When the JOBS Act was signed into law nearly two years ago, it was supposed to change the way everyday individuals accessed investment opportunities – and the way investment opportunities accessed individuals’ wallets. Many expected that the most likely beneficiary of the rule change would be technology startups who would now have an entirely new pool of potential backers. But another more traditional investment category has proven to be the favorite among newly-empowered everyday investors looking to pool their cash in search of healthy returns: Real estate.
The biggest player by nearly any measure in the real estate equity crowdfunding space is Los Angeles-based Realty Mogul. The now one-year-old company has completed 58 deals in 14 states totaling $104 million in property value, according to founder and CEO Jilliene Helman. In sum, Realty Mogul raised $14.6 million in crowdfunded equity from over 7,000 accredited investors since raising its first dollar in March 2013.
Today Realty Mogul announced the close of a $9 million Series A round of funding led by Canaan Partners. The round marks the largest financing by an pure equity crowdfunding company (AngelList and SecondMarket being tangential to the category). It’s also among the largest Series A rounds ever raised by a female founder, in any category.
So how does one explain real estate’s dominance of equity crowdfunding? In part, it’s because people with high net worth have invested in property for centuries and are generally more familiar with the ins and outs of the category. Real estate is a tangible asset that doesn’t require a particular academic degree or industry experience to grasp. Proverbial doctors and dentists can grok the basics and make relatively informed decisions about an investment transaction, something that is hardly the case when it comes to evaluating nascent technology startups.
For Realty Mogul, the key to success has been threefold, according to Helman: proprietary and heavily curated dealflow, subject to strict underwriting standards; a category-leading technology platform and user interface; and white glove customer service.
“Our investors love us because they’ve never had access to these kinds of high quality, off-market real estate assets,” Helman says. “You’d be surprised how sophisticated many of our investors are. Sponsors love us because we write them one check and they only have to deal with us as investment managers. We’ve become their capital markets arm.”
The company has also been able to secure a wide variety of deal-types for its investors. To date, 35 percent of its deals have been in the retail sector, 24 percent residential, 19 percent multi-family, 10 percent mobile homes, 7 percent self-storage, and 5 percent hospitality, according to the publicly available Realty Mogul statistics dashboard. Even more noteworthy, the company has further split its investments into 69 percent equity and 31 percent debt (loans). In nearly every deal, Realty Mogul targets cash-flowing real estate and passes through these proceeds to individual investors.
In nearly all cases Realty Mogul partners with other institutional investors like family offices and private equity firms. In that way, its stake in most deals are small, with the company writing checks between six- and seven-figures. But, as the platform grows, Helman is ratcheting up her deal size as well. “We’re looking at a $50 million dollar deal right now,” she tells me.
Realty Mogul collects a commission on funds raised – Helman wouldn’t disclose the size of this commission, but industry standard is low, single-digit percentages – and also charges its investors 1 percent per year to manage investments on the behalf (this is not optional).
Helman describes her ultimate vision as building “the E*TRADE for real estate.” This means not only becoming the definitive self-service investment platform for the $11 trillion commercial real estate investment category, but also offering users best-in-class tools like portfolio management and market analysis. The company already allows investors to browse investments, conduct due diligence, and invest entirely online, and then track the performance of their investments in real-time through an online dashboard.
Helman’s goal may be ambitious, but it’s one that seems inevitable for some company to achieve. Whether Realty Mogul is the one to pull it off will depend largely on execution and also a bit of luck. The crowdfunding revolution is still in its early days and it’s no sure thing that the ultimate winner will be a first-generation platform – the fast-follower model exists for a reason, after all.
“I look at this category a lot like the big banks and Lending Club – which was another of Canan’s investments,” Helman says. “In the beginning banks didn’t take them seriously. Now that they’ve put out billions of dollars in loans, banks are waking up, but it’s too late for them to compete.”
Canan Partners principal Hrach Simonian echoes this sentiment, saying, “Realty Mogul will be the next disruption in a massive asset class just like Lending Club has been for the consumer credit market.”
For Helman, most people look at the crowdfunding category and misunderstand the value.
“People like to say that crowdfunding is democratization of access to capital. No, it’s democratization of access deal flow.”
[Image via seishin17, Flickr]
- Realty MogulAccredited crowdfunding for real estate
Realty Mogul is a marketplace for accredited investors to pool money online and buy shares of pre-vetted investment properties like apartment buildings, office buildings and retail centers.
Realty Mogul is crowdfunding for real estate.