away from deals that are highly leveraged (over 75%) and from deals that rely on variable rate debt.  80% of my investments have been in counter cyclical plays such as self-storage and mobile home parks.  I am also considering value add projects that have a compelling story. I think it’s the wrong time to invest in the typical low cap rate strip centers or office buildings.  It will be very tough to make money on sub 6% cap rates with either rising interest rates or a recession.  Building up some cash will be prudent as bargains pop up over the next few years.

I thought I would give a quick update on my Realty Shares crowdfunding investments.  I invested 13 times with Realty Shares during the past 2 years.  I currently have 10 active investments and three have retuned my principle.

3 completed Investments

One investment was a fix and flip from Aug of 2014 (Pullman) was repaid in February of 2015 and made a 15% IRR. A Twi-west fix and flip from Aug of 2014 had it principle returned in Aug of 2015 with 9% interest.  The property (Van Ness) has not sold and if it hits certain metrics, another 9% will be paid.  The third closed investment was another Twi-west fix and flip (Normandie).  The principle was returned, but the developer lost money and no interest was earned.

1 Almost Complete

Another early investment should go full cycle in the next week or so. The AZ Chase office investment was bought in May of 2014.  The developer split off the bank parcel and sold it this summer and sold the remaining office building this week.  The final accounting is not finished, but investors should see a return higher than projected.

The other 9 Projects are:

Safeway center in AZ – Investment from March of 2014 is doing slightly worse than projected, cash on cash returns are about 655 of projections.  Sponsor feels they are on track to meet expectations

Single Family Fix & Flip II -  This investment from July of 2014 is wrapping up and has already returned about 30% of the principle with 9% interest.  It’s on track to be complexly paid back within 2 years and it appears they will beat the projected IRR of 20-25%.  Margins and sales have beat expectations

Manhattan Place was a retail investment from October 2015.  This 5+ year hold seems to be on track.

Anderson Ferry is a medical complex from October of 2014.  Occupancy is at 96% and they also seem to be on track with projections.

84 South Union is a fix and flip from Nov of 2014. They have paid the promised 9% interest each month.  They seem to have a few delays, but no red flags yet.  We should make another 8% at close.

Ichabod Lane is s fix and flip investment from February of 2015.  They are current on the 11% interest.  They too have had delays, but seem confident that they will still hit projections and we should earn another 8% at close.

Summerlin Las Vegas is a retail investment form April of 2015.  It’s still early, but all updates have been positive and they are current on the 8% preferred return.  Occupancy is up to 96% from 92% at close.

Broome Fix and Flip – This fix and flip fund from May of 2015 is current on their 14% interest payment.  The updates have all been positive

New England High yield II – This investment form December of 2015 is too new to provide any feedback.

Overall, I am pleased with my Realty Share’s investments.  I am staying away from high end fix and flips.  They have been taking longer than expected to sale and they will be the first to get hit in a recession.  I think the sweet spot for fix and flip investments are $100k to $300k and an ARV of 65% or less.

Realty Shares is still actively looking for new investors and will give new investors $150 if they register with this URL and link their bank to their Realty Shares account.

Real estate crowdfunding for accredited investors has been around for over 2 years now.  A handful of my investments did much better than expected and a few that did much worse that projected.  More than half of all crowdfunding deals in real estate have been with 506b platforms and there is almost no accountability for these investments. The SEC does not allow any public discussion while they are raising funds. The platforms have sent out cease and desist letters against sites like ours that  post 506b investments after they are closed.  Therefore, no one knows how crowdfunding investments perform except for the individuals who invested in specific deals. I think we could provide a great service to the crowdfunding investment community, if we would share our winner and losers.

A few members have already reached out to us about investments that did not go according to plan. I am asking our blog readers to please use our contact us form and let us know about any of your crowdfunding investments that:

1.  Beat projections by 50% of more

2.  Missed projections by 50% or more

3.  Crowdfunding Investments that went full cycle and you lost principle or broke even.

We will keep your identities confidential.  Please give us a much detail as you can.  Please include:

1. Platform & sponsor where you made the investment

2. Date when investment was made and date when the investment went full cycle

3. Projected returns

4. Actual returns

Thanks you for sharing and I will post a summary in January of 2016.

If you read any of my articles over the past 2 years, you would know that Bolstr has been one of my favorite crowdfunding sites.  My IRR is averaging about 20% over 10 loans.  However, recent events having giving me pause and I am having second thoughts over the underwriting at Bolstr.  As a reminder, Bolstr has a unique loan payoff structure. The typical loan is not based on an interest rate, but a multiple return.  Borrowers will pay back 3% of revenue for x months (typically 24 months or less) until they have returned 1.3X the amount borrowed.  Every loan is different, but this is a typical structure.

Bolstr displays the borrower’s income statement from the past few years with three year projections.  Most loans have a blanket lien against all company assets and a personal guarantee from the founder.  Bolstr states they do extensive due diligence and approve less than 5% of the loan applications.  For some reason they do not put the borrows balance sheet online, but they plan to in the future.  The income statements have been very impressive for most of my borrowers.  Many have been fast growing breweries.

This first event that gave me pause was a recent episode of The Profit on CNBC.  The show highlighted a Food Truck company from Chicago, DaLobsta.  You can see the episode on Hulu.  The opening line from Marcus Lemonis was” If I can’t get this company to follow my plan, they will go under”. Marcus walks away from Dalobsta when the founder will not agree to his terms.  According to the show, the founder has no skin in the game, uses company funds for personal expenses, and owes over $120k in sales tax that are past due.  At one point in the show the owner says he has financials, but “I am not sure how accurate they are”.  Bolstr gave Dalobsta a $150,000 loan in the summer of 2014.  While they have paid the loan on time to date, I would be very worried if this firm owed me money.  It concerns me that they passed the underwriting review process at Bolstr.  Thankfully, this loan is not in my portfolio.

The second event was one of my loans with Bolstr has declared bankruptcy.  The company is a fast growing brewery in San Francisco.  Sales are beating expectations and they have paid back over 50% of the loan in only 8 months.  The loan was earmarked to buy brewing and lab equipment for an expansion.  The first position lender did allow for a carve out of $100,000 for the new assets to secure this loan.  It turns out this fast growing company has secured debt that is almost twice that of the secured assets.  They did not use the $150k loan to buy new equipment and they have now declared bankruptcy, even though they expect a $600,000 profit for the year.  Since they did not buy any equipment with our loan, there are no assets that are securing the loan.   It appears our only hope is the personal guarantee which usually does not work out either.   Again, my question is how did this loan pass the underwriting process of Bolstr? Had it been disclosed that debts were almost double the assets, I hope I would have passed on this deal.

 Personally, I will not make any more loans with Bolstr until they tighten their underwriting procedures and present accurate balance sheets from borrowers.  Bolstr’s most recent borrower, which has not been funded as of this writing, shows a loss for 2015 on its posted income statement and a projected loss for 2016.  Yet another reason to temper my excitement for this crowdfunding platform.

There has been some good news with one of my Bolstr loans.  After only 4 months, one borrower is going to prepay his loan. That means I will get the full 30% interest in less than 6 months which will equate to an almost 100% IRR.  That will help offset my projected 50% loss from the brewery loan.  I do not fully understand why a borrower would prepay loan structured in this manner.  If it boosts my returns, I guess I should not care.

It was 2 years ago today that I made my first crowdfunding investment, a Real Crowd office building with Atlas Real Estate Partners in Washington DC.  That investment is now 100% leased and surpassing expectations.  Since then I have made 89 investments and 21 have been paid back. Twenty of the twenty-one completed investments have meet or exceeded projections. Only one completed investment yielded no return. Over $450,000 in loans and equity have been returned so far. Crowdfunding dramatically increased my access to deal flow, diversified my portfolio, and provided returns well in excess of 10%.

Here is a breakdown of my crowdfunding  investments by year:

2013 – 7 investments: 1 equity real estate, 6 startup equity investments

2014 – 44 investments:  19 equity real estate, 19 debt investments, 6 startup equity investments

2015 – 38 investments:  20 equity real estate, 14 debt investment, 3 startup equity investments, 1 energy investment

 

Here is the breakdown of my outstanding investments by platform:

Direct Real Estate equity (direct with sponsor or with a syndicate advisor) – 37% (9 deals)

Real Crowd RE equity –  15% (9 deals)

Realty Shares RE debt & equity – 11% (9 deals)

Realty Mogul RE equity – 9% (5 deals)

Patch of Land RE debt – 6% (6 loans)

Bolstr Corp. Debt – 6% (10 loans)

Angel List Startup equity – 5% (198 startups)

Fundrise RE Equity – 3% (2 deals)

Seedinvest Startup equity fund – 3% (50 Startups)

Ifunding RE equity – 3% (4 deals)

FundersClub Startup equity funds - 2% (68 Startups)

Energy Funders oil wells - <1% (1 deal)

Funding Circle Corp debt - <1% (60 loans)

 Most of my Angel investing has been in ‘startup funds’ that diversify across a wide range of startups.  About 10% of my crowdfunding dollars are in Startups and its spread out across 316 companies. These are 7+ year holds, so the verdict is still out on how well they will do.  Historically, 80% of startups are bankrupt within three years. Some of my companies that seem to be doing well are Betterment, Le Tote, Vouch, Life 360, Sendhub, MoveLoot, Memebox & Whale Path.

I will have a very detailed write up of the individual investment results for 2015, sometime next quarter.  My real estate debt investments have average a 12.2% return.  My corporate debt returns have averaged 12-25%.  Funding Circle is yielding 12.25% and Bolstr  25%.  I tested the water with a minimum investment at EnergyFunders over a year ago.  Projected payback on a multi-well deal was about a year.  Instead, it’s been a disaster with the state shutting down the project for almost a year and then one issue after another.  I doubt if I will ever see that money again.  Lesson learned the hard way.

3 of the 89 investments could be described as problem children.  One Realty Shares flip lost money for the sponsor and we only got back our principle.  I have 2 ifunding investments that are more than a year past projected settlement date.  I hope to break even on the ifunding Milwaukee flip and make a very small profit on ifunding’s Austin ground up deal.

Three of the investments could be described as wonder kids. A Real Crowd Xebec ground up industrial building that had over a 30% IRR.  A Real Crowd  Apartment building that doubled in less than a year.  In addition, I have another  Fla apartment deal that that will close next month and yield over a 43% IRR.

Over 37% of my deals have been either direct with the sponsors or through an investment advisor that sends out deals via email.  These deals are highly curated, very conservative, yield over 10%, and have $0 in ongoing fees.  Well over 50% of my investments (direct and with Real Crowd) have no platform fees. I try and avoid fees like the plague. Feel free to use our contact us link if you would like an introduction to this advisor’s group.

You can discover, rate, and review patch of Land investments at CrowdDD.com.

A member of our email real estate Crowdfunding email list Robert C, recently shared his list of due diligence tips investors should follow while evaluating real estate investments.  Most of this advice came from Jeremy R., a full time real estate investor. I strongly believe if you follow this advice, your chances of success  will increase.

