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The Ultimate Guide to Real Estate Crowdfunding

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By now, most people have heard of Real Estate Crowdfunding, but how exactly does it work? 4+ years after Obama signed the JOBS Act, which essentially opened the lane for Real Estate Crowdfunding to exist, and there are over 150 companies competing to get ahead in the industry.

In this thorough guide to Real Estate Crowdfunding we take a look at how investments work, pertinent rules and regulations, current players in the industry, and more.

Publicado en: Sector inmobiliario
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The Ultimate Guide to Real Estate Crowdfunding

  1. 1. THE ULTIMATE GUIDE: REAL ESTATE CROWDFUNDING Steven Lo | Marketing Manager | www.pyleloans.com
  2. 2. 1. WHAT IS REAL ESTATE CROWDFUNDING? 2. HOW DOES REAL ESTATE CROWDFUNDING WORK? 3. INVESTMENTTYPES 4. WHY ISTHIS A GROWING INDUSTRY? 5. RULES AND REGULATIONS 6. PLAYERS 7. PYLE OUTLINE
  3. 3. 1.WHAT IS REAL ESTATE CROWDFUNDING?
  4. 4. PROBLEM #1 Developers/Borrowers don’t have access to quick/adequate capital.
  5. 5. PROBLEM #2 Most people have little/no access to real estate investments.
  6. 6. SOLUTION Real Estate Crowdfunding (“RECF”)
  7. 7. RECF connects developers and investors online. Developer/ Borrower RECF platformInvestors
  8. 8. Through RECF platforms…
  9. 9. Developers/Borrowers get the funding they need… …and the crowd gets to invest in real estate deals they normally wouldn’t have access to.
  10. 10. 2. HOW DOES REAL ESTATE CROWDFUNDING WORK?
  11. 11. Meet John. John fixes & flips houses for a living.
  12. 12. John finds a new home to fix and flip. The purchase price is $5MM.
  13. 13. John puts up 10% of his own money.
  14. 14. The bank agrees to finance 60%.
  15. 15. Who will finance the remaining 30%?
  16. 16. ENTER RECF.
  17. 17. John is going to source the remaining 30% from “the crowd” via a RECF platform.
  18. 18. Through a RECF platform, John offers investors the opportunity to finance the remaining 30% ($1.5MM) of his project.* *The picture above is taken from patchofland.com.
  19. 19. Who are these investors?
  20. 20. They’re people who want to make passive income but who did not previously have the opportunity to participate in real estate deals. (Minimum investments typically start at $5000.)
  21. 21. Through the RECF platform, these investors create online accounts and invest from the comfort of their homes.
  22. 22. After Day 1, investors collectively fund $800K of the $1.5MM. 0 $1.5MM
  23. 23. By Day 5, more investors have joined and $1.3MM of the $1.5MM is funded. 0 $1.5MM
  24. 24. By Day 9, even more investors have joined and the full $1.5MM is funded! 0 $1.5MM
  25. 25. John uses the proceeds to buy, fix, and flip the home.
  26. 26. The investors earn monthly interest.
  27. 27. 1 year later, John sells the house, and repays the bank.Then he repays the RECF investors’ principal and accrued interest (if any).
  28. 28. Whatever’s left is John’s profit.
  29. 29. 3. INVESTMENTTYPES
  30. 30. DEBT EQUITY Invest in exchange for shares Invest in exchange for fixed returns INVESTMENT
 TYPE RISK POTENTIAL
 RETURN RETURN
 TYPE Dividend Upside when property sellsFixed interest income
  31. 31. Lending money to a borrower at a stated interest rate.The investor gets monthly (or quarterly) interest payments and a return of principal at maturity. DEBT CROWDFUNDING
  32. 32. Investing in exchange for a stake in the subject property. Investors share in the rental income that the property generates.Additionally, they share in the upside if/when the property sells. EQUITY CROWDFUNDING
  33. 33. CAPITAL STACK Common Equity Senior Debt Risk Level H L Senior Debt - gets paid first. RECF debt deals usually occur here (1st liens). 
 Mezzanine - gets paid second. Sometimes RECF debt deals occur here (2nd liens), positionally behind the bank. Preferred Equity - gets paid third. RECF equity deals usually occur here (gets paid before the Developer). Common Equity - gets paid fourth. Sometimes RECF deals occur here, but the risk is very high. Mezzanine Preferred Equity
  34. 34. The RECF platform funds a deal, then sells the investment on its website for the crowd to buy into. PRE-FUNDING
  35. 35. PRE-FUNDING (CONT’D) STEP 1 STEP 2 1. RECF platform pre-funds the Borrower $1MM. 2. RECF platform sells the $1MM loan to the crowd.
  36. 36. PRE-FUNDING (CONT’D) STEP 3 3.The crowd invests $1MM into the deal, and the RECF platform recoups its capital. STEP 4 4. RECF platform pre-funds another Borrower, and the process starts over.
  37. 37. Pre-funding allows Borrower to get capital immediately without having to wait for the crowd’s investment. PRE-FUNDING (CONT’D)
  38. 38. Pre-funding also allows Investor to feel safer because RECF company has “skin in the game.” If the investment isn’t fully fund by the crowd, the platform is stuck with the loan, forcing it underwrite well in the beginning. PRE-FUNDING (CONT’D)
  39. 39. The RECF platform acts only a conduit to connect Borrower and Investor. NON PRE-FUNDING
  40. 40. NON PRE-FUNDING (CONT’D) STEP 1 STEP 2 1. Borrower asks for $1MM. RECF platform puts $1MM investment opportunity on website. 2.The crowd starts investing in the deal.
