Author Topic: Real Estate "Crowdfunding"  (Read 8028 times)

Jack

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Real Estate "Crowdfunding"
« on: April 24, 2014, 09:33:36 PM »
There is a real estate development in my city that's being funded via one of these newfangled "crowdfunding" things (kind of like Lending Club, but for real estate, I guess). Apparently the deal is that you can invest between $500 and $10000 a year (as an "unaccredited" investor) for a share in some kind of illiquid K-1 partnership (is that the right terminology?). The information available is a little fuzzy on the details (including important ones like "in what manner does my share of the return get distributed back to me?").

I'm interested in funding this particular project, but I'm not sure how to evaluate the quality/risks/etc of the investment. Could y'all take a look and tell me A) what questions I should be asking, and B) what the answers to those questions are?

(Note that if I were to invest, it would be only $500-$1000, and I would be fully prepared to lose it. Without going into too many details (so as to protect my privacy), I would want this project to succeed for reasons other than profit.)

Freedom2016

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Re: Real Estate "Crowdfunding"
« Reply #1 on: April 25, 2014, 12:10:23 AM »
I know nothing about real estate but a basic question about the crowdsourcing process - it wasn't clear from the website: if they don't raise 100% of their goal, do you get your money back?

If not, I wouldn't invest.

S0VERE1GN

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Re: Real Estate "Crowdfunding"
« Reply #2 on: April 25, 2014, 06:15:36 AM »
It sounds to me like they're essentially trying to bootstrap their organization (through a schedule c business filing) until they have enough capital and investors to get the benefits and protection of a REIT filing (I think the criteria is 2.5 million and 100 different investors... i might be wrong)

Get to know the people doing it, see if they're straight shooters, and if they are, it could be a cool thing to explore.  I would make sure you have some decent voting powers as an investor as well.

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #3 on: April 25, 2014, 08:31:15 AM »
I would make sure you have some decent voting powers as an investor as well.

haha.  crowdfunding does not work that way.  :)
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S0VERE1GN

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Re: Real Estate "Crowdfunding"
« Reply #4 on: April 25, 2014, 09:50:08 AM »
I'm banking on the fact that that term is in quotations.


Jack

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Re: Real Estate "Crowdfunding"
« Reply #5 on: April 25, 2014, 11:40:45 AM »
Okay, so it looks like there are really two separate issues here:

  • How do I evaluate whether it's reasonable to do business with Crowdvested and whether the terms of the investment vehicle make sense?
  • How do I evaluate whether it's reasonable to do business with the project's developer and whether the plans to develop the property make sense? There's a document with more information, including tables showing developing costs and expected rents, but I'd like some help interpreting it.

For what it's worth, I'm familiar with the underlying property and area and the developer is well-established and has a good reputation... the major unknowns for me are the idea of investing via the third-party (Crowdvested), the structure and tax implications of the partnership, and whether the terms being offered are "fair" relative to more traditional types of real-estate investing.

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #6 on: April 25, 2014, 11:41:07 AM »
I'm banking on the fact that that term is in quotations.

Ah.  No, it's a specific term based on SEC regulations and the JOBS act, it has a special meaning, not just a generic use of the word "crowdfunding."
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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dragoncar

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Re: Real Estate "Crowdfunding"
« Reply #7 on: April 25, 2014, 12:06:21 PM »
Story time.  It's not a very good story, because I was young at the time, so my recollection is fuzzy.  It all started when my parents brought me to some fancy house for a party.  It wasn't a normal party, though, it was an investment party.  See, everyone was getting real excited because there was an opportunity to buy a cellular tower.  This was the 80s or early 90s, so mobile phones were the next big thing.  If you owned a tower, you could lease space on the tower to wireless providers and make a fortune!  But see, you need capital to buy the tower.  That's where the party people come in.  If everyone invests just a small sum, maybe $10k, the partnership can buy the tower.  It's all very exciting stuff.  Of course, in the end, everyone lost their money.  There was a lawsuit, but the money was gone.

slugsworth

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Re: Real Estate "Crowdfunding"
« Reply #8 on: April 25, 2014, 12:56:43 PM »
I deal with commercial real estate development for a living and it is pretty tough to give a quick, "oh sure this is a good deal", very quickly. It is also tough to know if the assumptions they use are valid given that I don't know anything about Atlanta's markets.

