If you’re not yet familiar, crowdfunding is the act of raising capital for a new business venture by using small donations from many different investors. Instead of one investor putting up $1 million to fund a deal, crowdfunding would source 10 different investors who all put up $100,000 each. While crowdfunding has not been traditionally seen as a legitimate way to raise money, the success of a few new companies is starting to change that perspective.
In particular, one company is slowly changing the way that commercial real estate deals are financed.
Let’s take a quick look at one of the most popular commercial real estate crowdfunding companies, CrowdStreet.
The idea for CrowdStreet was formed during the peak of the Great Recession when the floor fell out of the real estate market and property values dropped. CrowdStreet co-founders Tore Steen and Darren Powderly realized how overly reliant investors had become on Wall Street to help them find and fund deals. These two set out to offer people a better option when it came to investing in commercial real estate projects.
Today, the CrowdStreet marketplace is the largest commercial real estate crowdfunding marketplace in the industry. Since 2014, they have closed 524 commercial real estate investment offerings and raised $2 billion for sponsors.
The whole idea behind the CrowdStreet marketplace was to make investing in real estate projects more approachable for accredited investors. In the past, if you wanted to get started as an accredited investor in commercial real estate then you would need about $250,000. This excluded tons of investors from getting started investing in real estate. However, on CrowdStreet, accredited investors can get their foot in the door of institutional-level real estate deals with a minimum investment of only $25,000.
Additionally, CrowdStreet does its best to filter the deals that are offered on its platform. In particular, they look for deals that are backed by experienced real estate professionals in the commercial real estate market and an asset that has a history of success.
With that being said, let’s take a look at a few of the features that are offered on CrowdStreet’s platform.
It’s important to note that CrowdStreet is a two-way marketplace. By this, we mean that you can visit their site both as an investor looking for real estate deals as well as a broker looking to raise money for a real estate project. Regardless of your reason for visiting, CrowdStreet makes the process easy for both parties.
If you’re an investor, you simply create an account and then visit their marketplace. This is where you’ll be able to scroll through their active investment opportunities in search of a deal that fits your goals as accredited investors. They also have quite a few investor resources available so that CrowdStreet investors can stay educated about commercial real estate investing.
If you’re a sponsor, then you can visit CrowdStreet’s site in hopes of raising money for a real estate investment deal. In this space, CrowdStreet advertises itself as “the modern equivalent to institutional capital.”
From everything we can gather on CrowdStreet’s website, it is free to use their service if you are an accredited investor. This means that there is no cost to sign up, no cost to find real estate investment opportunities, no monthly subscription that you need to pay, and no percentage of your returns that CrowdStreet will collect keeping investor fees at a minimum.
Instead, CrowdStreet’s revenue is generated from fees charged to its sponsors. First, they sell their software to sponsors so that they can reduce their administrative costs and manage multiple deals more easily. Second, they charge a fee to sponsors who succeed in getting their real estate deal listed on the CrowdStreet site. This is a fairly standard fee that sponsors would have to pay anyway, regardless of how they’re raising money. By providing a solution that’s much quicker, easier, and smoother than alternatives most sponsors are fine with paying this fee.
If you are only interested in investing on CrowdStreet (not raising money) then you do not have to worry about paying any fees.
In general, CrowdStreet seems to have a very reliable real estate investing platform that clearly has a lot of benefits for an accredited investor. However, no investment platform is ever perfect. Let’s take a look at a few pros and cons that CrowdStreet investors face while using their service.
Here are a few of the pros of using CrowdStreet
➢ Flexible investment options – You can invest in either real estate funds/vehicles as well as individual deals. Real estate funds/vehicles eliminate the process of having to choose a deal. Instead, you just purchase shares in a real estate fund and the owners of this fund will make the investment decisions for you. Or, you can also choose to do the research yourself and invest in individual deals.