      *Strong cash flow is key (vs. speculation development with no cash flow)

  • Min 9% cash on cash year 1 and 11% cash on cash over term
  • Don't look at IRR, just gravy
  • Look closely at cap rates
  • JR only does 10 year opportunities (he thinks shorter term have too much recession risk at exit)
  • JR likes lower risk stabilized deals
  • Drill into the projections and assumptions in the proformas - you want conservative assumptions
  • New developments are higher risk
  • Drill into experience levels of sponsors - better if they are wealthier... JR even does a background check and meets them in person
  • Check the location closely (growing?  declining?)
  • Read the operating agreement for the LLC and PPM (cash calls?  etc...)
  • Likes at least a 7.5% cap trailing on B class (used to like min 8% a few years ago)
  • No % fee for assets under mgmt
  • Careful of shorter term opportunities in that they have enough runway to ensure EXIT doesn't come during recession
  • Choose opportunities that make sense for where we are in the cycle
  • Buy at a price and cap rates closer to market trough than peak
  • He is currently (this summer when I last talked to him) looking for stuff that would do better in a downturn (MHP, self storage, retail with grocery and drug store anchors and recession proof tenants)
  • Drill deeply into what is the projects exit strategy if things go badly?  What is plan B and plan C and will you still easily get your principle 

Jeremy uses these principles when picking his own investments and the investments he recommends to his group. I have invested in 7 deals Jeremy has recommended and each had a 10%+ cash on cash returns and are meeting or beating projections.  Investments include 3 self storage deals, 2 Mobile home park funds, a Houston retail center, and an Ohio industrial park. Unlike crowdfunding platforms, these investments do not have ongoing platforms fee that eat into your return.  If you would like to learn more Jeremy 's group and your accredited, please email me using our contact us link for an introduction.

You can discover, rate, and review patch of Land investments at CrowdDD.com.

In my recent blog post about Realty Mogul, I mentioned that a Mini Storage was under contract.  It did close on Nov 6.  The sale price was about $600k higher than the purchase price.  The 18 month hold will result in a 16.4% IRR.  The estimated IRR on the 10 year hold of this facility was 16.29%.  While the investment was not performing up to expectations during its first 12 months, Realty Moguls management team put enough pressure for its investors to not only exit the deal with the complete return of their principle, but the investors also netted a 16.4% IRR.

It turns out this was Realty Moguls first equity investment that was completed from start to finish. Happy to be a part of Realty Moguls first completed investment and thankful that their team was able to turn around a potentially poor investment. For the month of November, Realty Mogul is giving new accredited investor a $150 Amazon gift card when they successfully complete the investor registration process at RealtyMogul.com

It’s time for another update on some of my real estate crowdfunding investments.  It’s been almost 2 years since my first investment in real estate using on online crowdfunding platform. I am up to 85 crowdfunding investments to date.  58 in real estate, 16 in angel investments, and 11 small business crowdfunded debt deals.  17 have been paid back in full and I’ve only lost money on one investment, my very first angel investment in Lovely, an apartment app.  I recovered 60% of my investment, but learned a valuable lesson. Never invest in common stock in a startup. Preferred equity is the only way to invest.

Today’s focus will be on Realty Mogul.  My first 4 investments were made in 2014. 2 self-storage deals, a retail center, and on Mobil home park fund. Three out of four have been winners out of the gate.  One of the self-storage deals has underperformed projections, but Realty Mogul’s hand’s own approach has resulted in a positive outcome. 

Here are my four 2014 investments:

1. My investment in Mobil Fund IV has paid its preferred return in full and on time every quarter.  The sponsor gives a detail update each quarter and every indication is the fund is on track for an IRR north of 20%.  They made over 100% ROI on a park sale in less than 2 years:

 2. I invested into the Westpark plaza retail center in Jan of 2014.  The original plan was a 4 to 5 year hold and a 17% IRR.  They were able to refinance the property in less than a year and return 100% of my invested capital.  I still maintaining my equity ownership percentage, but have no cash at risk. Last quarter the distribution was about a 5% return on my original investment.  It would be nice if every investment performed like this.

3. My FL self-storage investment NOI is higher than projected for the year and they are current with their preferred return of 8%.  They paid out 8.3% last quarter.  They seem to be on track to hit their projected 22% IRR goals.

4. My  Mini Storage investment from May of 2014 had been a bit problematic. They have not hit their NOI goals and have made no preferred returns distributions to date.  However, Realty Mogul has been very active and has the power to remove the management team if they do not meet certain goals.  They seem to be on track over the past 6 months.  Realty mogul did put pressure on American Mini to sell the property if they could.  The market is still very hot and the property is indeed under contract at a price that will result in a 19% return.  While the cash flow has disappointing, it is good indeed to earn a 19% return on an under performing investment.  A lot of credit goes to realty Moguls management team for staying on top of this investment.

I made 3 additional investments with Realty Mogul in 2015.  It’s a bit too early to rate these investments, but all seems to be going according to plan.

For the month of November, Realty Mogul is giving new accredited investor a $150 Amazon gift card when they successfully complete the investor registration process at RealtyMogul.com.  I would recommend investing with Realty Mogul. They have a very strong investment committee and present only the best opportunities.

While this is not really about crowdfunding, I just wanted to share how awesome Tesla's new auto pilot update is. I have owned a Model S for about a year and it is hands down the best car I have ever owned.  The best part is it just got better. An over the air update gave made my Model S Auto Pilot! Check out this video and see for yourself how cool a self driving car cab be.  By the way, you can get $1000 off a new Tesla if you use this link http://ts.la/mark1213 by October 31 2015.  It links dirtecly to Tesla Motors order page.

I also found a site that will give you $1750 off your new Tesla Model S http://tesladiscountoffer.com/

A fellow investor compiled the following due diligence check list for real estate investors. After you are comfortable with the crowdfunding portal and the fees charged by both the platforms and developers, here are some of the questions you will need to answer. Don't be afraid to pick up the phone and call the sponsor or developer. It's your money and you should be aggressive in determining if an investment is right for you.

Checklist for Investing In Development Projects

Where is the developer/sponsor in the process of getting approved (permits, zoning, etc…)?


How much experience does the builder have? Past projects? References? Credit & background checks?


Have you checked the builders license, all insurance (s) are current?


Who is going to be the General Contractor?


Is there a construction loan? Amount? Terms? Can you review the inspections before draws are given?


What measures of control are available to investors if the sponsors don’t meet the milestones needed to complete construction and arrive at a marketable project?


If there are delays, cost overruns, etc...anything affecting the profitability of the project, will there be an adjustment made to the profit participation of the investors?
If the project is a failure, what can I hope to recoup from my investment and what is the process? How long would it take?


What is the structure of the partnership/JV?


Have you reviewed an appraisal on the after completed value of the units being built? Have you reviewed comps? Are those comps conservative? (this is in bold because it’s VERY important).


How much skin in the game does the sponsor have?


Is there any mechanism in place to make sure the project is built free of mechanics liens?

This is the fifth in a series of blog post about returns and tax implications from my crowdfunding investments from 2014.  The four post was about my investments from Realty Shares, ifunding, Realty Mogul, and Real Crowd.  Today’s post is about my twelve investments with Patch of Land.  All of patch of Land’s projects have meet expectations.  I earned 12% on my POL investments.

Patch of Land’s investments are all debt investments and pay monthly interest of 11% to 13%. They lend to developers on fix and flip on single family homes. My first investment was in March of 2014 and it was paid back in May of 2015.  Instead of boring you with all the details, I will just summaries how they have performed. Every investment has paid its monthly interest on time and every loan is current.

Every loan in my portfolio had a loan to after repair value of 60% or less and Patch of Land is in first position.  3 loans paid 11%, 7 loans paid 12%, and 3 loans paid 13%.  I tend to invest in a new loan one every month or two months.  It similar to a cd ladder which reduces the risk.  In any giving month a loan should be coming due.  5 of the 12 investments have been repaid. 2 of the investments went a month or so over the 12 month listed loan period and the sponsor had to pay an additional 1% penalty.

The loans were spread out over 4 states. 2 in NC, 5 in NJ, 3 in NY and 2 in IL.  The biggest lesson I learned is to find the sweet spot when lending on single family homes.  I stay away from million dollars houses and the low end of the market as well. The market can turn very quickly on the high end of the market. Invest in growing markets and stay away from “ghetto” homes.

There is no depreciation or tax advantages with POL investments. You will receive one 1099 INT statement from Patch of Land.

You can discover, rate, and review patch of Land investments at CrowdDD.com.

I just wanted to add a quick update on one of my crowdfunding investments from last year on the RealCrowd platform.  In May of 2014 I invested in  Slauson industrial and office building development.  The project was a ground up development and they estimated that the property would be ready and sold by September 2015.

The investment had a forecasted IRR of 18-20% and the terms were 8% preferred and then a 60/40 split in favor of the investor. The project was completed ahead of schedule and went under contract in June of 2015.  They closed the sale on July 9 and investors received their final distributions on July 15. RealCrowd’s investors realized a 1.35x return on their investment, which over the 14 month hold period represented a 29% IRR. As with all RealCrowd investments, there were no platform fees deducted from our returns.  It’s nice to see a professional developer under promise and over deliver to its investors.

Currently, BankRate reports the best one-year bank CDs rates are 1.25%. The U.S. inflation calculator says that the inflation rate for the year of 2014 was 1.6%. This means leaving money in one-year bank CDs for 2014, caused investors to lose value because the reduced purchasing power of those dollars exceeded the bank interest paid on bank CDs.

As reported by a study done at NYU, the annual return on the S&P 500 stock index for 2014 was 13.48% and the average annual return for the years from 2005 to 2014 was 9.37%. That period included a huge disaster during the year of 2008 showing a -36.55% loss.

Because bank CD interest rates do not even keep up with inflation and the stock market is unpredictable, many investors are looking at alternative investments with a goal to meet or beat the S&P 500 stock index average. A nice goal is to achieve 10% or higher annual returns on investments, while at the same time managing the risks.

Crowdfunding offers investors many opportunities to earn 10% per year or more that were previously either unavailable or difficult to source.

Here are four investments to consider:

  1. Short term real estate loans
  2. Loans to small business with personal guarantees and/or liens against equipment
  3. Access to hedge funds with smaller minimum investment contributions
  4. Longer term real estate investments

I've made about 60 investments in the past two years. While a few of the investments have underperformed, most have been successful. In total, my investment portfolio returns are more than 10% per year.

Short Term Real Estate Loans
I find these loan investment opportunities on PatchofLand. They pay about 12% and the term is 6 to 12 months backed by real estate. These loans are mostly to fix and flip (re-sell) single-family houses. So far, I've done over 13 loans with no defaults and no late payments. The average return is 12%.

Loans to Small Businesses
I find these loan investment opportunities on Bolstr. The payback for the loans is about 2 years. The Internal rate of return (IRR) averages in the mid 20's. I've made five investments on this system. All are on track to have 20%+ IRR. Investors make 30% on their investment. The borrower pays back a percentage of their gross revenue. The deals are structured so that the borrower pays the investors back in about 2 years. For example,  a loan of $10,000 to a microbrewery. They pay back 3% of their gross revenue until he gets back $13,000. Average payments per month have been about $650. The investment will be recouped plus 30% in 20 months providing an annualized Internal rate of return of over 25%.

Access to Hedge Funds
In the past, investing in some of the large, and best managed, hedge funds required a minimum investment of one million dollars. Through Slicedinvesting, investing in these hedge funds is now possible with a minimum investment as low as $10,000. Some of the funds have higher minimum investments of either $50,000 or $100,000. There are about ten hedge funds to choose from including short funds and peer-to-peer lending funds. The lending club fund paid over 10% for the past few years.

They can give you access to both traditional and alternative HF strategies, Private Equity, and late stage private company shares.

