Real Estate Crowdfunding Investment Ratings

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I am a member of a private email group that is realizing the potential of how I envisioned a due diligence website would help investors. The plan was accredited investors could share due diligence on crowdfunding deals and platforms. The hope was the wisdom of the crowd would point investors to the deals that had the best chance for success. Privacy, legal, and SEC challenges have made the public exchange of information all but impossible. Informational Crowdfunding websites have been threatened with lawsuits more times than you could possible imagine by crowdfunding platform and sponsors.

The good news is the private group model has been proven successful without the risk of lawsuits. The problem is this information is limited to our group and is not being shared with the accredited investing public. I hope to use this blog to divulge the consensus of the group about the potential of specific 506c investments without sharing the private due diligence that is uncovered.

Based solely on my opinion and my interpretation of the groups post, I will assign a value to each investment that is discussed in our group. I will use the following rating system:

5 – A “no brainer”. Very few concerns about the deal or the deals structure. Most investors in the group would invest if they had the capital. Less than 5% of the discussed deals have been 5’s.

4 - A very solid deal. A few issues/concerns are raised, but most the group believes the investment to be solid with a good risk/return structure.

3 - A solid deal but with issues with the structure or the sponsor that puts most investors on the fence. You should truly believe the sponsor’s story to pull the trigger at the stage of the market. We are late in the real estate cycle and a lot of solid deals on paper are being passed by the group because of timing.

2 - The consensus is this deal risk/reward structure is out of alignment for investors. Not necessarily a horrible deal, but with so many other investments in the market, why bother.

1 - Stay away. Run, don’t walk away from this investment. Due diligence uncovers something that most everyone agrees makes this a bad investment.

I have invested in “3”, “4” and “5” deals. Geographic and real estate class concentration in your personal portfolio will trump any rating system. It’s never a good idea to have too much concentration with any one sponsor, any geographic region or any investment class.

Another interpretation of my ratings:

5 - Heck Yes

4 - Yes

3 - Maybe

2 - No

1 - Heck No

Some of the 2016 deals discussed in the private group with my rating are below. RealtyMogul, RealtyShares and ifunding deals are not included because of SEC rules. However, most of these deals would have received a “2” rating if I could disclose. During 2016, I’ve made 20 crowdfunding investments. One was made with RealtyShares, zero with Realty Mogul, and zero with iFunding.

Project and/or Platform My Rating

CrowdStreet’s Virtua Addison 3

Lending Robot (Lending Club investment tool) 2

Rich Uncles REIT 3

YieldStreet 2

iFunding 1.5

RealCrowd’s Somerset Apts 2

CrowdSteeet’s Virtua 99th 2

CrowdStreet’s Virtua High Growth Fund II 4

MHC America Fund (mobile Home parks) 3.5

American Private Money Group 2

Alpha Flow Fund IV 4

RealCrowd’s San Dimas 3

RealCrowd’s MLG Fund II 5

RealCrowd’s Origins Fund II 3

Real Crowd O’Donnell Fund V 3

Atlas MIcro Hospital 5

SBRE Colonial Impact Fund II 3.5

Real Crowd’s BroadMark Funds 4

Patch of Land 2

CrowdSteet’s Intellistay Lima 3

LendingHome 2

CFX Markets 2

Real Crowd’s WCCG Mississippi Self Storage 1

Real Crowd Stratford Extended Stay 4

In the future, I will post my interpretation of our private discussion on live deals at Real Crowd, CrowdStreet and other 506C platforms. These ratings are just my opinion and I have no idea which investments will be successful and which will tank.  A "1" could outperform and a "5" could go bankrupt. I am not, nor do I represent myself as a financial advisor.

I like that OJ Simpson-style "I can't disclose my opinion of RealtyMogul or Realtyshares, but if I could, they'd both be a '2'."

I can express my opinion of  Realty Shares and Realty Mogul platforms, but not the investments on those platforms.  I would actually rank the platforms a little higher than a 2.  Now the legal council for some of the platforms, that number would be rather low. (negative)

Mark,

Thank you for cleaning up your rating. I read this thread on Friday and was very confused by your ratings. I look forward to reading your upcoming posts on your discussion results. Is your private group open to new members? If so, what are your criteria for acceptance?