➢ Easy to use – CrowdStreet is almost like eBay but for institutional-level commercial real estate investment deals. By visiting their [marketplace](https://app.crowdstreet.com/invexp/properties/all?), it’s incredibly easy to find deals that appeal to you. They also have plenty of filtering options so that you can find deals based on things like returns, deal terms, and sponsors.
➢ Education – Whether you’re new to real estate investing or a seasoned vet, CrowdStreet does a good job of offering materials that you can use to expand your knowledge base. In particular, they have routine “new investor conferences” for new investors that recently joined CrowdStreet. They also publish information like their 2021 investor thesis to keep you updated on the current state of the CRE market. This report breaks down the national market as well as each industry (hospitality, multifamily, office, retail, etc).
➢ High-quality deals – They have a thorough vetting process before presenting deals to their base of investors. They claim to only post 5 deals for every 100 that they receive.
➢ Deals are funded quickly – If you choose to participate in a deal, there’s a good chance that you won’t have to wait long for the funding to be completed. Most deals are funded in as few as 30 days. Some as fast as just 1 day.
Now it’s time for some of the cons of using CrowdStreet
➢ Accredited investors only – The biggest con of CrowdStreet’s platform is that it’s for accredited investors only and non-accredited investors are unable to participate. If you are an accredited investor, you are in luck. This means that, in order to use their platform, you must meet certain SEC requirements. According to the SEC, accredited investors are those who have a net income of over $200,000 or a net worth of $1 million. So, all of you accredited investors take advantage. Sorry, non-accredited investors.
➢ Requires an investing entity – To begin investing money on CrowdStreet’s platform, you will also need to register so type of investing entity. This can be an individual account, joint account, IRA, LLC, or something similar.
➢ High minimum investment – Most real estate deals on CrowdStreet require a minimum investment of $25,000. While this is lower than most other brokerages, it’s still quite a hefty minimum for the average investor.
CrowdStreet claims that its deals have generated an internal rate of return (IRR) of 17.75%. This return is an average over the holding period of the entire deal. Since their average deal lasts about 2.4 years, this translates into an annual IRR of about 7.4%. Additionally, their deals generate a 1.41x equity multiple for investors.
In total, CrowdStreet has paid out $245.6 million in distributions to its investors. On their website, they use the wording, “tens of thousands of individual investors have earned millions of dollars in distributions.”
When it comes to investing, there is always going to be at least a slight risk that you will lose money. If any investment offered a return with a 100% guarantee, everyone would be rich. When it comes to real estate investing, there are four common risk profiles:
1. Core – These are considered very stable properties that are likely to always have a reliable tenant. However, since they are safer, you can also expect a lower return when you invest in them.
2. Core-plus – These are properties that are still very safe but are not quite the top-tier. Just like core properties, core-plus properties are known for producing consistent income but not necessarily appreciating in value.
3. Value-add – These are properties where there is the opportunity to improve upon the property in some way. They have a higher risk because there are more steps involved on the road to profitability. However, if everything goes smoothly then you can expect them to generate a higher return.
4. Opportunistic – These are considered the riskiest types of properties. They are usually undesirable for some reason or another, however, if you are able to turn the property around then you have the potential to make a lot of money.
In general, CrowdStreet’s platform is not going to enhance these risks in any meaningful way. They do a good job of vetting deals that they list on their site, have a good track record of success, and are very transparent with the terms of each deal.
In summary, CrowdStreet is an exciting crowdfunding platform that is slowly changing the way that real estate deals are financed. They’re making it easier for sponsors to raise capital in order to fund projects while also making it easier for investors to find real estate offerings.
If you are an accredited investor who is looking to diversify your investment portfolio but is new to real estate then CrowdStreet is perfect for you. They allow you to easily scan through dozens of deals that you would not otherwise have access to as well as different investor resources. They also help you navigate the process of real estate investing, which is inherently complicated.
The only unfortunate part of CrowdStreet’s platform is that it is only available to accredited investors. This means that, if you do not make over $200,000 per year or have a net worth of over $1 million, then you will need to find another place to invest money in real estate.
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