RealtyShares, a San Francisco-based startup, is a real estate crowdfunding platform that offers debt and equity investments for apartment buildings, office buildings, malls and so on.
As recent as August, this crowdfunding company was named a “hot startup” by Inc. Magazine.
Since its 2013 inception, Realtyshares says it’s raised more than $870M for more than 1,160 real estate projects. Investors far and wide, left and right, were pouring money into the platform.
Had investors like…
And now, in November?
The very same startup announced it has stopped taking new investments, that it’s laying off most of its employees.
Why? Because they were unable to secure more operating capital.
The easy story to tell here is that real estate crowdfunding—an industry disruptor democratizing access to institutional real estate assets—is little more than fad—much like the whispers around crypto.
At the time, then-CEO Nav Athwal (who since left in November 2017) said they had over 120k users on the platform and wanted to “diversify in real estate in a way that hasn’t been possible before.”
At the time, Tyler Christenson, managing director at Cross Creek Advisors, who led the funding round, was super bullish with the boilerplate and jargon out in full force.
“RealtyShares is positioned to become the leading marketplace for sub-institutional debt and equity commercial real estate investment,” he said.
“These commercial investment opportunities in multifamily, retail, industrial, and office properties have historically been limited to large institutions, and RealtyShares has been able to break down many of the barriers investors have faced.”
Now? No more deals. And mass layoffs ahead.
$870M? $105M? $28M? What does it all mean?!
In 2017, when the round closed, Athwal said they had deployed $500M across deals. As of November, Realtyshares says that number’s $870M—a 74% jump in deal flow.
Now, just for clarity, taking investments for deals on the platforms vs. taking investments operating capital are two entirely different things.
As we’ve covered around here, startups raise capital for the purpose of increasing valuations, offering early investors (who take bigger risk by going in early) juicy exit strategies.
For Uber, back in 2014, when it was “just” worth $17B, early investors made 2,000x return their initial investment. Four years later, Uber’s now rumored to go public at $120B. You do the math on that one.
How does this tie into Realtyshares?
Good question. Here’s how.
You see, with each funding round—Series A, Series B, Series C (hey, can the WealthLAB finance team get on a “Funding Rounds, Explained” piece soon?!), Series D, etc.—startups hope to increase the valuation of the enterprise.
No. Real estate crowdfunding is basically pseudo-private/kinda-sorta public syndication of deals—a practice that’s existed forever.
Deals will continue to get syndicated, money will continue to pool, and this will happen offline, online, in whatever line. It’s one of the hottest asset classes for pension funds to protect against inflation, for instance.
You got $870M worth of deals. You raised over $105M. Where did the money go?
Important point to underscore: The capital invested into Realtyshares, Inc. is to run and scale the business.
These investors are totally separate from the investors in the real estate offered on the platform. In addition, the $870M is deal volume.
In theory, the deals you invest in on Realtyshares may be for a fraction of the equity in the total deal. Which then is leveraged with debt. (Mortgage. A loan.)
Like, here’s an example: Deal costs $100M. Down payment is $10M. Realtyshares has a $1M equity offering in said deal; 100 investors invested $10k in that deal. Total deal is technically $100M.
Doesn’t mean that Realtyshares actually had $100M between their hands. Their operating cash comes from that $105M+.
The “transition will have no impact on the underlying real estate investments,” Realtyshares said in same note. In other words, for the crowdfunding investors in the assets listed on Realtyshares, it’s business as usual.
Go ahead. Celebrate. Do a lil’ dance. You still got your money.
So why the smoke?
So the $105.6M? Where did it go? Yeah, here comes the bad news…
RealtyShares makes money when investors invest into the real estate deals on their platform.
In essence, Realtyshares snags a commission at the time of the investment and also over time, designed to be lower than the industry average.
Hence the disruption.
So, most likely, Realtyshares—whose disruptive business model offered investment access at lower fees than its private equity and asset management competitors, just to reiterate—found it couldn’t sustain the growth with its current business model.
When companies plateau…
This is obviously speculation on our behalf, but let’s use this entirely hypothetical example as an illustration.
You have a business that charges a $10 commission of each sale of hardware. Based on the market size, you can reasonably expect to do 100,000 sales every year.
Total market is 1M sales a year. In theory, you have another 90% of the market to get a piece of. But in reality, your plateau comes at 125k sales every year.
Your ceiling, in other words, is $1.25M in revenue every year.
Now, if you’ve raised money with the intention of increasing the value—again, this is a general example, not specific to Realtyshares—and you hit a ceiling in terms of revenue…
There’s only so much upside to justify a valuation to investors before they say…
Is that what happened here?
Who knows? Could be. Looks like it.
It’s what happen to a lot of them. They raise tons of cash, accelerate the growth, grow too fast, and then they die.
In fact, “premature scaling” at one point was (and still may be) the No. 1 startup killer. This basically means when a company grows too fast for its own good,
Or as internet entrepreneur and New York Times bestseller Neil Patel put it:
If you gain more funding than your business warrants at its specific stage, it can produce undesirable side effects. In essence, it can cause you to expand your operations beyond what is manageable. This is premature scaling in its most common and nefarious form, and it is going to destroy your startup.
Back to real estate crowdfunding.
So what’s the rest of the industry saying? Why the sudden Realtyshares collapse?
CEO of Crowdstreet Tore Steen says the Realtyshares situation isn’t an indicator of health or longevity in the industry.
“It’s actually an indicator that the industry is maturing,” Steen says. “In an industry like this—crowdfunding of commercial real estate—you’re going to have certain business models that survive and certain ones that might not.”