Here is my low-down on the deal. I'm not going to comment on crowdvested or its model.

The project looks has what to me looks like a pretty light construction budget at $42.05/sqft (what specifically are they doing - they showed fašade improvements but are all of the systems OK?), they are a little light on vacancy rate (below 10% on average) after saying that the area has a high vacancy rate. . .and I guess it would be nice to see their track record in lease-up or who their marketing team is. I don't see broker fees or TI allowances in their budgets - I don't know what is normal in your market for properties like this - but in my area those would be budgeted.

Again, I have no idea how things work in Atlanta, but one of the things they mentioned is demo'ing one building and building 30 parking spaces. In the areas I work we would have to involve a civil engineer to deal with storm water issues, etc. He has nothing in the engineering line item. . .and only has $40k in Arch that is mildly scary.

Guessing the future cap rate is a big deal in determining returns and the consensus is that interest rates are going up, so caveat emptor. . .I don't know the local market, but 7.5 might be a little light given that this isn't an institutional grade property. Also, kind of a big deal, I am not clear on the sale date (he says a long term hold) or the exit strategy for the LP investors. Maybe I missed it.

Perm loan interest. . .I didn't see it anywhere, but just working backwards, it looks like a 5% interest rate on a 30 year amortization. That may be fine, but again not knowing the hold period makes it a little unknown. Similarly, they have less than a 1% loan fee in their budget, which may be fine, but seems light.

I would like to see some specifics, are they acting as GC? Who is the construction lender, where is the rest of the LP funding coming from, when is the exit, etc, etc.

I would really want to pepper the developer with a lot of questions before making any investment in this deal.  This was my ~10 minutes review, so I could have missed a ton.

S0VERE1GN

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Re: Real Estate "Crowdfunding"
« Reply #9 on: April 30, 2014, 06:40:17 AM »
I'm banking on the fact that that term is in quotations.

Ah.  No, it's a specific term based on SEC regulations and the JOBS act, it has a special meaning, not just a generic use of the word "crowdfunding."

Really.... Well there's your answer right there IMHO. Sounds like a terrible idea.

Money Stoic

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Re: Real Estate "Crowdfunding"
« Reply #10 on: April 30, 2014, 07:16:09 AM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #11 on: April 30, 2014, 07:44:33 AM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

(Emphasis added.)

How did you evaluate the risk between these two investments?

To me investing in LC, at this point in time, is much less less risky than investing with GroundFloor (and I'm no fan of P2P lending.), for a number of reasons, primarily institutional risk.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Nords

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Re: Real Estate "Crowdfunding"
« Reply #12 on: April 30, 2014, 11:52:48 PM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

(Emphasis added.)

How did you evaluate the risk between these two investments?

To me investing in LC, at this point in time, is much less less risky than investing with GroundFloor (and I'm no fan of P2P lending.), for a number of reasons, primarily institutional risk.
I think it's difficult to assess one type of risk against another type of risk.  Although it's very easy to exchange one type for another...

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #13 on: May 01, 2014, 06:44:08 AM »
Maybe.

I don't think it's too hard to say that leveraged penny stocks represent a greater risk than a vanguard index fund, in almost every sense of the word risk.

I think we can, then, categorically call some investments "riskier" than others.  Though yes, typically we'll have to define what we mean by risk (as I'm in the camp that cash/cds/bonds are riskier than stocks for an ER person).

But in the context of the quote given (unsecured loan making me nervous), I think we can infer the risk meant, and try and categorize GroundFloor's real estate investments along the same spectrum of risk and decide which is more likely to happen (incur the costs/problems).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Jack

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Re: Real Estate "Crowdfunding"
« Reply #14 on: May 08, 2014, 09:33:17 PM »
I (and some others) asked the CrowdVested people some questions, and got some answers. Given the additional information, what do y'all think of the prospect now? (And what other important questions remain to be asked?)

Q: So is the property in fact under contract by Paces?

A: Yes, the property is under contract by Paces.  They are looking to close in early June, thought it could get pushed back.

Q: And is the CrowdVested fundraiser to be applied only to the renovation?

A: All the money invested will go to the project, less our fee of 5%.   The structure works like this.  The total project is about $3.6 million.  That includes the acquisition price, rehab of the property, a fund for Tenant improvements and operating reserves.  Paces is putting in about $200k.  Investors are putting in about $1.25 million, and the bank is funding the rest.  Money raised through CrowdVested will be part of the 1.25 million being raised from investors (part of the "equity" piece of the capital stack).