@Mark Robertson that was a great thing u did. I asked crowdstreet about this offering (because they sent an email about this offering) and they said they are still getting some clarification about the fund.

@Mark Robertson why you think realcrowd somerset offering is "2"? What is that you see I missed? I felt that your risk is low because it's value add and the sponsor is coming with previous asset experience. 

Actually had it as a 3 in my notes. Pretty aggressive rent increases and company founded in 2015 were the notable negatives.

@Mark Robertson what happened to the first post of this? I saw your responded to my response but it said they removed it?

@Mark Robertson

This also brings up some interesting points

1) You seem to have liked and/or invested a lot in RealCrowd and CrowdStreet what is it you like about their offerings?

2) There seem to be a lot of funds and/or REITs there what do you like about these vs. investments in targeted assets? Don't you lose some flexibility? If you know what you are doing the fund would seem inferior to assets.

3) Did you invest in MHC directly? Are all investments without a platform listed direct? For MHC why did you choose direct vs the one that I think was advertised by a platform? 

4) A bunch of these are major firms with numerous offerings I have seen. I have always avoided these (except MHC which I like) because I figured scale is a double-edged sword as the bigger you are the more closely you track the overall niche and the harder it is to do right by your investors because the amounts are too large (easy to come out of pocket or take a hit on a $2MM multi, a lot harder on most of the stuff mentioned). Thoughts? 

@Charles Worth  BP deleted the first thread.... will leave it at that.

1. RC and CS are listing platforms and do not charge investor any fees.  They also seem to have more experienced sponsors than some of the 506b platforms. Most of the other platforms charge 1 to 2% a year in fees and sometimes other fees.

2. Investing in a fund is investing in a sponsor.  The key is finding sponsors will experience, low fees and a good track record.  Not a fan of Reits...too many fees.

3. Direct is usually better because the fees are often less. (not always though) I did invest direct,

4. Some truth to this, but if you find a niche or your own secret sauce, it can be repeated over and over.

I don't understand the attempt of using Crowdfunding as a source for REI. To me, the numbers just don't make sense.

Example: Assume the purchase price of 100k and we get 100 participants via CF, or 1k each. Whatever the profits might be down the road, each participant should get an equal share or 1% of the net profit. How is this worth the time, effort or the ROI?

@Jeff B. 20% IRR is 20%, no matter how much you invest. Most CF minimums for accredited investors are around $25k and the equity raise is in the millions. Some are as low as $10k, but there does come a time when you have to ask yourself is it worth doing the due diligence on small investments. In 2014 I did 45 CF investments. In 2016 I did less than 20, but invested more money for the year. Quality over quantity.

@Mark Robertson   Your numbers are fine, but don't address my example.  The profits / participants is a low return.

My point was I don't invest $1000 at a time and most CF platforms would not let you.  Your example is flawed and that's not how people use crowdfunding investing. 1% of a big project is just fine, 1% of a small one is not. As I said its not worth anyone's time to do Due diligence on a $1000 investment with hopes of making $10-$20 a month profit.

@Jeff B.

I have to agree with @Mark Robertson at least in part. Most people think they will get better returns on their own stuff and in some sense they are right because of a few things (not an exhaustive list but this is what I observe):

1) They don't pay themselves for time. If they did a big return would probably go down a little

2) They are dealing with small amounts. Dealing with sub $80K properties is really tough to scale without a lot of headaches (see point 1) so yes if you have $50K you can probably find a better return because its not something bigger folks want to be in. This is great if you have the time and the wish to do this but many either have larger amounts to invest or don't have time to deal with it vs. the money they can make otherwise. 

3) Flipping (the most immediately profitable for many)  is taxable most CF investments are shielded at least for a time. 

4) For more passive investments I think a lot of people don't take into account the full return. I think its really tough to find anything really doing 20% after taking into account all costs and fees. 