Longer Term Real Estate Investment
These are 1 to 5 year holds for investments in shopping centers, multi-family buildings, self-storage centers and other real estate. Typically, the IRR for these investments is in the 15% to 20% range with cash-on-cash returns in the 8% to 12% range. 

The web sites where Mark has found good deals include:

The actual results of the real investments made through these three systems are reported on Mark’s blog here:

Summary
Investments that make an average 10% or higher annual return are readily available through these systems. Follow along with my progress as I report on actual investment results on CrowdDD.

If there is interest, I will post after I make a commitment  to a crowdfunding investment.  A few people have emailed saying that it  may help to see when others invest.  I may post when I pass as well.

My investments in June:

1. A self Storage facility in Fl  Projected 25% IRR. 10 year hold

2. A Loan on Bolstr for Scout Beer. Projected 24% IRR . 2 year hold

3. Real Crowd's South Landing. Retail 11% ConC projected 15% IRR. 6 year Hold

4. Realty Mogul's Courtyard Marriott deal 15% ConC projected 20% IRR.

5.  (on Bigger Pockets) Texas Multifamily. 17% projected IRR

CrowdfundBeat was kind enough to invite CrowdDD.com founder Mark Robertson to it's Crowdfunding USA Forum Conference last month at the National Press Club.  It was a very exciting conference and we were able to join a panel discussion about the issues facing the real estate crowdfunding industry.  The biggest buzz at the conference was the effect on the crowdfunding industry from new Security Exchange Commission (SEC) RegA+ rules.

They are a game changer for raising capital and Crowdfunding USA had a panel devoted to this topic.  The moderator was Jonathan Frutkin who is an attorney from Phoenix, Arizona active in the crowdfunding space since 2012. The esteemed guests included Samuel Guzik, Mark Roderick, Stevens Sadler, and Craig Denlinger.

Sam Guzik is a well-known securities attorney from Los Angeles. Mark Roderick is a securities attorney from the firm of Flaster Greenberg in New Jersey. Stevens Sadler is from Allegiancy in Richmond, Virginia. Craig Denlinger is a CPA who used to work for Deloitte, who has now opened his own firm to specialize in providing accounting and auditing services that are necessary for companies wishing to file a registration for a Regulation A+ offering.

Here is what the panel members had to say:

  • Sam Guzik - Regulation A+ requires filing a registration statement for the securities with the SEC. The offering will receive SEC review and comments, which need answering before approval. The benefit is when the offering completes the SEC process; the company can sell free-trading securities. There are no 144 restrictions on the sale of shares. A company bypasses all of the previous holding period for shares under 144 restrictions and the restriction only to take investments from accredited investors, Under Regulation A+, a company starts raising money as an initial public offering (IPO) immediately. The shares trade publicly without any restrictions as long as a secondary market exists or can be created. The ability to buy and sell shares provides liquidity. Both accredited and non-accredited investors can participate. Once the SEC approves the offering, companies are free to advertise their investment offering any way they want. Regulation A+ only requires a federal review and does not require state review in any state that the securities are sold. This makes the filing of a Regulation A+ offering less expensive.
  • Mark Roderick - He points out to achieve the pre-emption from filing the offering with the states, the Regulation A+ offering must be a Tier 2 A+ offering under the new law, which goes into place June 19, 2015. Tier 1 is the old regulation A with increased capital raising limits from $5 million to $20 million. Tier 2 is the new Regulations A+ that is the paradigm shift, which has a higher limit of raising $50 million per 12 months. Audited financial statements are required. Non-accredited investors can only invest 10% of annual income or net worth, whichever is higher.
  • Stevens Sadler - Steve manages real estate portfolios and did a $5 million Regulation “A” offering for accredited investors last year. He now plans to do a $30 to $50 million regulation “A+” filing during June 2015, with SEC approval expected in Fall 2015. He is most excited about the preemption of state approval, which in the past has been problematic.
  • Craig Denlinger - Craig provides audit services, even for raw start-ups. Investors want this as well, because it provides credibility.

Summary
Regulation A+ has challenges in getting SEC approval, but has advantages in that a Regulation A+ creates a public offering of stocks that are tradable and can be advertised to seek investment from anyone. Investors want to have information so the best Regulation A+ offerings are the ones that give investors audited information to increase investor confidence. You can discover, rate, and review crowdfunding investments at CrowdDD.com.

When examining the different fee structures in real estate deals not only is it important to look at the fees charged against the investment portfolio, but also at the fees charged by the sponsor against the project because this effects the potential of any upside returns in excess of the preferred returns.

Fees charged by the sponsor to the project may include:

  • A yearly management fee
  • A yearly asset management fee
  • A construction fee
  • An asset disposition fee

Russell Research has an in-depth analysis of these fees in a downloadable pdf report called Management Fee, Carried Interest, and other Economic Terms of Real Estate Funds.

Exit Participation by Sponsor
On top of the fees charged by the sponsor to the ongoing project, there is usually a provision for exit participation in profits that are in excess of the preferred returns for investors. Let’s examine the effect on these fees and participations, which may take various forms including:

  • 80/20 split after preferred return - 80% to investors, 20% to sponsor
  • 70/30 split after preferred return - 70% to investors, 30% to sponsor
  • 50/50 split after preferred return - 50% to investors, 50% to sponsor
  • 80/20 split after preferred return to 15% IRR then 50/50 split thereafter - 80% to investors, 20% to sponsor until the investment has returned 15% IRR then 50% to investors, 50% to sponsor
  • Catch up Style - Preferred return to investor, then equivalent preferred return to sponsor, then 60/40 split - Investor get preferred return (10%), the sponsor get an equal amount of return (10%), any remaining profits are divided 60% to investors and 40% to sponsor

For an investment of $100,000 with a preferred annual return of 10% and a 50% extra profit on exit after year five, here is how the calculations work out when comparing these investment programs:

Initial Investment $100,000.00 Yr1 Yr2 Yr3 Yr4 Yr5 EXIT TOTALS Gross Profit
Return 10% per year $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $50,000.00 $100,000.00
Project Fees
no fees $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $100,000.00
1% annual fee $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $5,000.00 $95,000.00
2% annual fee $2,000.00 $2,000.00 $2,000.00 $2,000.00 $2,000.00 $10,000.00 $90,000.00
Deal Structure no fees 1% annual 2% annual
80/20 Gross Profits $90,000.00 $85,000.00 $80,000.00
Total IRR 90.0% 85.0% 80.0%
Annualized 18.0% 17.0% 16.0%
70/30 Gross Profits $85,000.00 $80,000.00 $75,000.00
Total IRR 85.0% 80.0% 75.0%
Annualized 17.0% 16.0% 15.0%
50/50 Gross Profits $75,000.00 $70,000.00 $65,000.00
Total IRR 75.0% 70.0% 65.0%
Annualized 15.0% 14.0% 13.0%
80/20 to 15% IRR Gross Profits $72,500.00 $70,000.00 $67,500.00
then 50/50 Total IRR 72.5% 70.0% 67.5%
Annualized 14.5% 14.0% 13.5%
Catch Up Style Gross Profits $50,000.00 $50,000.00 $50,000.00
no extra returns Total IRR 50.0% 50.0% 50.0%
Annualized 10.0% 10.0% 10.0%

As illustrated by these comparisons, the returns are strongly affected by the change in any fees charged to the project and IRR limits. With the “catch up style,” any extra returns go to the sponsor in the case of where there is a 50% return on exit because this is equal to the investor’s preferred return of 10% per year. Investors would be wise to carefully consider the ongoing fees charged to the project and the sponsor participation.

Fees reduce investment returns so significantly that the SEC issued a bulletin-warning alert about the long-term effect of fees on investment portfolios. In the SEC bulletin, they compared the effect of fees on a $100,000 investment for a twenty-year period. Even when investments are for shorter periods, one can assume the money made will be re-invested, so a twenty-year time horizon is a good way to look at the long-term effect of fees on investment portfolio returns.

In the SEC example, they used a very modest 4% annual return, assuming that in some years, the investor might do better than that, but in other years, they might do worse, noting that the effect of fees is lessened if the returns were higher. On the other hand, when returns are abysmal or go into the negative, the impact of fees is more dramatic. In general, what happens from an annual fee is an erosion of the initial investment capital.

For $100,000 invested at the average annual return of 4%, without fees the investment returns $120,000 to bring the portfolio value to $220,000 at the end of twenty years. The SEC compared annual fees of 0.25% with both 0.50% fees and with 1.0% annual fees. Over a twenty-year period the portfolio with a 0.50% fee loses $10,000. The portfolio with a 1.0% fee loses $28,000.

Additionally, there is the opportunity cost of the lost investment money, which could have been invested therefore increasing the overall portfolio returns through the effect of compounding. This opportunity cost for a 1.0% annual fee is the amount of extra money that could have been earning on the missing $28,000, which equals another $12,000 for a total of $40,000 in lost investment returns. This amount is one-third of the total return of $120,000 on original investment if there had been no fees.

Crowdfunding Fees
There are a variety of fee structures in crowdfunding deals, which range from investment offerings that have no fees to those with annual fees as well as partial participation in upside returns above the preferred returns offered and participation in profits on exit.

For comparison purposes, look at the difference in returns from recent investment offerings of Real Crowd, Realty Share, and iFunding. Real Crowd has no ongoing fees charged to the project, because the sponsor pays them to list the investment offering. Realty Share typically has a 1% annual fee. iFunding standard is a 2% annual fee and participates in any returns above the preferred rate of 10% annual return by taking 20% of the extra return.

For a hypothetical  investment of $100,000 with a preferred annual return of 10% and a 50% extra profit on exit after year five, here is how the calculations work out when comparing these three investment programs:

Initial Investment $100,000.00 Yr1 Yr2 Yr3 Yr4 Yr5 EXIT TOTALS Gross Profit IRR Annualized
70% to investor
Return 10% per year $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $35,000.00 $85,000.00
Funding Fees
Real Crowd no fees $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $85,000.00 85.0% 17%
Realty Share 1% annual fee $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $0.00 $5,000.00 $80,000.00 80.0% 16%
iFunding 2% annual fee $2,000.00 $2,000.00 $2,000.00 $2,000.00 $2,000.00 $7,000.00 $17,000.00 $68,000.00 68.0% 14%

Real Crowd makes a total return of $85,000 on the $100,000 investment for a total IRR of 85% or 17% per year. Realty Share makes a total return of $80,000 on the $100,000 investment for a total IRR of 80% or 16% per year. iFunding makes a total return of $68,000 on the $100,000 investment for a total IRR of 68% or only 14% per year.

From these examples, it is clear that fees and exit participations significantly influence overall investment returns, so investors would be wise to take a very careful look at the fees and participations in any deal.

This is the fourth in a series of blog post about returns and tax implications from my crowdfunding investments from 2014.  The first three post were about my investments from ifunding, Realty Mogul, and Real Crowd.  Today’s post is about my five investments with Realty Shares.  In general, my Realty Shares investments have meet or beat expectations.

 

INVESTMENT 1 – Safeway Anchored Retail Center, Phoenix, AZ

This was my first Realty Share investment from March of 2014. This was a NNN retail project that was over 95% occupied.  The project debt was only 53% and the sponsor equity was 10%.  This project is unique in that the sponsor will not earn any additional fees for sourcing, improving, managing and ultimately disposing of the Property.  It was projected to have an average 9% cash on cash return and a mid teen IRR.  There is an 80/20 spit of profit when property is sold.