Q: What is the scope of renovation it is to be applied to?

A: Paces is planning on significant renovations.  There is a lot of great architectural features like hardwood floors and exposed brick that will retained and enhanced.  And the outside of the buildings will remain essentially the same, but cleaned up and improved (though there could be some facade changes depending on the tenants).  There has been significant deferred maintenance, and the goal is to bring the buildings back to a great condition.

Q: What is the ROI/incentive to contribute to the fund?

A: The projected yield, after rent stabilization, is 12%.  What that means from a practical standpoint is that during the rest of this year, there will be little positive cash flow while the property is rehabbed and new tenants put in place.  Starting next year, Paces projects that positive cash-flow will yield 12% to the investors.  It could be less, it could be more, and it could fluctuate from year to year.  When the project is ultimately sold, the investors will get their money back and share in any capital appreciation of the project itself.  Total internal rate of return is projected between 16% and 24% (it varies based on how long the hold is and a bunch of other factors).

Standard disclaimer - like any investment, a lot of bad things could happen that would prevent these types of returns. There is a disclosure document on the site that lays all of this out - you need to be logged in to see it.

Q: What happens to the deal if not enough money is raised via CrowdVested? Do the non-CrowdVested investors just put in more, or does the deal fail? If not enough people invest, do those who did get their money back?

A: If not enough money is raised by CrowdVested, the current plan is that other investors will make up the difference.  Nothing would change on the on the projected returns.  However, if Paces decides not to move forward with the project, or if they decide the amount raised was too small to bother with, all amounts would be returned to the investors in full.

Q: How is the CrowdVested investment structured? How are the returns (profits? dividends?) distributed, and according to what schedule? What are the tax implications?

A: The investors are being pooled into an limited liability company.  That company is then investing in the project.  When profits are distributed, the LLC gets one check, which is then redistributed to the investors (we also get a management fee - see below).  This eliminates much of the hassle and overhead that has prevented developers in the past from wanting to make their deals available to smaller investors (there other big reason is that the law prevented these types of deals from being offered to small investors without a costly and time consuming regulatory process (think months and 10s of thousands of dollars in accounting and legal fees).

Our management fee is 10% of the profits distributed to the investors.   So for example, if you invest $1000, and if the profit for that period is 10% ($100), then we would get a $10 fee (you would get $90).  Note that the fee is on profits only.  No profits, no fees.  Also, when your investment is returned, that is without any fees.

The returns are structured like this (referred to sometimes as a "waterfall"):

Bank and vendors get paid first.
Equity Investors (including CrowdVested) get paid second.
Paces gets paid third.

So, once there is more cash flow than there are expenses, 90% of that cash-flow is paid to the investors until they receive an 8% per year return (Paces gets the other 10%). After that, the investors get 50% of the excess cash flow (Paces gets the other 50%).

Same process works on a sale of the property.  The bank gets paid off first.  Then the investors, then Paces.  If there is any money left, 90% goes to the investors until they have gotten an annualized 8% return (if they have not gotten it already), and then the investors get 50% of the rest.

Distributions are scheduled to be made quarterly.  Initially, the distributions will be small or non-existent while they are rehabbing the property and getting tenants in there.  Once the property is "stabalized", distributions will come out at a normal rate.

As to taxes, investors will get taxed on the amount of distributions they receive.  They may get allocated some depreciation, lowering the total tax owed, but that is not assured.  When deciding whether or not to invest, just assume you won't get allocated depreciation.  If you do, it will be a pleasant surprise.

Q: You mentioned "All the money invested will go to the project, less our fee of 5%." Who pays that fee, investors or Paces? Are we talking about a one-time fee at the beginning of the deal (like a front-end-load on a mutual fund), or an ongoing fee (like an expense ratio)?

A: The 5% fee is paid by Paces.  They get the amount invested, less 5%.  They have to pay out like they received the entire amount.   This is a one-time fee.

Q: What is the investment's exit strategy? Does it "mature" and return principal like a loan or bond, or does it create an ongoing equity interest? Will CrowdVested be creating a secondary market to trade these partnership shares? What happens if an investor needs to liquidate in the short or medium term?