  41. 41. NON PRE-FUNDING (CONT’D) STEP 3 4. RECF platform releases the $1MM to the Borrower. 0 $1MM STEP 4 3. RECF platform waits for the $1MM investment to be fully funded.
  42. 42. Since the RECF platform puts up no money, they bear no risk. Moreover, since there’s no pre-funding, the Borrower must wait until the investment is fully funded on the platform before obtaining the capital. NON PRE-FUNDING (CONT’D)
  43. 43. RECF investments are illiquid. Once you’ve invested into a RECF deal, you typically can’t pull your money out until the stated term is up. Some RECF platforms allow investors to redeem their capital, but at a penalty. LIQUIDITY
  44. 44. 4.WHY ISTHIS A GROWING INDUSTRY?
  45. 45. 1.The Jumpstart Our Business Startups Act
  46. 46. In 2012, Obama signed into law the Jumpstart Our Business Startups (JOBS) Act.
  47. 47. Part of the law essentially recognized investment crowdfunding as a legitimate vehicle to sell securities to the general public.
  48. 48. 2. Banking Inefficiencies
  49. 49. The banks are notoriously slow. After the 2008 crash, they became even slower/more heavily regulated.
  50. 50. People who should have no problem raising capital suddenly found themselves left out in the cold.
  51. 51. RECF offers developers/borrowers speed and convenience at reasonable rates. From the date of application, a developer/ borrower can get the capital he needs in 7-14 days.
  52. 52. From the investor side, more and more people are second- guessing the necessity of banks beyond holding deposits— all thanks to the internet.
  53. 53. <1% has become the new “norm” for investors.
  54. 54. RECF, on the other hand, offers investors 7 -16% annual percentage rate (APR).
  55. 55. Add up the JOBS Act and bank inefficiencies on both sides, and the result is this…
  56. 56. In 2016, over $3.5 billion was raised through RECF platforms. That number is only projected to increase year by year.
  57. 57. 5. RULES AND REGULATIONS
  58. 58. When a RECF company offers a new security on its platform, it does so through one of 3 SEC rules: A) Rule 506(c): Crowdfunding to accredited investors B) RegA+: Crowdfunding up to $50MM per year C) Title III: Crowdfunding to accredited and non-accredited investors
  59. 59. Allows a sponsor to offer debt or equity securities to accredited investors. 506(C)
  60. 60. • If single, $200K annual income • If married, $300K annual income (joint) OR • $1MM net worth excluding place of residence ACCREDITED INVESTOR
  61. 61. Allows a sponsor to sell up to $50MM per year of a security to both accredited and non-accredited investors. Before the change, the limit was $5MM. The sponsor must first file a formal prospectus with the SEC and get approval before marketing takes place. REG A+
  62. 62. Allows a sponsor to issue securities, up to $1MM per year, to both accredited and non-accredited investors. Sponsor does not need to file a prospectus with the SEC, but must include certain disclosures about the company in its offering memorandum. TITLE III
  63. 63. 6. PLAYERS
  64. 64. Some players in the industry right now…
  65. 65. RealtyShares concentrates on smaller investments, like single- family house flips, rather than on large apartment buildings and commercial investments.
  66. 66. Realty Mogul recently introduced a REIT called MogulREIT I. No accreditation is needed and the investment minimum is lower ($2500) than that on other RECF platforms.The REIT has an annual fee of 3%.
  67. 67. Deals made on PeerStreet are all debt-based.The deals are put together by “originators” who represent the principal party in the transaction. Sometimes they invest alongside the crowd, which can make the crowd feel safer knowing someone else has “skin in the game.”
  68. 68. Patch of Land’s pre-funds all deals before offering them to investors. This allows the Borrower (usually fix and flippers) to move ahead with rehab immediately. Moreover, investors feel confident knowing POL bears risk if the investment isn’t fully funded by the crowd.
  69. 69. Fundrise offers eREITs only on its platform.The crowd is investing into a group of real estate projects—a mix of debt and equity offerings. Fundrise charges a 1% annual asset management fee.
  70. 70. Realty Shares Realty Mogul Peer Street Patch of Land Fundrise Property Type Res & Com Com & REIT Res Res Com & REIT Investment Type Debt & Equity Debt & Equity Debt Debt & Equity Debt & Equity Investor Type Accredited Both Accredited Accredited Both Minimum Investment $5000 $1000 $1000 $5000 $1000 Investor Fees 1-2% of annual investment amount 1-2% of annual return 0.25-1% spread per investment; charged only when investor gets paid 1-2% of interest distributions 1% of annual investment amount
  71. 71. 7. PYLE
  72. 72. Private Online Lender PYLE PHASES RECF platform Where We Are Now
  73. 73. PHASE 1: PYLELOANS.COM
  74. 74. Our niche is short-term, interest-only, real estate-backed loans.
  75. 75. In Phase 1, we’re focusing on 2 things: 1) Attracting qualified borrowers/developers 2) Transforming an inefficient lending system through a streamlined application/common-sense underwriting approach
  76. 76. We’re now in the process of funding and closing a plethora of deals.
  77. 77. We plan to open our platform up to investors in the latter half of 2017.
  78. 78. www.pyleloans.com VISIT US!

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