Results – We have received 2 updates on this project. They resigned a few leases and have a couple of new leases as well.  Things seem to basically be on track.  The tax bill is higher than budgeted and they have hired a vendor to fight for a reduction. The first 2 distributions were about 5%, which is below the 8% first year projection.  It will be interesting to see if they catch up with the next 2 distributions.

Tax consequences –For every $10,000 invested $350 was paid out in 2014.  The K1 (after depreciation etc.) reports a loss of $180 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $350 is tax deferred “dividends” and $72 decrease in is taxes owed from the reported “loss”.

 

Investment 2 – 1921 Normandie Ave Los Angeles, CA

This investment from April of 2014 has a very high 20% preferred return plus 10% of the profit on this high end fix & flip in Los Angeles.  The sponsor contributed 20% of the equity. The project included adding 600 sq. feet of living space and a new pool.

Results - The project has had a few delays with the city and permits. These issues caused a delay of 3 to 4 months.  In October the sponsor paid a 10% payout to investors.  This equals 6 months of the 20% preferred return. The project went on the market in March of 2015 at about 200k above the pro-forma asking price.  It was recently reduced by $100k. There seems to be another $200k margin for error before the 20% preferred return is in jeopardy. Hopefully, it will go under contract soon.

Tax consequences - For every $10,000 invested $1000 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a gain of $0 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $1000 is tax deferred “dividends” and $0 increase in is taxes owed from the reported “gain”.

 

Investment 3 – Chase Building  AZ

This investment from May of 2014 is going according to plan. This project was unique because there were 2 potential scenarios.  The office building contained a Chase branch and the sponsors plan was to sub divide and make the chase portion a NNN condominium. They would then sell the Chase portion within a year and return equity to its investors.  The cash on cash yield was projected a 10-11% and the IRR ranged from 10% – 28%. The high end of the IRR was dependent on selling the Chase portion early.  Getting all the approvals for the subdivision was the great unknown.

Results – It took almost a year, but the sponsor was able to separate the Chase condominium and they have received several offers above the pro-forma selling price.  It has not closed as of this writing. In addition to the Chase success, they have added a number of new tenants and occupancy is above projections.

Tax consequences - For every $10,000 invested $0 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a loss of $1680 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $0 is tax deferred “dividends” and $672 decrease in is taxes owed from the reported “loss”.

Investment 4– Single Family Home Fix & Flip Fund

This investment from May of 2014 is a mezzanine equity investment in a Fix and flip fund. This 2 year investment pays a 9% monthly preferred return plus 10% of the profits from properties purchased and sold in the fund.  The IRR is 17.6% to 25% depending on the number of homes flipped

Results – As of February they had sold 4 homes, and had 10 under contract. They do not go over 30 homes in inventory. According to their updates, they appear to be on target.  They have paid the 9% preferred return every month.

Tax consequences - For every $10,000 invested $418 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a loss of $33 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $418 is tax deferred “dividends” and $13 decrease in is taxes owed from the reported “loss”.

 

Investment 5 – 220 Van Ness Los Angeles

This investment from August of 2014.  This is another high end fix and flip. Investors receive  11% monthly interest payment plus an 8% annualized return upon the sale of the property. The projected IRR is 19% and the sponsor is contributing about 20% of the equity.  The project is expected to take 8-10 months

Results – The last update was in January and the project was on schedule and on budget.  They expect to list the property toward the end of May and middle of June.  They have paid the 11% interest every month.

Tax consequences - For every $10,000 invested $370 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a loss of $33 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $370 is tax deferred “dividends” and $13 decrease in is taxes owed from the reported “loss”.

You can discover, rate, and review similar investments at CrowdDD.com.

Venture Capital funding continues to play major role in Real Estate Crowdfunding market. This process is facilitated by the development of new real estate search websites which began about one decade ago. These new websites are dedicated to helping the average consumer find homes and other real estate properties available for sale in the real estate markets.

 Many investors and real estate venture capital firms have seen a great investment opportunity through the Real Estate Crowdfunding process to enable them take advantage of the unfolding opportunities to make some money through their investments.

Evolution of Real Estate Crowdfunding technique

The real estate crowdfunding method is a process through which venture capitalists raise money for real estate companies. The process enables investors to earn and receive cash flow from their invested assets. The Real estate crowdfunding method benefits sponsors as well as investors.

According to Dow Jones VentureSource, during the first quarter of 2014, Venture Capital companies raised and funneled $118.5 million into 11 real-estate startups. Such level of Capital surpassed the amount of capital raised since 2000. Such exponential growth tells in itself, the story of the rapid growth and importance of the relatively new real estate crowdfunding technique to the overall U. S. real-estate market.

Recent Crowdfunding Notable Deals

SmartZip Analytics a predictive analytics company which assists to project which real estate home owners who may likely sell their properties has raised over $12 million from the Crest Capital Ventures and Claremont Creek ventures.

In August 2014, March Capital Partners and Triangle Creek Partners raised $6 million for Agent Ace Inc., a company which employs home sales data to match sellers and buyers with the best available real estate agents for the type of home they own.

Recent real-estate crowdfunding deals include:

  • $10 million raised by Realty Shares
  • Real Crowd raised $2 million for Angel Co.  
  • Patch of Land raised $23 million venture Capital funding
  • In September last year Fundrise raised another $3.6 million bring its total raised funds to $38 million, making Fundrise the heaviest Venture-backed crowdfunding real-estate start-up company

Sources of Crowdfunding money for Venture Capital

 Funding for real estate crowdfunding comes through a variety of sources within the U.S. investor community and their foreign counterparts. These may include:

  • Investor Pools
  • Accredited investors with about $5,000 as minimal investment
  • Institutional Investors
  • Family Offices
  • REP investors-large scale Commercial Real Estate investments
  • Hedge Funds and Alternative investment seekers-Hedge funds have been increasingly drawn into the real estate market sector. Hedge Funds use a variety of hedging strategies to seek returns for their investors which may also include qualified investors, or investor Pools.

Real estate crowdfunding methods will definitely grow in popularity as an alternative method of raising venture real estate capital as well as an important investment portfolio for investors seeking to put their money into the real estate market. This method will be around for as long as there is a real estate market, and has become part of the U.S. real estate establishment. Investors can discover, rate, and review Crowdfunding platforms and investments at CrowdDD.

Can you Earn 25% or more with Crowdfunding investments?

Most debt crowdfunding investments have yielded investors 9& to 16% annual returns since the passage of the Jobs act of 2012. First position twelve month real estate notes on sites such as Realty Mogul and Patch of Land yields have been between 10% and 13%. These notes typically pay a monthly interest until maturity and then the principle is returned. This sure beats the ½ % money market rates we earn on idle money. However, how great would it be to earn over 25% on a short term investment?

I have discovered Bolstr, a new Crowdfunding platform for short term business debt, that has a very unusual payout structure. The best performing investments are paying out an effective interest rate of 25%+. Bolstr model is unique in that the total return is fixed, but the payments are a percentage of the company’s sales.

They set up most investments to have a 1.3x payback in about 2 years. In a typical deal a company will payout 2-4% of its monthly sales to investors until they have paid back the principle back plus 30%. If sales are higher than projected, investors will get larger payments and will get paid off sooner. Of course if sales dip, so will the payments.

This structure is a benefit to the borrower because his payments are not fixed and his payment will correlate with cash inflows. The lender will receive both principle and interest each month. The loans have personal guarantees and certain company assets are put up as collateral. Bolstr pre-screens all loans and only a small percentage are approved.

Example

To illustrate how these loans work and how investors are earning 25% and more, I will show you some actual results from one of my Bolstr investments. A brewer bowered $150,000 and agreed to pay investors 1.5% of its monthly sales until they paid out $195,000. Sales averaged $440,000 a month in 2014 and were forecasted to be $800,000 a month in 2015. Sales have averaged over $600,000 a month since the loan was procured.

For a $10,000 investment in this project, the average payment received has been $610 a month. At this rate it will take 21 months to recover the promised $13,000. The effective interest rate of a 21 month loan that pays $610 per month is 28.5%. Its hard to believe, but go to an online amortization schedule and enter a loan amount of $10,000 and a term or 21 months. To earn a payment of $610 your interest rate per year has to be 28.5%! In other words, if you borrowed $10,000 from your local bank at a 28.5% interest rate for a 21 month term, your payment would be $610.

Four loans have been fully paid back and no loans have defaulted to date. Every investment has funded in under 5 days. You can discover, rate, and research Bolsters investments at CrowdDD. CrowdDD provides crowdsourced due diligence, the “Yelp” of the crowdfunding industry.

This is the third  in a series of blog post about returns and tax implications from my crowdfunding investments from 2014.  The first two post were about my investments from Realty Mogul and Real Crowd.  Today’s post is about my three investments with ifunding.co.  Some of my investments with ifunding have been problematic.

INVESTMENT 1 –  Linden Street, Austin TX

This was my first ifunding investment from March of 2014. This is a ground up development of a 2 unit condo near downtown Austin. The original milestones were for an October 2014 completion and a December 2014 Sell. The project has a 10% preferred return (then 10% of residual profits to sponsor) with a 50/50 split thereafter. It was projected to have an average 0% cash on cash return and an 18% IRR.

Results – The project has had a series of delays and the timeline has been pushed back several times. The sponsors have been pretty good with updates, they even have a forum thread at Bigger pockets  with a “Construction diary”. I actually discovered Bigger Pockets while doing due diligence on the sponsor  and meet many fellow crowdfunding investors at this forum. There most recent update called for a 5/15/2015 completion date and a 7/15/15 sale date.  They indicate they are on budget.  They have not given any feedback on what the delays will mean to the projected IRR. The Jury is still out on this investment.

Tax consequences – For every $10,000 invested $0 was paid out in 2014.  The K1 (after depreciation etc.) reports a loss of $0 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $0 is tax deferred “dividends” and $0decrease in is taxes owed from the reported “loss”.

 

Investment 2 –  Milwaukee, Wisconsin

This investment from June of 2014 has been my biggest mistake to date. This residential flip has a 12% preferred return to investors and then a 64/36 split thereafter.   During this period many high projected IRR projects would fund in a matter of hours.  I committed to this project on the spot and planned to do my due diligence before I funded the deal.  I decided not to invest after doing some due diligence. The sponsors low, low margins and a few other red flags were key factors.  A few weeks after my commitment I received an email saying I need to fund my investment.  I wrongly assumed it was another investment I had committed to a few days before and I funded the project.  I did not discover I had invested in the wrong project for over 6 months.

 

Results –  Long story short, the investment did not go according to plan.  Ifunding took over the project from the sponsor along with 3 other similar projects in Milwaukee.  Instead of selling the homes, they are now rented. They are hoping to sell all the projects to local investors. Ifunding has given investors a verbal commitment to make everyone whole and we should not lose any money.  The plan is  to have this resolved this spring.  

 

Tax consequences - For every $10,000 invested $0 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a gain of $0 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $0 is tax deferred “dividends” and $0 increase in is taxes owed from the reported “gain”.

 

Investment 3 – Almonaster

This investment from October of 2014 is going according to plan. This is a fix and flip project in New Orleans. The loan to after repair value is 50%. The projected pays a 14% monthly interest for a 6 to 12 month term.