A: Paces has characterized this as a "long-term hold" meaning they have not set a date for a sale.  But like any investor, they will look to maximize their profits and sell when most advantageous.  You have an ongoing equity interest that (hopefully) is paying very nice quarterly returns.

If an investor needs to sell out early or transfer his shares, we will manage and assist in that process. The laws governing this require that you invest for the purpose of holding the investment (as opposed to buying it with the intent of reselling it).  So we have to restrict transfer initially.  That said, if something comes up and you need to get your money out, we will assist in the transfer when you find a buyer.

As to a secondary market, that is a great idea, and one we have been discussing, but it is not currently planned.  There are some tricky legal hurdles we have to figure out.

Q: You say that "Paces is planning on significant renovations," but the renovation budget is only $42/sq. ft., which seems low to me. What work is actually being planned?

A: I'm afraid I can't speak on exactly what Paces is planning to do from a renovation standpoint.  I'll try to get you some answers.  But I do believe this - the bones of the property are in decent shape.  I expect most of that will go toward repairing and updating systems and exterior repairs.  The cosmetic and non-structural parts of the interior I would expect to be addressed primarily with the new tenants and the build-out to reflect the tenant's concept.

Q: The proposal contemplates spending $0 on engineering, but wouldn't the site development (demolishing the garage and creating additional parking spaces) require some engineering work?

A: Re Engineering costs:  Good question, and I don't know the answer.  It is possible that the engineering costs are included in one of the other categories.  I'll try to find that out also.
« Last Edit: May 08, 2014, 09:35:49 PM by Jack »

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #15 on: May 08, 2014, 09:45:43 PM »
Interesting read.  Thanks for posting.
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Jack

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Re: Real Estate "Crowdfunding"
« Reply #16 on: May 09, 2014, 09:17:02 AM »
Some more Q & A:

Q: You [the CrowdVested representative] wrote "After that, the investors get 50% of the excess cash flow (Paces gets the other 50%)" in response to my previous question. On the project's financials page, it says that LP equity is $1,275,000 and Paces' equity is $151,000. So if the project hypothetically made $30,000 in excess cash flow (beyond the 8% return), then Paces would get $15,000 of it (~10% return on their $151,000) and the investors would get $15,000* of it (~1.2% return on their collective $1,275,000)?

A: That is a good observation, and your analysis is correct.  It is also typical for commercial real estate deals.  Note I am not saying all deals are structured the same way - they all vary - but it is typical for the project "sponsor" (in this case Paces) to get a disproportionate return if they exceed project goals.

One reason it is structured this way is that Paces stands last in line for the profits.  If the profits never exceed the 8% threshold, they get little return (not no return but less than the other investors).   And if the project fails, they are last in line to get their money back on a liquidation (bank first, then the investors, then Paces).  Essentially, Paces has a "common" interest while the investors have a "preferred" interest.  Also Paces would typically guarantee the debt, while the "preferred" investors would not have to (I have not seen the bank financing documents, so I can't confirm they are guarantying the debt on this deal).  So they are taking a significantly larger share of the downside risk.  The trade-off is they get a disproportionate upside benefit for doing a great job with the project.

Q: Another question: with this kind of investment, is it possible to lose more than the total amount invested?

A: No, it is not possible to lose more than your investment.  THAT would be a scary proposition!

[Note: I was asking this question because I was wondering if (for example) the debt-financed part of the deal could create liability for the limited-partnership investors. I don't disbelieve the CrowdVested representative, but what would I have to do to verify? Ask the developer to look at the bank financing documents?]

bacchi

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Re: Real Estate "Crowdfunding"
« Reply #17 on: May 09, 2014, 11:42:51 AM »
Quote
A: If not enough money is raised by CrowdVested, the current plan is that other investors will make up the difference.  Nothing would change on the on the projected returns.

If this is such a solid deal, why don't the "other investors" pony up all the funds for it? A 12% return is fantastic.

Jack

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Re: Real Estate "Crowdfunding"
« Reply #18 on: May 10, 2014, 05:47:49 PM »
If this is such a solid deal, why don't the "other investors" pony up all the funds for it? A 12% return is fantastic.

Although I appreciate your sarcasm, I'm actually interested in this investment and am trying to do my due diligence. As such, I'd prefer substantive advice rather than witty quips. Thank you!

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #19 on: May 10, 2014, 05:50:50 PM »
If this is such a solid deal, why don't the "other investors" pony up all the funds for it? A 12% return is fantastic.

