For those looking to diversify out of the stock market and into asset-backed or alternative investments, real estate has long been a popular choice. In 2014, things changed significantly for these investors; historically if they didn’t have $40,000 for a down payment on an investment property loan or $4 million to spend on commercial property development, they would be out of luck. Recently, however, we have seen successful startups looking to lower the barrier to entry for novice real estate investors.
Earlier this year, we examined the breakdown of proptech and where its four separate divisions fit into fintech. Today we’re taking a closer look at one of those categories, real estate investment technology, and 15 startups in that sector. Companies in this area are as diverse as the real estate industry itself, but they can easily be categorized under three major business models:
- Cash flow share
- Match-making platform
Here’s a quick comparison chart of companies working on crowdfunding and cash flow share models (right click to enlarge):
Here’s a more in-depth look at each company’s model:
Think of it as Kickstarter for Real Estate— it’s the most common model for real estate investment platforms. While many companies in this category take a different approach and host a variety of offerings, all rely on a crowdfunding model.
Cadre caters to a range of high net worth accredited investors and institutional investors who are willing to commit a minimum of six figures per deal. The company focuses on commercial, retail, and multifamily properties in all major U.S. markets. Cadre undertakes all sourcing and due diligence on properties before presenting the opportunities to investors. When users find a deal they like, they request their desired allocation to a specific property (or across multiple properties) and fund the deal. Investors receive quarterly distributions along with performance reports.
EquityMultiple offers accredited investors debt and equity investments in commercial real estate projects. The company has raised $10 million since launching in 2015. Its partnership with Mission Capital – a national loan sales and commercial real estate advisory firm – has helped it access institutional projects, closing 25 and comprising over $300 million in total capitalization since launch. Its debt deals range from six to 18 months while the term for equity projects ranges from two to five years, during which time investors receive a share of the cash flow.
Fundrise allows users to build a diversified portfolio of eREITs, a real estate investment trust built on the Fundrise platform that cuts out the middlemen often involved in traditional REITs. The REIT consists of commercial real estate investments and earns returns through rental income and property appreciation. Investors start with a minimum of $1,000 and select from three different U.S. geographies. Returns and distributions are specific to each listing, as is the term of each investment.
Groundfloor is open to accredited and non-accredited investors in eight U.S. states. The company sells debt securities called Limited Resource Obligations (LROs) to investors with a minimum investment of $10. Once investors purchase an LRO, they become a creditor to Groundfloor. Each LRO is paid back to investors when the borrower repays the loan, which ranges from a term of 6 to 12 months. If a loan fails to fully fund within 45 days, the company relinquishes the funds back to the investor.
Lending Home is open to accredited investors looking to fund real estate investment projects for a term of 12 months or less. The company funds mortgages for real estate professionals and makes them available to investors as fractional notes. Each note sells for as low as $5,000, but LendingHome requires a $50,000 minimum investment to start. Lenders receive interest on a monthly basis and when borrowers repay the loan at the end of the 12-month term, the investor receives their principal.
- Patch of Land (FF 2014 demo)
Patch of Land uses a crowdfunded approach by matching borrowers in need of short term financing for a real estate project, with lenders looking for real estate investment opportunities. The company vets each property purchase and project (refinance, rehab, or flip) and curates information such as financials, appraisals, and project details. Under Patch of Land’s model the investor doesn’t own the property nor the title. Instead, users invest in a borrower payment dependent note– a contract with Patch of Land in which they receive interest for the term of the loan and then repayment of their principal once the term is complete.
PeerStreet enables accredited and institutional investors to invest in private real estate loans secured by first liens on real estate (in other words, not refinances or second mortgages) through partnerships with top-tier originators. The investments are short term, ranging from six to 24 months and are intended to fund a real estate project. Investor funds are held in an Investors Trust Account with City National Bank and in the event of default, the funds are FDIC insured up to $250,000. Users invest in mortgage-dependent promissory notes issued by PeerStreet. The minimum investment is $1,000.
- RealtyMogul (FS 2014 demo)
Founded in 2012, RealtyMogul operates under a crowdfunding model that matches sponsors and borrowers searching for capital with individual investors looking for a higher return. The company offers two investment types: joint venture equity investments, and a real estate investment trust (REIT).Joint venture equity investments focus on properties with existing cash flows (rented real estate). Throughout the term of the investment, which ranges from one to 10 years, investors receive a monthly return from the cash flow and a share of the proceeds when the property is sold. RealtyMogul offers a 1031 exchange option for investors for a tax-friendly funding option. The MogulREIT is an SEC-registered LLC formed to invest in and manage a diversified portfolio. The REIT requires a minimum investment of $1,000 and is open to both accredited and non-accredited investors and is generally more liquid than debt and equity funding, as it generally allows for redemptions once per quarter.
RealtyShares offers a minimum investment of $5,000 with monthly or quarterly cash flow options. The company enables accredited and institutional investors to invest in commercial (office, industrial, self-storage, retail, medical office and hospitality facilities) and residential (used for investment purposes, not owner-occupied) properties. RealtyShares sells securities related to secured real estate loans, equity investments in commercial properties, and preferred equity investments based on investor preferences. With equity investments, the company sets up individual LLCs for each property. Under this structure, investors own shares in the LLC. Interest distributions for equity investments are paid out on a quarterly basis depending on cash flow. When the property is sold, investors receive any appreciation realized over the term of the loan. For debt and preferred equity investments, users invest in notes corresponding to the loan and typically receive payouts monthly. The company does not offer a 1031 exchange but it does offer self-directed IRA investments through five preferred custodians.
- Yield Street
Yield Street sells a variety of asset-backed offerings– from real estate, to commercial equipment, to lawsuits– to help accredited investors diversify their portfolios. The company is also set up to handle larger opportunities for money managers and institutional investors. Yield Street manages the investments, which are divided into Special Purpose Vehicles (SPV’s) available for a minimum of $5,000. Interest payment frequency and the term of the loan vary per investment.
Cash flow share
These companies offer investors returns on the cash flow of the property. They do not cater to borrowers and instead own the properties themselves.
- CK Mack (FF 2012 demo)
CK Mack is a Montana-based startup that allows users to invest in the cash flow of rented real estate in $25 increments for a minimum of 12 months. The company maintains ownership and responsibility for the properties themselves and takes care of all property management responsibilities.
Australia-based Brickx divides the purchase price of houses into 10,000 units, or bricks, and places each unit for sale on its marketplace. At the end of each month, members receive their share of the net rental income of the house. Brickx takes care of all property management.
These are Lendio-type platforms that simply serve as a matchmaking platform for borrowers and investors. They are not a party to the transaction.
CrediFi offers a platform that matches borrowers, brokers, and lenders. The company does not invest on the users’ behalf.
- Crowd Street
Crowd Street hosts a marketplace that matches accredited commercial real estate investors with borrowers, which the company refers to as sponsors. It was created to offer investors easy access to private equity real estate operators, such as commercial real estate developers and managers.
RealCrowd allows accredited investors to browse, compare, and invest with professional, private, commercial real estate companies. The platform simply serves as a matchmaker for investors and real estate professionals and is not involved in the transaction.
Our proptech series continues next week with a closer look at mortgagetech players.