Co-founder of competitor EquityMultiple Charles Clinton agreed, saying head count is to blame.
“I think you’ve seen some of the platforms that have managed headcount and spending a bit more judiciously are maybe a bit better situated for the next couple of years of growth,” Clinton told NREI.
And in the meantime?
It’ll create a “temporary crisis for people,” but that the industry will get past this pretty easily, Clinton said. “We’re still in the very early innings of total growth.”
So you just sold one of your stock or bond investments and now you’re about to get crushed with capital gains taxes, right?
You see, you still have options to defer or even completely eliminate those taxes using a new loophole in the system.
Let me explain.
Opportunity Fund Investing is a newly-minted tax-advantaged method of investing in real estate that will accessible to individual investors, not just institutional capital.
What are opportunity funds?
Opportunity Funds are a new tax -advantaged investment vehicles created as part of the Tax Cuts & Jobs Act of 2017.
The concept was introduced as part of the Investing in Opportunity Act – a bipartisan bill that was included alongside the broader tax bill -but has received far less attention until now.
The goal is to help spur greater private-sector investment in targeted communities across the country called Opportunity Zones.
What are opportunity zones?
Opportunity Zones are designated census tracts selected by the state and federal governments for economic development.
Opportunity zones can be found in every state and in urban, suburban and rural areas. These are areas that have historically been passed over by investment capital, and meet certain qualifications with respect to poverty levels and/or sub-median income levels.
Qualifying census tracts must meet a minimum threshold of its population living below the poverty line, and/or a max average income of 80% area median income.
This hardly means, however, that these areas should be unappealing to investors.
Many of the opportunity zones already established are centrally-located infill neighborhoods in thriving metros that, while less affluent than their cities overall, already exhibit signs of economic vibrance and should continue to develop alongside the broader metro.
Market fundamentals already support investments in many of these census tracts. This new system of tax incentives should make such investments all the more compelling.
Why invest in opportunity funds?
Qualifying investments offer three unique and compelling tax advantages – investors can defer paying federal capital gains from recently sold investments until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on their Opportunity Fund investment if held for 10+ years.
Opportunity Fund investing also offers the chance to have material impact on the well-being of under-resourced communities.
This presents the opportunity for individual investors to include real estate in their portfolio of “triple-bottom-line” investments – those that not only yield compelling returns, but also yield positive social impact.
Even if you’re only concerned with net returns, however, the tax advantages alone should pique your interest.
What kind of gains are eligible for tax deferral?
Investors may defer capital gains tax on any recently sold investment – including the sale of stocks, bonds or real estate – so long as those gains are rolled over into an Opportunity Fund investment within 180 days of sale.
Simply put, this new program for tax-advantaged investing is a sea-change in how investors are able to reduce capital gains tax, and carries the potential of funneling huge volumes of capital to communities across the country that need more affordable housing and more efficient access to equity for small business.
If done well and with proper oversight and guidance from the Treasury Department, this may truly create win-win-win investments across the country.
Many markets in the U.S. are suffering from an acute affordable housing shortage.
This exciting new program affords individual investors the chance to invest in the revitalization of neighborhoods across the country, while potentially earning very compelling after-tax returns.
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At trillions of dollars, it’s no secret that the real estate market has been one of primary resources for the world’s wealthy to pad their accounts.
But contrary to popular opinion, real estate is still a desirable asset class for entrepreneurs with smaller bank accounts. Here are five ways to fund your first real estate investment—even if you’re low on cash.
1. Know Your Numbers
Remember, while property values fluctuate, your rental income is locked into a leasing agreement—and so is your valuation.
That means, as long as the numbers work, the market can do what it wants. Asset-based lenders (B2R Finance is one) lend primarily on the cash flow of the property, rather than personal income like more traditional lenders.
For instance: If you have a lead on a four-family property that’s fully leased and cash-flowing, you can finance up to 80% of the property’s value.
Or translated in layman’s speak: You don’t really need a credit score or a great job to get financing.
If you’re looking to garner the benefits from real estate investments without the hiccups related to the market’s expenses, real estate crowdfunding platforms are a great way to lock in your investment.
Apart from perks like hedging your money against inflation or high interest rates, real estate crowdfunding comes packed with some major tax benefits. Here are five platforms that generate around 8% average returns annually:
With assets worth over $1.4 billion to their credit, Fundrise has channeled investments into construction homes and loans, office buildings, and multifamily developments, amongst others. An investor can expect dividend yields that average 8% for an annual fee that varies between 0.15-1%.
The platform is tailored largely for the social conscious and impact investors. It invests in projects that include green buildings, eco-friendly materials, and affordable housing. One factor that differentiates Small Change from other platforms is its no-fee policy – the company instead splits profits, pegged at over 8% annually, with its sponsors.
Although the minimum investment amount is pitched at $5,000, the platform has various offerings for the investor to choose from – be it equity or debt, smaller commercial properties or residential properties. RealtyShares’ payout can be either monthly or quarterly, and returns can be anywhere between 8-20% for a fee of 1% on equity and a 2% interest rate on debt.
With a portfolio that’s worth over $1 billion, the platform has exposure to shopping centers, hotels, real estate loans, commercial facilities and apartment buildings. One of their more popular stake is a 15% share in the Hard Rock Hotel Palm Springs. Investment periods range from six months to a year and enjoy an estimated 8.5% returns annually.
It is no secret that crowdfunding real estate projects have gained huge popularity, and the numbers throw light on this – nearly $2.5 billion worth of investments in the real estate market are through crowdfunded platforms. There’s tremendous growth projected for the industry, which means individuals gain access to more opportunities for investments and improved portfolio diversification.