Although I appreciate your sarcasm, I'm actually interested in this investment and am trying to do my due diligence. As such, I'd prefer substantive advice rather than witty quips. Thank you!

I didn't read that as a sarcastic or witty quip, but genuine question.  Approach it as that, and ask yourself why they aren't.
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Jack

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Re: Real Estate "Crowdfunding"
« Reply #20 on: May 10, 2014, 07:53:02 PM »
I didn't read that as a sarcastic or witty quip, but genuine question.  Approach it as that, and ask yourself why they aren't.

Sorry, I had read that, along with S0VERE1GN's above assessment of it as "terrible" based solely on the fact that I put quotation marks around "crowdfunding" in the title and your post that it was "interesting" without elaboration, and started to get annoyed.

Maybe to you guys this is an obviously bad investment, but it isn't obvious to me (other than the lack of liquidity and diversification, but most real estate is equal or worse in that regard...) and I'm asking for help figuring it out.

If this is such a solid deal, why don't the "other investors" pony up all the funds for it? A 12% return is fantastic.

  • In large part, "other [normal real-estate] investors" are ponying up for it. Of the $1,275,000 in total LP equity, the crowdfunding goal is $250,000 (or just under 20%).
  • You could also turn the question around and say "why aren't all real-estate projects crowdfunded?" The answer to that, of course, is that the government only started allowing such a thing a few months ago so the choice didn't exist before. (In fact, in most states other than Georgia it's still not allowed because you have to be an "accredited investor" to participate!) The developer is merely experimenting with a brand new kind of investment, just as I would be if I went for the deal.

Money Stoic

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Re: Real Estate "Crowdfunding"
« Reply #21 on: May 10, 2014, 08:17:10 PM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

(Emphasis added.)

How did you evaluate the risk between these two investments?

To me investing in LC, at this point in time, is much less less risky than investing with GroundFloor (and I'm no fan of P2P lending.), for a number of reasons, primarily institutional risk.

GroundFloor is new, but offers 1st and mezzanine secured loans against real property. 

LC and Prosper offer a bill collector with a telephone.

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #22 on: May 10, 2014, 09:01:17 PM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

(Emphasis added.)

How did you evaluate the risk between these two investments?

To me investing in LC, at this point in time, is much less less risky than investing with GroundFloor (and I'm no fan of P2P lending.), for a number of reasons, primarily institutional risk.

GroundFloor is new, but offers 1st and mezzanine secured loans against real property. 

LC and Prosper offer a bill collector with a telephone.

I'm aware of the differences between the companies.

In other words, that didn't answer my question.  :)

How did you evaluate the risk between these two investments?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Jack

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Re: Real Estate "Crowdfunding"
« Reply #23 on: May 10, 2014, 09:42:20 PM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

(Emphasis added.)

How did you evaluate the risk between these two investments?

To me investing in LC, at this point in time, is much less less risky than investing with GroundFloor (and I'm no fan of P2P lending.), for a number of reasons, primarily institutional risk.

GroundFloor is new, but offers 1st and mezzanine secured loans against real property. 

LC and Prosper offer a bill collector with a telephone.

I've been looking at GroundFloor since you mentioned it, and both the company itself and the projects it invests in are considerably scarier, IMO, than the CrowdVested project I'm looking at.

Regarding the company, I notice two problems at first glance:
  • They seem to only allow out-of-state investors. Many of the projects are in metro Atlanta, but Georgians aren't allowed to invest in them despite the fact that state law allows it. Maybe it doesn't help with diversification, but if I'm investing in real estate I want to invest in an area I'm familiar with.
  • I see an obvious glaring inaccuracy in one of their listings, which makes me wonder about the accuracy of the rest of the information they present. (1315 Wylie St in "Folton, GA" doesn't exist. They really meant "Fulton County, Atlanta, GA" but even then they're wrong because that address is just over the county line in DeKalb)

Regarding the projects, know that I live in Atlanta, and am familiar with the areas those investments are in.

