There are few verticals in which a dedicated equity crowdfunding platform is warranted. In most cases there is both insufficient demand and not enough differentiation required to justify the fragmentation. Real estate seems like a category where it is well justified. While betting on internet startups and independent films is typically not a wise move for everyday investors, real estate is approachable and has made countless doctors, lawyers, and executives truly wealthy. At the same time, regulatory elements and ongoing operational requirements dictate that real estate crowdfunding be handled differently.
Today, real estate equity crowdfunding platform Realty Mogul is launching out of private beta and announcement $500,000 of seed financing from angel investors including Gust CEO David S. Rose, Zillow board member Gordon Stephenson, and serial entrepreneur and Sky Kruse. The company completed its first crowdfunded transaction, raising a 10% secured loan of $110,000 from a fraction of its 200 accredited investor beta users toward a co-investment with AH Capital to purchase and rehab a duplex in Los Angeles.
This initial transaction is just a single example of the types of deals that Realty Mogul plans to offer. The platform will feature a combination of debt and equity investment opportunities in a variety of property types in multiple states. Initially, the Los Angeles startup with Seattle roots – via its time in Microsoft’s Techstars accelerator – will feature projects in California and Washington.
The key to the Realty Mogul model is that it will alway invest alongside established real estate companies which will act as the managing member in each transaction. In addition to AH Capital, the startup is already working with multiple other preferred investment partners and anticipates completing two other pending transactions in short order, including one in LA with Arenda Capital, a firm with more than $2 billion in combined transactions completed.
Realty Mogul will conduct due diligence on each transaction proposed by its investment partners and share the results with its members. From there, the individual investor assumes all responsibility for their investment decision.
Realty Mogul was founded by real estate and financial services veterans Justin Hughes and Jilliene Helman as an attempt to leverage the power of collaborative consumption – in fact, the initial name for the company was “Real Estate with Friends.” The underlying idea is that, for a minimum $5,000 investment, accredited investors can pool their resources and get access to larger and more exclusive transactions then are typically available to the general public.
The startup is neither a real estate broker nor a securities broker dealer meaning it can’t collect commissions on investment transactions. Instead, the company makes its income on loan spreads, in the case of its debt offerings, and on posting and reporting fees associated with equity investments.
In addition to its initial 200 beta users and investors, Realty Mogul has a waiting list of over 1,000 applicants. Beyond that, the company plans to attract additional investors initially through its relationships with Gust, which has more than 40,000 angel investor members, Zillow, TechStars, Microsoft, and others. As for attracting properties, when established real estate investors see the model working and the cash flowing in, expect there to be a line around the block.
There remain significant challenges with Realty Mogul’s model, however. As with all investments, crowdfunded or otherwise, there is always the risk of loss. Weathering the inevitable bad deal will present a real challenge to concept. Second, due to the LLC structure used to fund each investment, investors are positioned as Limited Partners and have little say or control over how each property is managed, whether additional investment is made, and when it’s sold.
The real estate crowdfunding platform will have to compete for accredited investor dollars with dozens of other larger and more well-known alternative investment channels, including AngelList, SecondMarket, CrowdFunder, Gust, and others, as well as real estate competitor Fundrise.
There are a number of features that Realty Mogul could add to enhance its product. If the platform grows big enough, Realty Mogul would be well served to provide an internal liquidity marketplace to allow investors to enter and exit existing deals. Similarly, the company would be wise to incorporate a virtual data room for managing and sharing transaction due diligence documents, as well as a forum or captive social network for communicating with investors.
Real estate investing is a proven path to wealth and is not going anywhere soon. Crowdfunding may be a new twist on the opportunity and one that will require an adjustment period from both individual investors and real estate professionals. That said, Realty Mogul has built an attractive model that should be well received by sophisticated and aspirational investors alike. There will surely be bumps in the road, but this is an idea that makes sense.