THE ULTIMATE GUIDE:REAL ESTATE
CROWDFUNDINGLawrence Lo | Founder & CEO | www.pyleloans.com
1. WHAT IS REAL ESTATE CROWDFUNDING?2. HOW DOES REAL ESTATE CROWDFUNDING WORK?3. INVESTMENT TYPES4. WHY IS THIS A GROWING INDUSTRY?5. RULES AND REGULATIONS6. PLAYERS7. PYLE
OUTLINE
Developers/Borrowers get the funding they need…
…and the crowd gets to invest in real estate deals they normally wouldn’t have access to.
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.
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.)
Through the RECF platform, these investors create online accounts and invest from the comfort of their homes.
1 year later, John sells the house, and repays the bank. Then he repays the RECF investors’ principal and accrued interest (if any).
DEBT EQUITY
Invest in exchange for sharesInvest in exchange for fixed returns
INVESTMENTTYPE
RISK
POTENTIALRETURN
RETURNTYPE
DividendUpside when property sellsFixed interest income
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
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
CAPITAL STACK
Common Equity
Senior Debt
RiskLevel
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
The RECF platform funds a deal, then sells the investment on its website for the crowd to buy into.
PRE-FUNDING
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.
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.
Pre-funding allows Borrower to get capital immediately without having to wait for the crowd’s
investment.
PRE-FUNDING (CONT’D)
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)
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.
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.
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)
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
Part of the law essentially recognized investment crowdfunding as a legitimate vehicle to sell securities
to the general public.
The banks are notoriously slow.
After the 2008 crash, they became even slower/more heavily regulated.
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.
From the investor side, more and more people are second-guessing the necessity of banks beyond holding deposits—
all thanks to the internet.
In 2016, over $3.5 billion was raised through RECF platforms. That number is only projected to increase year by year.
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 investorsB) RegA+: Crowdfunding up to $50MM per yearC) Title III: Crowdfunding to accredited and non-accredited investors
• If single, $200K annual income• If married, $300K annual income (joint)
OR
• $1MM net worth excluding place of residence
ACCREDITED INVESTOR
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+
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
RealtyShares concentrates on smaller investments, like single-family house flips, rather than on large apartment buildings
and commercial investments.
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%.
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.”
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.
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.
Realty Shares
Realty Mogul
Peer Street
Patch of Land Fundrise
PropertyType
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
amount1-2% of annual
return0.25-1% spread per
investment; charged only when investor gets paid
1-2% of interest distributions
1% of annual investment amount
In Phase 1, we’re focusing on 2 things:
1) Attracting qualified borrowers/developers2) Transforming an inefficient lending system through a
streamlined application/common-sense underwriting approach