Results – The loan is still outstanding and interest payments have been made on time for the past 5 months.  The sponsors have not given any feedback to date.  I will assume no news is good news on this one.

Tax consequences - For every $10,000 invested $233 was paid out in distributions during 2014. Investors received a 1099 INT.  The net effect for investor is $233 in taxable interest.

On March 25, 2015, the SEC approved the new rules for registration by any non-public American or Canadian company to raise up to US$50 million during a twelve-month period through Regulation A+ offerings made to the public. Under this new rule, companies may accept both accredited investors and NON-ACCREDITED INVESTORS, which means anybody.

The new rule becomes effective sixty days after publication in the Federal Register, which takes about two weeks to happen, so the estimated date of effectiveness of this new legislation is during the first weeks in June 2015.

This change in the SEC law in the United States is astonishing. This kind of a change happens only once in a lifetime. Companies will no longer be tormented by having to accept investments from only accredited investors and to verify accredited investors status for investment offerings under the new Regulation A+.

This accomplishes three things, which are:

  1. Companies have no risk of securities violations from accepting investment from non-accredited investors. No longer need companies worry about the status of the investors themselves.
  2. Accredited investors do not have to prove they are accredited to make an investment in a Regulation A+ offering. The reduces the annoying feelings and security risks of accredited investors having to provide very private and confidential personal financial information to either the company or to third-party verification services.
  3. Non-accredited investors may invest. That includes everybody! This is the most significant change because prior to this new Regulation A+ type offering, investors who were not able to reach the status of making over $300,000 annually or have a minimum net worth of US$1 million in order to be “accredited,” were barred from making any investment of these types.

How Did This Come About?
Prior to the initial SEC changes in Regulation A, companies were prohibited from general solicitation of the public and could only accept investment from parties or entities that they already knew. Changes in SEC law now allow the ability for companies to solicit publicly (for example, use advertising) investment in offerings under Regulation A. Allowing advertisement of investment offerings was the first big change to occur in the SEC law.

The Jumpstart Our Business Startups (JOBS) Act became law on April 5, 2012. This new law signed by President Obama, creates cost-effective ways for companies that are brand new and companies of all sizes to raise investment capital without being over-burdened by Federal regulations.

In response to the JOBS Act, the SEC first created Tier 1 in the Regulation A rules and now the new legislation creates Tier 2, which is designated as Regulation A+.

Driven by Crowdfunding Success
It is clear that the crowdfunding process on the Internet is a huge success. Crowdfunding has been successfully used to fund everything from feature films, television shows, new product launches, startups, real estate deals, technology development, and much more.

With crowdfunding, the process of raising capital that used to take many months at best and included high expenses, such as legal fees, can now be achieved sometimes in a matter of days depending on how popular the idea is with the public who invest.

Summary
This new law of Regulation A+, when it goes into effect sometime during June 2015, will create an explosion of investment opportunities where anyone may choose to invest.

One word of caution to those newbies who are investing in Regulation A+ type offerings for the first time, DO NOT INVEST ANY AMOUNT OF MONEY IN A REGULATION A+ OFFERING THAT YOU CAN NOT AFFORD TO LOSE COMPLETELY.

Under Regulation A+ offerings, the due diligence burden of investigating whether the offering is a good investment or not, falls completely on the investor. Just because something is presented attractively on the Internet will not guarantee it is true or that it is a good investment. Therefore, investigate thoroughly and use good judgment before making any investment. Accredited investors automatically do this, because they have had plenty of experience. New investors need to proceed with caution as they go through the learning process finding good investments.

Besides the need for investors of all kinds to use the correct amount of caution, the advantages are greater than the disadvantages. This new Regulation A+ is a fantastic development that will open up many extraordinary investment possibilities to everyone.

This is the second in a series of blog post about returns and tax implications from my crowdfunding investments from 2014.  The first post was about my four investments from Realty Mogul.  Today’s post is about my five investments with Real Crowd.  All of Real Crowd’s projects have meet or exceeded expectations and pro-formas.

Note - Distributions are paid quarterly, 4-8 weeks after each quarter.  All my investments were made in 2014, so I did not receive 4 distributions  in calender year 2014 for each investment. 

INVESTMENT 1 - Office/Retail Center Washington, DC

This was my first ever real estate crowdfunding investment.  I dipped my toes into crowdfunding in December of 2013. This investment is an office/retail center located in Washington DC. The project has an 8% preferred return with a 65/35 split thereafter. It was projected to have an average 12% cash on cash return and an 18% IRR.

Results – Cash distributions were slightly less than projected cash on cash return of 10.5% for 2014.  However, they exceeded their underwritten projections each quarter. Several new leases were signed over the year as well. New lease rates were projected in the mid $20’s and they were able to achieve rental rates in the mid $30’s

Tax consequences –For every $10,000 invested $843 was paid out in 2014.  The K1 (after depreciation etc.) reports a loss of $1121 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $843 is tax deferred “dividends” and $448 decrease in is taxes owed from the reported “loss”.

 

Investment 2 –  Apartments Durango CO

This investment from January of 2014 has performed better than projected. This 3-5 year hold of a 112 unit apartment community was estimated to have a cash on cash yield starting at 8-10% with an IRR of 14-17%.

Results – Cash distributions rose form 8% to 9.2% during the year. Operating income beat projections by over 15% by the end of the year.

Tax consequences - For every $10,000 invested $650 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a gain of $2 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $650 is tax deferred “dividends” and $1 increase in is taxes owed from the reported “gain”.

 

Investment 3 – Wisconsin Fund

This investment from February of 2014 is going according to plan. The Wisconsin diversified real estate fund was projected to have a7-10% cash on cash return in year one and an average cash on cash return of 10.24%.  The projected IRR for the 5 year hold is 15%.

Results – Distributions during 2014 were at 7% which are at the low end of projections. However, they did announce the sale of an asset in the first quarter of 2015. The return on equity from this sale was over 100%. They plan on returning over 30% of our capital while we still maintain our ownership percentage in the fund’s assets.  100% return (on a portion of the investment) in less than a year is my definition of a good return.

Tax consequences - For every $10,000 invested $472 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a loss of $203 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $472 is tax deferred “dividends” and $82 decrease in is taxes owed from the reported “loss”.

Investment 4 – Industrial Development Los Angeles

This investment from May of 2014 has performed as projected. The opportunistic ground up development had a projected IRR of 18-20%.  The 2 year project is for an industrial building in Los Angeles

Results – There were no distribution planed or made during 2014.  They state that the project is on budget and on time.

Tax consequences - For every $10,000 invested $0 was paid out in distributions during 2014. (as expected) The K1 (after depreciation etc.) reports a loss of $0 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $0 is tax deferred “dividends” and $0 decrease in is taxes owed from the reported “loss”.

Investment 5 –  Apartments Jacksonville, FL

This investment from Sept of 2014 has performed in line with projections. This 3-5 year hold of a 112 unit apartment community was estimated to have a cash on cash yield starting at 10.75% and an IRR of 15%.

Results - There were no cash distributions because of the timing of the investment. They have meet or beat there operating income projections each month.

Tax consequences - For every $10,000 invested $0 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a gain of $145 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $145 is taxable “dividends” and $58 increase in is taxes owed from the reported “gain”.

I’ve talked to many investors that are on the fence about equity crowdfunding. Many have read about equity and debt crowdfunding and even joined a crowdfunding platform or two.  However, most are reluctant to pull the trigger on investing in this new and fledgling industry. I have made over 50 crowdfunding investments over the past 15 months and I plan on sharing unbiased real world results on those investments.  Some investments were made in the second half of 2014 and their results may not be meaningful.

The crowdfunding platforms have issued K1’s on my investments for 2014, so I can share not only the actual returns, but the tax ramifications of my real estate crowdfunding investments. Over the next few weeks I will show results from Realty Mogul, Realtyshares, RealCrowd, Fundrise, Patch of Land, ifunding, Sliced Investing, Bolstr and investments direct with sponsors.

My first report will be about my investments with Realty Mogul.  I made 4 investments in 2014 on their platform.  One exceeded projections, two meet expectations and one is lagging expectations.

Note - Distributions are paid quarterly, 4-8 weeks after each quarter.  All my investments were made in 2014, so I did not receive 4 distributions  in calender year 2014 for each investment. 

INVESTMENT 1 San Antonio Plaza

The first investment from February of 2014 performed the best, in San Antonio, Texas. The retail center was 86% occupied and was projected to have an average 11.78% cash on cash return and a 17.14% IRR after 5 years. The plan was to refinance in year 3 and return 80% of investor’s equity and sale the asset in year 5.

Results – Cash distributions meet the pro-forma cash on cash return of 4% for 2014. They were able to refinance the property in year 1 and in November of 2014 returned 100% of invested capital back to investors. We still maintain our ownership percentage. Realty Mogul investors now the Plaza risk free as limited partners and can reinvest this capital into other projects while still participating in cash flow and asset appreciation.  I can only wish crowdfunding investments performed this well.

Tax consequences –For every $10,000 invested $284 was paid out in distributions (in addition to the $10,000 returned).  The K1 (after depreciation etc.) reports a loss of $2,850 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $284 is tax deferred “dividends” and $1,140 decrease in is taxes owed from the reported “loss”.

 

Investment 2 - Mobile Home Park Fund IV

This investment from February of 2014 has performed as projected. This 5-10 year hold of a portfolio of Mobil home parks was estimated to have a cash on cash yield starting at 8% and increasing to 14% with an IRR of 18%.

Results – Cash distributions meet the pro-forma cash on cash return of 8% for 2014. All reports are they are meeting or exceeding expectations on the parks purchased.

Tax consequences - For every $10,000 invested $463 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a loss of $187 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $463 is tax deferred “dividends” and $75 decrease in is taxes owed from the reported “loss”.

 

Investment 3 – AZ Mini Storage

This investment from May of 2014 is not going according to plan. The 61% occupied self-storage facility in Tuscan, AZ was projected to have a 5% cash on cash return in year one and an average cash on cash return of 10.24%.  The projected IRR for the 5 year hold is 21.45%. The plan is to increase occupancy to 80% by year 3.

Results – No distributions have been made to date and occupancy has remained flat.  They recently fired the management group that ran the facility. The bad news is their plans to date have not succeeded.  On the positive side, highway construction is causing their closest competitor to close by midyear. This should result in a bump in occupancy. A new management company will hopefully help as well.

Tax consequences - For every $10,000 invested $0 was paid out in distributions during 2014. The K1 (after depreciation etc.) reports a loss of $880 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $0 is tax deferred “dividends” and $352 decrease in is taxes owed from the reported “loss”.

Investment 4 – Melbourne Self Storage

This investment from July of 2014 has performed as projected. The 94% occupied self-storage facility in Melbourne, FL was projected to have a 9% cash on cash return in year one and an average cash on cash return of 11.74%.  The projected IRR for the 6 year hold is 22.11%. The sponsor plan is to raise the facility from a class B to a class A facility.

Results – Distribution were paid as projected 2 months ahead of expected distribution date (payment made in 2015) and results have exceeded projections so far.

Tax consequences - For every $10,000 invested $0 was paid out in distributions during 2014. (as expected) The K1 (after depreciation etc.) reports a loss of $67 for each $10,000 invested. The net effect for investor in a combined 40% tax bracket is $0 is tax deferred “dividends” and $27 decrease in is taxes owed from the reported “loss”.

Overall, these Realty Mogul investments have exceeded my expectations.