5) The risks on the right CF investment can be much lower again due to the asset class and the expertise that you get. As even a little time on BP I think shows the higher returning asset class is tough to manage (not enough margin for a good manager for instance and tough tenants), tough to get out of and risky since even $5K can tank your return. 

Course I think @Mark Robertson  that the 20% number can also be tough to really get. At least from what I can see most CF investments use optimistic numbers and much of this does not come from current numbers but from future projections. Maybe 2013 or even 2014 vintage but 2016 vintage I think many of these projections are a little optimistic but defendable in today's environment. Course if that changes (and I would argue when it does) that 20% goes up in smoke quickly.  

@Mark Robertson

Did they really have a secret sauce though? MHC I think did but the others? I am not trying to argue I am truly curious. Its something I have often thought about which is why I have kind of defaulted to those I know well and not invested much in others. 

Understood on the funds comment, same as above really curious here. To me, a sponsor esp. a large one needs to keep investing that is how they live and how they pay their fixed costs. So no matter what market they will keep investing. On the other hand I (and I think you) can not invest. If the market is too hot I would like to think I can just sit on my hands (course thats easier said than done). I have seen lots of funds have this problem in other markets and a number of very good managers who have told me this is one of their biggest problems as fund managers. its a very hard problem because no one pays you to hold cash but don't hold cash and you could lose money. By investing asset by asset I can kind of tell at least a little when the investment is better. 

Any interesting niches you are exploring now? I personally have done some more unusual stuff like an oil deal as it seems many of the good stuff has gone away. 

Originally posted by @Charles Worth :

....

Any interesting niches you are exploring now? I personally have done some more unusual stuff like an oil deal as it seems many of the good stuff has gone away. 

oh boy.....

It is late in the cycle to just throw money around. My last few investments have been on the alternative side:

Vulture fund that rescues DST and TIC's

Got in on a fund as it closed to investors that had 30%  of it assets purchased 2014 and earlier and had substantial built in gain.

A ground up micro hospital with impressive personal guarantees and collaterals with a fantastic track record.

An industrial fund, I have very little exposure to industrial and it seems to be an asset class that was late to turn around

Fund that purchases mortgages at 30-50% of face and sales them to seminar real estate "students" at their note school.

an extended stay hotel that's throwing off 19% cash on cash in year one

@Charles Worth  Is your oil deal 270 wells, 3 hours south of Midland, TX?

@Mark Robertson

Yes I did the first one where the oil prices were at a low.  I am not as hot on this one but think its decent so I put a small allocation. I also really liked the structure itself, very investor freindly. What are your thoughts on it? 

I have been looking at industrial. A lot of interesting applications for that stuff in the future in my opinion and very few focus on it. 

Where are you sourcing the more unsual stuff from?

Hospital was direct from a sponsor that I invested with on RealCrowd in 2014 not 506c so no Adv allowed

The TIC/DST fund is Virtua on CS O'Donnell is the Industrail on RC and CS

The Mortgage on is Colonial on SBRE  

The Closed fund with old was a sponsor from RC in 2014 (fund 1 assets from 2014 are in the fund 2 that closed in 2016)

As far as oil goes, I've been burned by it from other sponsors in 2009 and 2010 and learned my lesson.  Ask around from investors that have passively invested with O&G...everyone I talked to has lost money over the years.  These new one may be different, but I will not find out personally. There are many, many layers of fees in the extraction and transportation and estimates about future BPD are often way off.

@Charles Worth Mark R couldn't have said it better.  I hope I am wrong about it too, but I don't see syndicated oil&gas deals as something good for the investor.  High risk, low return (yes, mainly because of the fees and other costs rarely shown in PPMs)

@Mark K. I would agree I think are def more good deals in other sectors and a lot of the O&G stuff is as you described but I did not see the high fees and other problems here, at least not anymore than mutli-family and other stuff I have looked at. maybe Mark saw something I did not.  Returns were also good (even at 0 leverage) but that had a lot to do with costs that were very low and a higher than typical split. All-in-all I have done some work in the sector so its not like I went in blind and the first deal at least was at very low oil prices and a big discount because oil was at ~$30 at the time. 

Certainly willing to admit I could be wrong though. 

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