Any concerns about investing in crowdfunded commercial real estate?

[El Gringo]

Fundrise is an internet startup that has a fascinating model of crowdfunding real estate development, selling small shares to individual investors. It's an innovative concept and has huge potential. Right now the only place you can do it is through Fundrise and only if you live in VA or DC. They have building currently open now: https://fundrise.com/offerings/3/view

I have no legal background and am wondering if there is anything to be concerned about before buying some shares. In the Operating Agreement (https://s3.amazonaws.com/fundrise-content/offering-documents/70231517-c874-46b7-884b-fd59812d54f1/Fundrise_906_H_Street_--Second_Amended_and_Restated_Operating_Agreement.pdf), check out Section VI Transfer of Membership Units and Withdrawals of Members and section 9.16.9. It seems like it's nearly impossible to get out of if I ever wanted to. Should I be concerned about that? I'm also wondering in what context section 3.2.2. Procuring Additional Funds would apply. In what sort of situation would I be required to contribute more funds? Anything else I should be concerned about?

It's kind of daunting that the ability to transfer my interests are very limited. If I'm going to be stuck with it, I want to be sure that there's no liability. In other words, is there any other risk, besides the always-present risk that I could lose my whole investment? As long as that's the only risk, then I'm ok with it, because I only plan to throw a few hundred bucks in it, which I can afford to lose.

(For interesting analysis on how this could shake up commercial real estate, read this interesting article in Atlantic Cities: http://www.theatlanticcities.com/neighborhoods/2012/11/real-estate-deal-could-change-future-everything/3897/ )

[marty998]

These sort of things always blow up. Why? Because the developer can't get finance elsewhere (like from a bank) because his/her business model doesn't stack up.

There are so many that have blown up in Aus over the past few years:

Fincorp
Westpoint
Bridgecorp
Banksia
LM
Anything Gold Coast related

etc
etc

Please stay away

[Another Reader]

Looks like you have a vacant building on a street full of empty boarded up buildings next to a vacant lot.  The developer wants to redevelop the building on spec, with no tenant in hand.  The banks told the developer "no."  Why?  Because the risk is too high.  So the "visionary" developer (every developer has a monumental ego and thinks of him/herself as a visionary) won't let go and turns to the uninformed public for money.  Any concerns?  I don't have any, because I would not touch this mess.

[arebelspy]

Do you have the knowledge to properly analyze this investment (the risk vs reward, specifically, and actually be able to accurately compute numbers for those)?

[jfer_rose]

Thanks for asking this question! I live in DC and have been looking at Fundrise and was thinking the same thing. I really like the idea of investing in my community, and the potential opportunity to use what I learned in my grad-school course on real estate finance. But the fact there's no way to sell your stake down the line is the reason I don't see myself jumping anytime soon. Hopefully they will figure out a way to do that down the line?

[El Gringo]

Looks like you have a vacant building on a street full of empty boarded up buildings next to a vacant lot.

Actually this building is located on one of the hottest streets in DC (and even the country). If you wanted to pick a place to invest in real estate, this is exactly the place and time to do it.

 

Do you have the knowledge to properly analyze this investment (the risk vs reward, specifically, and actually be able to accurately compute numbers for those)?

I don't. I basically am interested in just throwing in a few hundred dollars as an experiment/for fun to see how it goes. Also, I like the opportunity of investing in my community, even if it's just a tiny share (that of course, is the whole idea behind crowdfunding!) It's like the real estate version of Prosper.com or Lending Club.  I'd be investing a small enough amount that if I were to lose the entire amount of investment, it'd be no problem. I just want to make sure that I don't enter any sort of legal obligation that gets me into something I don't want.

Thanks for asking this question! I live in DC and have been looking at Fundrise and was thinking the same thing. I really like the idea of investing in my community, and the potential opportunity to use what I learned in my grad-school course on real estate finance. But the fact there's no way to sell your stake down the line is the reason I don't see myself jumping anytime soon. Hopefully they will figure out a way to do that down the line?