  • 1315 Wylie St is in a gentrifying neighborhood, and would probably be a decent investment (assuming the developer is decent too, of course).
  • 843 Joseph E Boone Blvd, on the other hand, is in a flat-out war zone. The project's description as being in the "dynamic Westside district" is almost a lie. Yes, that neighborhood is surrounded by awesome things like the aquarium and the Beltline, but the neighborhood itself is something like 50% vacant and completely crime-ridden. Once it starts to gentrify -- and it will, eventually -- it'll be an awesome investment, but it hasn't started yet. This project will end up just as foreclosed, boarded up and stripped of copper as it is now.
  • All the other metro Atlanta projects fall between the two previously mentioned. But the really scary part is that, just from the GroundFloor descriptions, there's no way to know. On the website blurb, the war zone property sounds better than the gentrifying neighborhood property! o_O

FYI, on "quality of location" the CrowdVested project I'm looking at slightly edges out GroundFloor's Wylie St project. I also like that CrowdVested is much more forthcoming with information about their projects (without having to create an account to see it).

(By the way, if anybody is interested in my help evaluating the other metro Atlanta projects on GroundFloor, send me a PM. I may be asking questions about a commercial real estate deal in this thread, but I think I have a decent understanding of single-family residential.)

Money Stoic

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Re: Real Estate "Crowdfunding"
« Reply #24 on: May 11, 2014, 07:10:57 AM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

(Emphasis added.)

How did you evaluate the risk between these two investments?

To me investing in LC, at this point in time, is much less less risky than investing with GroundFloor (and I'm no fan of P2P lending.), for a number of reasons, primarily institutional risk.

GroundFloor is new, but offers 1st and mezzanine secured loans against real property. 

LC and Prosper offer a bill collector with a telephone.

I'm aware of the differences between the companies.

In other words, that didn't answer my question.  :)

How did you evaluate the risk between these two investments?

I actually struck up an online conversation with the CEO of GroundFloor, found out his other start-up (Republic Wireless, which he was bought out of) is a great company (guy running the company...check).  Followed up with an 30 minute phone convo. 

I then looked different risk scenarios.  If loan defaults go up, what % of my investment dollars will be recovered?  With the real estate backed first position lien, it appears I could get 65 cents on the dollar back on default (estimate based on projected costs of foreclosing and reselling the property). 

On the unsecured loan, that number drops to below 20%. 

If you are looking for a numbers formula spreadsheet that shows x is risker than y right now, I don't have that.  But, as soon as Prosper or Lending Club hits a rough patch of borrowers defaulting  (again), will the crowd funding investor turn to the next best option, an investment secured with a lien on real property?  If the answer is yes, that is because it has a slightly less risk level. 

Money Stoic

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Re: Real Estate "Crowdfunding"
« Reply #25 on: May 11, 2014, 07:14:44 AM »
I have invested in a project with GroundFloor..

They secure your investment loan notes with a first position or mezzanine lien on the property. 

LendingClub and Prosper's unsecured loan were making me nervous.

(Emphasis added.)

How did you evaluate the risk between these two investments?

To me investing in LC, at this point in time, is much less less risky than investing with GroundFloor (and I'm no fan of P2P lending.), for a number of reasons, primarily institutional risk.

GroundFloor is new, but offers 1st and mezzanine secured loans against real property. 

LC and Prosper offer a bill collector with a telephone.

I've been looking at GroundFloor since you mentioned it, and both the company itself and the projects it invests in are considerably scarier, IMO, than the CrowdVested project I'm looking at.

Regarding the company, I notice two problems at first glance:
  • They seem to only allow out-of-state investors. Many of the projects are in metro Atlanta, but Georgians aren't allowed to invest in them despite the fact that state law allows it. Maybe it doesn't help with diversification, but if I'm investing in real estate I want to invest in an area I'm familiar with.
  • I see an obvious glaring inaccuracy in one of their listings, which makes me wonder about the accuracy of the rest of the information they present. (1315 Wylie St in "Folton, GA" doesn't exist. They really meant "Fulton County, Atlanta, GA" but even then they're wrong because that address is just over the county line in DeKalb)

Regarding the projects, know that I live in Atlanta, and am familiar with the areas those investments are in.