Title: 5 Ways Patch of Land Protects Their Investors' Best Interest

Despite the tremendous growth of marketplace lending, one of the major challenges remains the ability for crowdfunding portals to gain the trust of potential investors.  Patch of Land has established itself as a trustworthy leader in the real estate debt space by placing an increased emphasis on complete transparency as well as state of the art technology, strong due diligence, and thorough underwriting. In fact, Patch of Land believes in the quality of their offerings so much that they prefund their loans and take on 100% of the risk up front.  These core values are some of the ways Patch of Land is able to prevent bad deals from slipping through the cracks.  Now let’s examine the 5 ways Patch of Land Protects their investors’ best interest and establishes trust within the alternative lending marketplace.

 

1) An Exclusive Focus on Real Estate Debt Crowdfunding

From its inception, Patch of Land has exclusively focused on real estate debt because they believe it’s the most scalable and secure version of online real estate investing. While there’s no way to completely remove risk from a real estate investment, Patch of Land attempts to minimize risk for investors by offering short-term notes ranging from 30 days to 12 months. In many cases, calculating a return on investment is also more accurate because future projections are less uncertain compared to equity-based investments. Additionally, the corresponding notes are backed by first lien positions, and in many instances personal guarantees are also received in writing. Therefore, in a worst-case scenario if the property needs to get liquidated, the debt holders are at the very top of the capital stack and will get paid back first.

2) Enhanced Due Diligence

Perhaps the most important and tedious element to real estate investing is the due diligence involved. To assist in the process, Patch of Land uses state of the art technology developed by its Co-Founder, Brian Fritton, to assess property risk with agility and accuracy. The application of technology is used to gather relative and pertinent property data which can determine how a particular asset might perform in its particular market.  Based on the numbers, Patch of Land's tech will pre-score the quality of a potential investment. If the score is sub-par, the project will immediately be rejected before a loan officer or underwriter even sees the application. This system is put in place to help weed out any bad investments that might potentially slip through the cracks for whatever reason.

Although technology is a great tool to prequalify potential investments, Patch of Land does not rely on it to verify the overall quality of a loan. Every project proposal that tech approves will still be evaluated by a human pair of eyeballs. The Company’s standard is to work exclusively with professional real estate developers who have years of experience under their belt, as well as a solid track record to back up the quality of their work. Additional credit reports and background checks are executed to make sure the borrower does not have a high-risk profile.

If a borrower is credit-worthy the project is further evaluated.  Patch of Land will break down the pertinent figures, comparables, and will also send out a third-party appraiser to do a full walk-through and value analysis of the location in question. A solid exit strategy for the project is another key factor. Typically, Patch of Land looks to rebuild within a metropolitan statistical area (MSA) with a good-sized population, that way there will be more opportunity to sell, or buy and hold, once the project is completed. For added assurance, the Company looks to fund up to a certain percentage of the ARV (after repair or rehab value) and LTV (Loan to Value) of the property. Therefore, in a worst case scenario the property can be liquidated and funds will be returned back to the investors. The Company’s current average ARV is approximately 56.7%. More real time data can be found on Patch of Land’s Stats Page.

 

3) Prefunded Real Estate Investments

Another way Patch of Land has established trust with its investors is by prefunding real estate investment opportunities. Since the inception of the Company, Patch of Land has prefunded their loans to show investors they believe in their offerings enough to take on 100% of the risk up front. After a loan is prefunded, then Patch of Land will present it on the crowdfunding platform for the investors. If nobody in the crowd decides to invest, then Patch of Land will still move forward with the project. Therefore, it behooves the Company to implement thorough underwriting and strong due diligence on every single project. Prefunding also works in the investors’ favor because they are able to start earning interest on their principle investment as soon as their funds clear escrow.  This is unlike many real estate crowdfunding platforms where an investor’s money might sit dormant for an extended period of time until that particular loan is fully funded.  Patch of Land’s prefunding strategy establishes trust with the crowd by putting their own money into their offerings, while respecting the core concept of time is money for their investors' best interest.

 

4) Complete Transparency

A buzzword throughout the world of marketplace lending is complete transparency. Patch of Land’s Investor Dashboard helps provide transparency by allowing investors to see what their money is doing 24/7.  Furthermore, the Investor Dashboard gives access to in-depth investment summaries, pictures, due diligence documents, the financial overview, the lead Developer’s profile and past projects, as well as useful links to outside sources such as Zillow listings, Google Maps, and City-Data.  All of these resources are free to the investors so they can perform their own due diligence on top of Patch of Land’s and be confident that they are making a sound investment decision every time.

Investors are also notified of property updates along the way so they can see what phase of construction their project is in. Written description and visual progress reports are given by the lead developers and posted on the portal. Investors can also download files and tax returns to do year-end reconciliations, manage account funds, and conduct withdrawals to linked external accounts. Additionally, projected distribution timetables and figures are sent once a loan starts approaching its maturity date. This type of openness is much appreciated by investors who like to have an active role and want to know the progress of their investments along the way.

 

5) Experience, Credibility & Reputation

While Patch of Land is still a young startup, they have quickly become a trusted industry leader in the real estate debt crowdfunding space. The Company’s reputation stems from being the first to offer prefunded real estate investments and one of the only real estate crowdfunding platforms to focus exclusively on debt since the beginning.  Patch of Land is an experienced company having funded over 85 projects to date.  In fact, according to Crowdmason.com, in Q4 2014 Patch of Land singlehandedly had more 506c fillings than all of New York, Florida, and Texas combined. Patch of Land’s ability to consistently raise large amounts of capital for real estate projects has led to the Company being 1 of only 16 crowdfunding sites listed on CNBC’s Crowdfinance 50 Index, and 1 of only 8 real estate crowdfunding portals used to generate the Crowdfinance Real Estate Average.

Patch of Land is also the first crowdfunding company to crowdfund itself. By doing so, they completely opened themselves up for investors to evaluate the company inside and out. Ultimately, Investors displayed their trust and belief in the Company’s business model and ability for sustained longevity, as their SeedInvest capital raise surpassed the funding goal in less than two months’ time.

 

As time moves forward and investors become more educated and comfortable with online real estate investing, it will be interesting to see which crowdfunding portals withstand the test of time. Honesty, transparency, credibility, and reputation will all play a huge factor in which platforms survive and which ones fall by the wayside.  Those that continue to thrive will make it a priority to have the investor’s best interest at heart. Those that do not will undoubtedly be revealed by due diligence sites like CrowdDD.

During the past 14 months, I have made over 50 debt or equity crowdfunding investments.  I quickly realized that due diligence is difficult, but not impossible.  There are 4 basic steps needed to evaluate a real estate debt crowdfunding deal (shared below).  I felt that once that’s done, it is also helpful to learn what other investors think about the deal.

Looking over 500+ online investment opportunities, I’ve learned a great deal about due diligence and the pitfalls to avoid while investing.  The biggest benefit is access to deal flow and the ability to diversify geographically and across asset classes.  In my mind the asset class that offers the highest risk adjusted return is debt investing via crowdfunding platforms.

Here is my 4 step due diligence process as an online lender (online hard money lender):

  1. Research crowdfunding platforms.  You need to first get comfortable with the platform. Do they have the experience and capital to be long term players?  Do they have the investor’s interest as their number one priority? How much due diligence do they perform on the investor’s behalf? Does the platform have a contingency plan for distributions and K1’s if they go out of business?
  2. Research the Fess.    Fees vary wildly from platform to platform.  I stay away from high fee deals and platforms. You have to weigh the tradeoff of services provided versus the fees charged.  How much due diligence is the platform providing?  In general the higher the fee, the more due diligence the platform performs.
  3. Research the borrower.  How many deals have they done?  What is their track record? What is their credit rating?
  4. Research the Investment.  If and only if you are satisfied with the first 3 steps, dig into the investment details. Study the appraisal and comps.  Do they ring true?  What is the loan to after repair value percentage? I do not invest if it’s over 70%.  I like deals in the 50’s.  Are you in first or second position? I like the safety of first position and only invest if I am first in line if the deal goes south.  Google the location and do street views of the neighborhood.  Research the city and confirm it’s actually growing and has real estate appreciation.

Once you are satisfied, I will invest less than 10% of my personal “loan pool” into any one deal. I then stager my loans to only 1 or 2 a month.  By doing so, I have some loans coming do about every month which reduces my risk to an economic downturn.  I also diversify by never loaning more than twice to the same developer or in the same city.

Doing the above takes time and energy.  I typical share due diligence with a handful of fellow investors via email and we have saved each other from making bad investment decisions.  We have uncovered information that once shared with the crowdfunding platform resulted in the investment being removed and refunds issued.  If 3 investors had the power to remove potential bad investments, what could thousands of investors do if they worked together?

With that in mind I developed CrowdDD.com, the “Yelp” of equity and debt crowdfunding.  Crowd Due Diligence was born with our motto “Let the wisdom of the crowd guide your next investment”. 

1.      Do you use 506b or 506C regulations and why that one over the other?

All of the investments on the RealCrowd platform are currently structured as a 506(c) offering. This is due to the fact that we do not act as the issuer of the securities being offered – the real estate operator themselves are the issuers and the investors are investing directly in the assets with the real estate operators. We feel this is the most efficient way to make direct investing in real estate accessible to retail investors. Creating intermediary entities introduces unnecessary weight and complexity to the private capital raising process that we feel is inefficient.

2.     What fees do you charge the investors and sponsors? (% ranges for up front and annual fees)

We do not charge the investors anything to invest through our platform. We charge the real estate operators a flat fee (ranging depending on what level of services they choose) to utilize our platform and manage their investors.

3.     What is your due diligence process for investments that are listed on your portal?

Our process is focused primarily on the operating partners themselves. We run a screening process which includes review of their track record, prior operating history, review of any prior foreclosures/bankruptcy’s/litigations etc. They must all meet our minimum required standards of 10 years of principal level experience and a minimum of $50M of assets under management. Our current operating partners have an average of $690M of real estate assets under management and a combined average experience of 56 years.

4.     How much VC capital have your raised to date?

We have raised a $1.6M seed round after exiting the YCombinator program in August ’13.

5.     What safeguards are in place for your investor’s money if your platform is forced to shut down?

One of the main benefits of how RealCrowd operates as a platform is that there would be no disruption to investors’ money if we were to shut down. When you invest through RealCrowd, you are investing directly with the real estate operator – not in a startup fund of funds manager. We feel that is an unnecessary risk and investors should have access directly into ownership of the assets, not in a fund that is controlled by a crowdfunding company.

6.     Is your platform associated with a registered broker? (why or why not)

We are not affiliated with a registered broker/dealer as there is an exemption to register as a broker dealer for portals as defined in the JOBS Act. We feel this is the most efficient way for us to operate at this stage.

7.     How do you verify if an investor is accredited?

Part of the difference from a 506(b) and a 506(c) offering is the higher standard for determining accreditation for investors. We take this very seriously and have a multi step process in place to verify the accredited nature of the investor.

As a first step before any investor can view the full offering materials or make a commitment to a project, they have to complete a self-certification. Once an investors makes a commitment to a project, if they have not previously verified with us before, we take one of the following steps:

·       Third party certification – here a broker/dealer, Registered Investment Advisor (RIA), a Certified Public Accountant or attorney can sign a letter, on behalf of the investor, that they have taken “reasonable steps” to verify that the investor is accredited.