Yea, it's a great idea and I'm really excited about it! I, too, have the same reservation though.  Where in DC do you live?

[KingCoin]

Why not just buy some REITs that are focused on Washington DC? That way, you're investing in your local area and can do so in any size that you please. Furthermore, the investment is entirely liquid and free of things like additional complicated tax filings (which alone make an investment of a few hundred bucks not worth the hassle). Problem solved.  Probably not as exciting to talk about at a cocktail party, but much more sensible.

A projected annual return of 7% on a project like this isn't nearly juicy enough for the risk and illiquidity.

[tooqk4u22]

Looks like you have a vacant building on a street full of empty boarded up buildings next to a vacant lot.  The developer wants to redevelop the building on spec, with no tenant in hand.  The banks told the developer "no."  Why?  Because the risk is too high.  So the "visionary" developer (every developer has a monumental ego and thinks of him/herself as a visionary) won't let go and turns to the uninformed public for money.  Any concerns?  I don't have any, because I would not touch this mess.

Do you have the knowledge to properly analyze this investment (the risk vs reward, specifically, and actually be able to accurately compute numbers for those)?

Why not just buy some REITs that are focused on Washington DC? That way, you're investing in your local area and can do so in any size that you please. Furthermore, the investment is entirely liquid and free of things like additional complicated tax filings (which alone make an investment of a few hundred bucks not worth the hassle). Problem solved.  Probably not as exciting to talk about at a cocktail party, but much more sensible.

A projected annual return of 7% on a project like this isn't nearly juicy enough for the risk and illiquidity.

Agree with all of the above.   I would also add that control and controls matter dearly when investing with a developer that is not institutional quality (capital, experience, sophisitication, etc.), and you only get control/influence with major portion of the investment. 

I wouldn't do it - stupid money leads to stupid investments.  If the deal made any sense, high net worth investors would be easy to attract even if banks weren't.

[jfer_rose]

[/quote]
Yea, it's a great idea and I'm really excited about it! I, too, have the same reservation though.  Where in DC do you live?
[/quote]

I live on the edge of Adams Morgan near Columbia Heights.

[nktokyo]

I think there are easier ways to get into property than this kind of venture.

[giggles]

I do think it looks interesting.  I wish that you could get information about what is going on with the fully-funded projects.  I don't live in VA/DC, so I couldn't test the waters with their current offering, but I will keep an eye on it to see how the site develops.

[El Gringo]

There's been some interesting discussion recently by some DC-based journalists. The Washington Post did an article which highlighted the fact that numerous financial advisers were very cautious about Fundrise as an investment (http://www.washingtonpost.com/business/on-it/fundrise-faces-off-with-skeptical-financial-services-industry-over-crowd-funded-real-estate/2013/06/07/78ba818a-cdeb-11e2-8845-d970ccb04497_story.html)

Emily Badger at Atlantic Cities (http://www.theatlanticcities.com/neighborhoods/2013/06/point-crowdfunded-real-estate-isnt-make-everyone-rich/5876/) and Matt Yglesias over at Slate (http://www.slate.com/articles/business/moneybox/2013/06/fundrise_real_estate_crowd_funding_could_beat_nimbys.html) talk about how it's less about making money and it's more about creating a process in which local people can have a collective ownership and say in the development that happens around them.

I ended up not buying a share, exclusively because of my concern about the almost 100% illiquid nature of the share. That's my only real beef. But if they change the terms in the future, so that it's not next to impossible to get rid of your share, then I'd be really interested in buying shares. And, as Yglesias says, it would be with entirely disposable money (fun money that I might otherwise have spent on something that's not even an investment), and it would be less for the financial investment and more for the hope of seeing this platform grow as a means for giving people more ownership and say in the development in their neighborhood and city.

[grantmeaname]

Actually this building is located on one of the hottest streets in DC (and even the country). If you wanted to pick a place to invest in real estate, this is exactly the place and time to do it.

Then why is the developer not pursuing traditional real estate funding channels?