  • 1315 Wylie St is in a gentrifying neighborhood, and would probably be a decent investment (assuming the developer is decent too, of course).
  • 843 Joseph E Boone Blvd, on the other hand, is in a flat-out war zone. The project's description as being in the "dynamic Westside district" is almost a lie. Yes, that neighborhood is surrounded by awesome things like the aquarium and the Beltline, but the neighborhood itself is something like 50% vacant and completely crime-ridden. Once it starts to gentrify -- and it will, eventually -- it'll be an awesome investment, but it hasn't started yet. This project will end up just as foreclosed, boarded up and stripped of copper as it is now.
  • All the other metro Atlanta projects fall between the two previously mentioned. But the really scary part is that, just from the GroundFloor descriptions, there's no way to know. On the website blurb, the war zone property sounds better than the gentrifying neighborhood property! o_O

FYI, on "quality of location" the CrowdVested project I'm looking at slightly edges out GroundFloor's Wylie St project. I also like that CrowdVested is much more forthcoming with information about their projects (without having to create an account to see it).

(By the way, if anybody is interested in my help evaluating the other metro Atlanta projects on GroundFloor, send me a PM. I may be asking questions about a commercial real estate deal in this thread, but I think I have a decent understanding of single-family residential.)


I think you may have the Georgia investment backwards.  The GA investments are open to Georgians at the moment (and not outside unaccredited investors).  I am a Georgian actively investing in GroundFloor Georgia investment properties. 

Jack

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Re: Real Estate "Crowdfunding"
« Reply #26 on: May 11, 2014, 08:02:34 AM »
I think you may have the Georgia investment backwards.  The GA investments are open to Georgians at the moment (and not outside unaccredited investors).  I am a Georgian actively investing in GroundFloor Georgia investment properties.

Ah, okay, I see now: some of the Georgia projects are offered to Georgia investors, and some are not. The two I mentioned above are " Offered in MA, IL, AZ, VA" but (for example) 890 Custer Ave is "Offered in GA Only."

Right now, the "funded projects" in GA looked to have been open to GA investors. Two of the three "promoted projects" are (namely, the two in Woodstock, an exurb) but the other (in Washington Park, a Beltline neighborhood) isn't. None of the "new projects gaining momentum" are listed as offered in GA.

Maybe GroundFloor has decided they like out-of-state accredited investors better, and to change their business model accordingly?

(By the way, 890 Custer Ave is another listing with inaccuracies: it claims to be "located in East Atlanta between the popular areas of Grant Park, East Atlanta Village and Ormewood Park", but it's not "between" those popular areas, but rather about a mile south of them which makes a big difference. It's really in Custer/McDonough/Guice which is not as nice a neighborhood.)
« Last Edit: May 11, 2014, 08:06:55 AM by Jack »

arebelspy

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Re: Real Estate "Crowdfunding"
« Reply #27 on: May 11, 2014, 08:54:55 AM »
How did you evaluate the risk between these two investments?

I actually struck up an online conversation with the CEO of GroundFloor, found out his other start-up (Republic Wireless, which he was bought out of) is a great company (guy running the company...check).  Followed up with an 30 minute phone convo. 

I then looked different risk scenarios.  If loan defaults go up, what % of my investment dollars will be recovered?  With the real estate backed first position lien, it appears I could get 65 cents on the dollar back on default (estimate based on projected costs of foreclosing and reselling the property). 

On the unsecured loan, that number drops to below 20%. 

Neat. Thanks!
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AmericanEagle

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Re: Real Estate "Crowdfunding"
« Reply #28 on: May 26, 2014, 11:43:45 AM »
There's another site, www.fundrise.com, which crowdfunds real estate.  The intesting thing about Fundrise is they have some investments available for NON accredited investors, starting at $100.  Accredited investors can invest from anywhere.  Non-accredited is only for the Washington DC area (DC, MD, VA).

SDREMNGR

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Re: Real Estate "Crowdfunding"
« Reply #29 on: May 26, 2014, 02:40:21 PM »
They may hit their target numbers but I still think it's a less than stellar deal for 1 main reason.  You take most of the risk, they take most of the rewards.  I have done deals as the developing partner in commercial deals and we often had similar payout structures.  The developing partner would put in very minimal capital and all of the grunt work.  Then you can have some sort of up front initial returns to equity partners (8% in this case) and then split the rest.  Note that they split 90/10 until equity partners hit 8% which means the developing partner makes 0.88% return and then splits the rest 50/50.

I know that 12% sounds exciting but it's really not.  Because in case of less than that, the developers make a decent enough return on the transaction costs (I'm sure they pay themselves for management and acquisition/disposition commissions) and if they hit a home run, they make bank, and if they don't, they still make some money.

I personally would not invest in anything that I'm not getting 100% of the upside.  Too much risk otherwise.