·       Income – we will collect appropriate tax documentation (1099’s, W-2’s, K-1’s etc) along with a certification from the investor that all information is accurate and complete

·       Net Worth – we will collect appropriate statements of net worth (bank balance statements, brokerage account statements etc) and have the investor either provide a credit report or authorize us to pull a credit report as well as a certification that all information is accurate and complete.

Once we have performed one of those methods of accreditation we will provide a certificate to the real estate operator outlining the investors in the project and which method we utilized to accredit them. Ultimately the decision falls upon the issuer as to whether or not the reasonable steps have been taken, so we do provide them with all of the back up documentation.

We take the accreditation process very seriously as we fully understand the ramifications if errors are made in the process. As stated earlier, when a general solicitation is made, a self-certification alone does not qualify as a sufficient process to determine accreditation status.

8.     What is the investment minimum for your platform?

This varies by project and is determined by the real estate operator. Minimums have ranged from $10k to $50k, but most have been around $25k.

9.     How often are updates on investments?

This also varies by operator, but at minimum most are updated quarterly with distributions occurring either monthly or quarterly as well.

Did you know that the JOBS Act of 2012 is not related to employment? The JOBS acronym is short for the Jumpstart Our Business Startups Act. Signed into law in 2012, the section allowing Equity Crowdfunding was finally implemented in 2014. So how did the first year go, and where are we going with it in 2015?

2014 in Review

Crowdnetic is the preferred resource for the Equity Crowdfunding industry as a resource for insight and education for global crowd financing. According to the site, $207,.7 million was raised by equity crowdfunding during 2014. Only 534 of the 3,361 of the companies met their goals, but that means that on average, each company received $407,685. There is little doubt, that publicly asking for money from accredited investors has successfully created a new system of equity funding.

According to Forbes Magazine, the leading sector to raise investments from equity crowdfunding was the “Service & Technologies sector, which raised $107.4 million and $77.9 million respectively.”

Where Does Equity Funding Take Place?

Although the United States was not the first country in the world to allow Internet Crowd Equity Funding, preceded by many countries across the globe, according to Forbes it has spread across all fifty states, Puerto Rico, and the District of Columbia. California leads the way, thanks to Silicon Valley followed by;

  1. New York;
  2. Florida;
  3. Texas; and
  4. Illinois.

Within the United States, there are approximately 9 million accredited investors. There is hope that the SEC will change their rules so that small investors can participate since the buyin can be as low as $1,000.

Another important change to SEC regulations has taken place; that was the elimination of a ban on advertising and soliciting equity investors. This change was part of the JOBS act and is known as Rule 506(D) of regulation D. Before this change became law, entrepreneurs needed an existing relationship that was substantial with a prospective investor. So advertising was not permitted for startup companies. According to TechCrunch, the change in SEC regulation is shaping “investment banking in the world today.”

The Future of Equity Crowdfunding

When the law was passed, many people were excited about Title III. This includes President Obama, who said;

“Start-ups and small business will now have access to a big, new pool of potential investors. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

The website FundWisdom says that by 2016, when Title III of the JOBS act is made law, the restriction barring non-accredited investors from participating in equity crowdfunding will change, and will provide “endless opportunities for non-accredited investors to participate in crowdfunding.” As of now, the exact date for implementation of the law in uncertain.

While new investors can enjoy the potential of equity of crowdfunding, startups, and other companies now have a new source of capital. FundWisdon also remarked that “ With Title III in place, every entrepreneur and investor will be moving closer to equity crowdfunding. The groundwork for the much-anticipated equity crowdfunding has already started.”

Presently only accredited investors can take part in online equity funding. However, Republican representative Patrick McHenry, of North Carolina said about this bill; “The goal is to democratize and improve finance.”

So, soon, the overwhelming number of Americans can back their views on a new investment with their own cash. Truly, America is filled with opportunity.

Under the SEC rules, offerings of 506c investments made through general solicitation and advertising, require the issuer to take reasonable steps to verify that investors are "accredited.” An accredited investor must be able to satisfy requirements of income or net worth. There are a few ways to meet the SEC requirements in order to verify an investor is accredited so that the investor may participate in investments offered through a 506c investment platform.

The SEC rules for an accredited investor include:

    Earning $200,000 or more in annual income (or $300,000 when including spouse's income) for the past two years, and having a reasonable expectation of the same or higher income for the current year, OR
    Having a net worth that exceeds $1 million, solely or including a spouse's assets (excluding the primary home value).

Meeting the Income Level
Proof of income may be demonstrated by providing copies of the last two-year’s income tax returns including all W-2, K-1, and 1099 forms. A written statement must be signed by the investor (and spouse if there is one), saying the current year's income will be the same or higher.

Proving New Worth
This is achieved by providing copies from the most recent three months, for all bank statements, brokerage accounts, CDs, tax bills, and appraisals. Liabilities are found from information obtained by a credit report that is also from the period within the last three months. The investor signs a written statement stating that all liabilities have been disclosed. Liabilities are deducted from assets to calculate net worth.

Third Party Verification
Because financial information of investors is highly confidential, investors may prefer to use third party verification instead of providing documents directly to the issuer of the 506c securities. Such third party verification certifies that the third party took reasonable steps within the most recent three months to verify that the investor is accredited.

Third parties who are qualified to make such a verification of accredited investor status include:

    Certified Public Accountants
    Registered Broker-Dealers
    Investment Advisers registered with the SEC
    Attorneys
    Professional Accredited Investor Verification Services

Each time an investor joins a new platform or makes a 506c investment the investor must prove they are accredited. Getting letters from CPAs or attorneys is time-consuming and costly. Getting letters from registered broker-dealers and investment advisers is not always possible because there are serious liability issues for firms disclosing private information.

Most active 506c investors prefer to use a professional accredited investor verification service. Private and confidential information is submitted to only one company and they verify the accredited investor status every time it is needed for a full year. The investor needs to only update the information if there is a change in financial status and renew the verification each year by providing the tax returns and other updated documents. This is a much more convenient and a less costly way to achieve this verification than the other possible methods.

Examples of Professional Accredited Investor Verification Services include:

    Accredify - The cost for this service is $49 per year. They verify accredited investor status using income, assets, and third-party letters.
    EarlyIQ - The cost for this service is $35. They verify the investor's identity, and then the investor submits the required documents online and uploads them to a secured server. Then the investor receives an online link, which is encrypted, that provides an up-to-date accredited certificate to whomever is given the link.
    AccreditedAM - This is a free service sponsored by North Capital Private Securities Corporation who is a registered broker-dealer.

Summary
Investors are using these professional accredited investor verification services for convenience and protection of confidential information so they may invest in the growing number of online platforms for 506c investments.  We recommend AccreditedAM because of the ease of use and low cost (FREE).

Find ratings and review of crowdfunding platforms and investments at CrowdDD

 Jilliene Helm, founder of Realty Mogul was gracious enough to answer a few investor questions.

 Thanks Jillian!

     1.  Do you use 506b or 506C regulations and why that one over the other?

We utilize 506b for the majority of our raises. We have also used 506c. The primary benefit of using this exemption allows us to market the security publicly – this is also known as “general solicitation” – but it also comes with additional compliance measures. 

      2. What fees do you charge the investors and sponsors?

We charge sponsors a commission on raise funds through our broker-dealer partner, and we have a tiered fee scheduled based on the amount of capital we raise. We also charge our investors a 1-2% investor reporting and technology fee, which is based on invested capital.

  1. What is your due diligence process for investments that are listed on your portal?

For equity investments, we and our broker-dealer partner review every transaction in-house. We go to great lengths to fully understand the variables of each transaction including the structure, the market statistics, the property, the quality of the property and the track record, reputation and quality of the real estate investment company we are working with. This process includes background, criminal and credit checks to mitigate the risk of fraud. While Realty Mogul cannot provide an assurance to investors that investment objectives of any given investment will be reached, only a small percentage (we estimate less than 5%) of investments we review will be included in the Realty Mogul marketplace.

  1. How much VC capital have your raised to date?

Over $10 million, including a recent $9 million Series A led by Canaan Partners.

  1. What safeguards are in place for your investor’s money if your platform is forced to shut down?

 In the event of a corporate bankruptcy, there would be uncertainty and ultimately it's up to the courts to decide, but from day one we have worked to make sure we have a contingency plan in place.  For all of our investments, we have charged a fee from the first transaction we ever did in the event we have to put a replacement servicer in place.  

 For our debt investments, we have identified a third-party servicing firm as a preferred vendor we would look to work with to transition any loan servicing.  

 For our equity investments, we would look to a national bank with a real estate trust specialty to take over management of our LLCs.  Another option is a third party fund servicer – their bread and butter business is fund servicing and as long as there are fees embedded to pay them (which we require), we see them as another good option.  This again is not a guarantee, but we've had active discussions with both banks and alternative managers around sub-servicing in the event of a bankruptcy and have identified specific individuals that would be contacted (we update this list and our contingency plan on an annual basis).

 On a related note, we are currently well capitalized as a business having raised a $9 million round of capital for the company.

6. Is your platform associated with a registered broker? (why or why not)

Yes, we believe strongly in regulation and compliance as we feel that it benefits investors and sponsors.  Realty Mogul offers equity securities through WealthForge, LLC, a registered broker/dealer and member FINRA/SIPC.

  1. How do you verify if an investor is accredited?

 We employ a strict cooling off period during which we get to know our clients.  For Reg D 506(b) transactions, we use a four step accreditation process and for Reg D 506(c), we take reasonable steps above and beyond our traditional four-step process to validate the investor.  That may include a letter from a CPA or attorney, or validation of net worth or tax documentation.

  1. What is the investment minimum for your platform?

$10,000

  1. How often are updates on investments?

Monthly or quarterly depending on the investment.

What is equity crowdfunding and why should I care? The simple answer more money for you and higher returns for your idle cash. Relatively safe short term (six to nine months) crowdfunded real estate loans are paying investors 9%- 13%. This certainly outpaces the .25% money market funds returns.

Crowdfunding’s roots began in 2009 when reward based sites such as Kickstarter began to proliferate. Companies used crowdfunding sites to launch new products and services by giving rewards and discounts to consumers who would “preorder” their offerings.  The crowd would then fund the project and the company could ramp R&D and production without incurring debt. For example, the Pebble smartwatch raised over $10 million dollars from thousands of consumers before they produced their first watch.

In 2012, Congress passed the Jump Start our Business Act (JOBS ACT) which now allows companies to solicit capital from accredited investors to crowdfund their debt and equity deals.  Before the Jobs act, companies could only pitch their deals to people with whom they had a preexisting relationship.  As a result, reaching new investors was an ongoing issue. Before crowdfunding, the minimum investment into a deal was often $100,000 or higher. Now investors can pool smaller amounts of money and make one large investment as a group.  Instead of one person making a $100,000 investment, a group of 20 investors can put $5,000 each into the deal.

The most beneficial aspect of equity crowdfunding is the tremendous access to deal flow, increasing diversity across different geographic regions and different asset classes. Using a real estate crowdfunding platform, you could put $5000 each into a 15% IRR equity investment of a hotel in Colorado, an apartment in San Francisco, a shopping center in Houston and a self-storage building in Washington DC.  You could then put another $10,000 in an Atlanta house flip debt deal, paying 13% with a loan to value of 55%.

The good news is we now have access to deals all over the country, but how do we know the good investments from the bad ones? That has been the problem.  CrowdDD is the solution.  Let the wisdom of the crowd guide you as they rate and discuss the many investment opportunities available to you.  We also provide ratings and reviews on the many crowdfunding platforms. All platforms are not created equally and knowing the difference will help guide you away from the poorly run portals.

We asked WeFunder several investor related questions and Mike Norman was kind enough to provide us with his company's answers.

  1.       Do you use 506b or 506C regulations and why that one over the other?

 We do both

  1.      What fees do you charge the investors and sponsors? (% ranges for up front and annual fees)

Generally a 10% carry plus a $25 -$75 fee per investment depending in the amount. Some investments have no fees no carry. 

  1.      What is your due diligence process for investments that are listed on your portal?

We look for user and/or revenue traction, big markets, name brand investors and accelerators that have invested, aspirational startups solving big problems, and compelling experienced founders.  

  1.      How much VC capital have your raised to date?

 Over $2 million

  1.      What safeguards are in place for your investor’s money if your platform is forced to shut down?

All investment flow through separate LLC's that exist independently of the platform so they are protected in the unlikely event that Wefunder shuts down.

  1.      Is your platform associated with a registered broker? (why or why not)

At the current time we operate as an exempt reporting advisor but that may change once the 4a6 rules are put into place. Operating as an exempt reporting advisor is less costly for us and as a result investors and companies. 

  1.      How do you verify if an investor is accredited?

https://wefunder.com/accredited/verification 

  1.      What is the investment minimum for your platform?

 $100 platform wide but some investments have higher minimums

  1.      How often are updates on investments?

 This depends on the company. Some update quarterly, others more or less. 

Real estate investment trusts are good for people who have very little time to devote to real estate investing and do not mind giving up almost all the decision-making control to a third party. They also involve a timing risk. At any given time, the stock market's price of a REIT can either overvalue or undervalue the underlying assets. The "true" value on any given day for a REIT is very subjective at best. Five years ago, this was my best option for giving my portfolio some exposure to real estate returns.

Direct lending is the obvious choice for the greatest return — if you have the time and knowledge to devote to it. I personally run or help run three businesses, and I also have a family that requires my time. This pretty much rules out direct lending for me. Having said that, 3 to 4 percent origination fees and interest rates of 12 percent and up are very appealing.

For my circumstances, real estate crowdfunding is a no-brainer. Access to deal flow across many different asset classes and different geographic regions is a game-changer for a passive investor. Now, you can also further diversify by investing in different durations and putting money into both debt and equity deals. With CDs paying less than 1 percent and the stock market at record highs, this is the perfect time for a new investment alternative.

The hard part is choosing which deal to invest in. There are really two routes you can take. 

One is to use a crowdfunding platform that curates the deals and does a great deal of due diligence on your behalf before offering an investment. The platforms that do the most due diligence also charge the highest fees.  

The second route is to rely less on the crowdfunding platform and do your own extensive research and due diligence on each individual deal. You usually do not have to pay the 1 to 2 percent yearly platform fee when you go this route. It depends on how important your time is to you and how confident you are in your research and due diligence skills.

I make investments using both types of crowdfunding platforms. My ultimate decision depends on the unique characteristics of the deal. I am willing to pay the 2 percent yearly platform fees on some self-storage, mobile home park, and similar nontraditional deals because of the higher returns and the diversification they offer. However, if I can choose between two similar shopping

center deals, and one platform has a 0.25 percent fee and the other platform has a 2 percent fee, the deal with the lower fee gets my money.

For the typical investor, who may not have a great deal of real estate investment experience, there is a strong need for crowdfunding platforms such as Realty Mogul. The ability to take advantage of the platform's investment committee and due diligence will greatly reduce the risks associated with real estate investment

 

Top 5 by Overall Rating


CrowdStreet

Website - CrowdStreet

Phone888 432-7693

SEC REG - USES 506(c) - Open Investments can be advertised and publicly discussed

CrowdStreet allows accredited investors to purchase real estate investments through their platform. Investors can from a wide variety of choices, sign legal documents online and maintain their portfolio. Unlike many sites, CrowdStreet features both debt investment and equity opportunities. These include a wide variety of projects including retail, office, industrial and land.

CrowdStreet reviews every potential opportunity and rejects those that do not meet their strict standards. At this time only accredited investors can look at the investments on CrowdStreet.

Usually, these are wealthy individuals interested in real estate investments, but are interested in combining their resources with other investors. The site benefits accredited investors because now they can see opportunities that were potentially only available to institutional investors were private individuals.

Because they provide wide access to new opportunities, a larger pool of real estate options becomes available. Investors can put their money into a variety of properties across a wide geographic range with a small capital outlay.

Investors see a return on their investment when CrowdStreet distributes the money. Distributions depend on whether the investor has selected equity, debt or a form of hybrid investment. Investors receive distributions in the form of a share of profits for equity investors. Debt investors receive their distribution at a previously agreed-upon interest rate. Both investors would also receive distributions when a property is sold.

There is no fee to join the platform and get involved with investment opportunities. There is a minimum investment for individual opportunities, and some are very low-- in the area of $10,000.

CrowdStreet may open their platform to nonaccredited investors in the future depending on the outcome of the Security and Exchange commission's decision on updating regulations of the JOBS Act.

 

CrowdStreet announced in September of 2014 and they had received $800,000 in seed funding from a group including Green Visor Capital and Seven Peaks Ventures with additional participation from the Portland Seed Fund. They have posted real estate properties worth more than $100 million.

 

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Real Crowd

WebsiteReal Crowd

Fees - NONE

Phone800-286-1602

SEC REG - USES 506(c) - Open Investments can be advertised and publicly discussed

Real Crowd is a private, secure, and simple-to-use online platform for accredited investors to assess, review, and invest in commercial real estate opportunities across the nation. It gives investors the tools to browse, compare, and invest with real estate companies. The company was founded by four real estate experts in Silicon Valley. Adam Hooper, Roman Rosario, JD Conley, and Andy Norburg started the company in February 2013. It was built on the Founders' collective capital which was obtained from quality underwriting and transaction experience. Because of their years in working with the best real estate operators, the founders bring consistent and attractive deal flow to their customers.


This company is ideal for accredited investors seeking to diversify their investment portfolio with real estate. RealCrowd is free for investors. By simply creating an account on their website, investors can be connected to the best private real estate companies that are looking for new partners. These private real estate companies pay RealCrowd in order to use the company's platform while investors are not charged.

RealCrowd has been involved in the successful funding of over $110M in deals throughout its platform. What sets this website apart from others is that it is one of the most active institutional-quality commercial real estate investment platforms in the United States. RealCrowd provides access to industrial, retail, cashflow, and multi-family investments from coast to coast. Deals are done from San Francisco to Colorado, Arizona to Washington. RealCrowd’s platform is built around SEC Rule 506(c). To date, RealCrowd has raised over $1.6M in the real estate industry. Investors include Y Combinator, DCVC, Initialized Ventures, Andreessen Horowitz, and General Catalyst.

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Fund That Flip

URL - Fund That Flip

Fees - 2% to 4% loan points as an origination fee deducted from loan funds at loan closing, plus 1% to 3% interest rate spread taken from loan repayments over the course of the loan. There is no cost for investors to sign up and review deals.

Phone - (646) 895-6090

SEC REG - USES 506(c) Open Investments can be advertised and publicly discussed

Fund That Flip specializes in funding the rehabilitation of homes by re-developers. All funding is by debt, not equity investment. Investors are secured with a first-position lien on the underlying real estate.

Loans are given only to qualified re-developers with a minimum of six successfully completed previous projects. The minimum equity investment required of the re-developers seeking the loan funds is 20% of the real estate property's acquisition cost. In some cases, this requirement may be higher. Up to 100% of the construction costs are financed, with holdbacks that are released upon successful achievement of construction milestones, subject to physical inspection. Loan-to-value must be less than 65% of the value of the property after repairs are made.

Investors invest in a Borrower Dependent Note (BPN). This is a security issued by Fund That Flip, which represents a debt investment in the fund. The proceeds less the transaction fees of 2-4% are used to invest in a first-position mortgage note on the property. Investors invest in a specific loan on a specific piece of real estate for a specific borrower. The performance of the investment is directly correlated with the performance of the underlying borrower note (mortgage). Annual returns for investors are in the range of 8% to 14%. There is no indication of how much they have raised so far. The minimum investment is US$5,000.

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Equity Multiple

Website - EquityMultiple.com

Fees - .5% annual asset management fee on equity + 10% carry

Phone - (646)-844-9943

SEC REG - USES 506(c) - Open Investments can be advertised and publicly discussed

EQUITYMULTIPLE is the only online investing platform backed by an established real estate company - Mission Capital, a leading national real estate capital markets firm. Since 2002 the firm has advised and managed transactions across commercial and residential loan sales and arranged project financing.
Our national network of real estate companies is constantly seeking opportunities across the country and across property types. They diligence each project and invest with their own funds, aligning their interests with EQUITYMULTIPLE investors and providing a first layer of diligence. 
For projects that survive initial due diligence, we stress test underwriting assumptions, review key legal documents and third party reports and consider transaction structure. A select few are presented on our platform.

We strive to:

Offer a highly curated set of deals, presented comprehensively and transparently
Collaborate with the sponsor or lender to optimize risk-adjusted returns for our investors
Ensure that all investor questions get answered by our dedicated team of investment specialists

Once an equity investment has been made, EQUITYMULTIPLE charges investors a small annual fee — typically 0.5% of the aggregate amount invested — that is paid periodically to cover ongoing investor reporting, tax preparation and communications relating to the investment. EQUITYMULTIPLE also receives 10% of investor profits after investors have received all of their initial investment back.


For preferred equity and debt investments, EQUITYMULTIPLE typically takes a servicing fee in the form of a “spread” between the interest rate being paid by the sponsor or originating lender and that being paid to investors. EQUITYMULTIPLE also generally charges the lender an origination fee and other charges typically associated with initiating a real estate loan or preferred equity investment. In the event of default, extension or other special circumstances, certain fees and charges payable by a borrower or Sponsor will be shared among EQUITYMULTIPLE and investors, as such situations involve increased servicing duties on the part of EQUITYMULTIPLE. Details as to such fees and sharing arrangements can be reviewed in the applicable investment documentation.

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Yieldstreet

Website - Yieldstreet.com

Fees - 1-4% annual management fee

Phone844-943-5378

SEC REG - USES 506(c) - Open Investments can be advertised and publicly discussed

YieldStreet’s technology connects investors to asset-based opportunities presented by best-in-class originators. And, its as easy as buying stocks.

YieldStreet investments are debt based alternative investments. YieldStreet Originators take out a loan for a project or need that is collaterized by an underlying asset the originator has, such as a real estate property or legal settlement.

Our offerings currently concentrate in three primary alternative asset classes; real estate, litigation finance and commercial finance. You can learn more about each of our asset classes on YieldStreet University. YieldStreet seeks investment opportunities that provide investors with low correlation to the broader stock market, and target annual yields between 8-20%.

As originators make principal and interest payments during the term of their loan, distributions are paid out directly to investors in the offering.

All YieldStreet offerings are asset-based, meaning your investment is backed by strong collateral such as vehicles or real estate. This collateral acts like insurance in the rare case a borrower defaults.

Our team does an initial review of the opportunity according to the five criteria set in our Investment Philosophy:
Asset-based with strong collateral
Low market correlation
Established asset managers
Short duration (1-3 years)
Attractive yield (8-20% annual target returns)

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