Analysis

RealtyShares launching captive-fund to finance deals

The p2p startup boom has till recently focused on Consumer or SME lending.  San Francisco-based RealtyShares was founded in April 2013(and became operational in November 2013) to build a crowdfunding platform exclusively for real estate financing where individual and institutional investors can buy an interest online in carefully curated investment opportunities. It focuses on US-based residential and commercial real estate projects with a value of under $50m. RealtyShares has become so popular among the US investors and sponsors that it is now known as “Lending Club of Real Estate Sector”. The company has also launched a diversified equity fund rivaling a REIT which will focus on equity investments in the platform only.

Founding and funding

Nav Athwal is the co-founder and CEO; he holds an electrical engineer degree and a law degree. He practiced law as a real estate attorney where he focused on REITs, fund managers,solar developers and other land use needs. Thanks to his family’s 20 years of experience in real estate, he worked as well as a commercial real estate broker.  He represented for example Archstone in a 700 apartment unit development across from the AirBnB headquarters. As he was investing in real estate during the lows of 2010 he had difficulty finding capital. Most investors are limited to finding equity capital from friends and family which is always difficult. This capital lack was distracting him from the real business value added: finding good deals. He was, therefore, looking to making real estate investment streamlined and more accessible and marking real estate debt and equity more efficient for companies. He then partnered with Ray Sturm and launched RealtyShares from his living room.

His other co-founder, Ray Sturm, is an experienced professional in the field of finance and investments and was initially the VP of Business Development. Ray has since moved on to launch his own multiplatform investment fund for real estate called AlphaFlow . The team has grown from 15 to more than 50 professionals in the last year.

In 2013 RealtyShares was accepted in the famous 500startups accelerator. As the next step, they raised $2m through General Catalyst partners. And in April 2015, they raised $10m from Menlo, some of the most sophisticated investors.  Recently RealtyShares raised $20m round B from Union Square Ventures, another very successful  New York-based VC firm .

Differentiator

According to repeat investors, RealtyShares’ core differentiator in the industry is a bigger number of deals and a larger deal variety than other platforms . In Nav’s eyes platforms in this space will be judged by the deal flow and deal performance, hence their focus. However, in the short term, the company is focused on diversifying the sources of capital.

How it works

Deals are submitted by real estate operators, also called sponsors, who aspire to access potential capital sources. The company has three products, plain vanilla senior debt with a yield of 10-12%; preferred equity/ mezzanine financing with expected yields of 15% and joint-venture equity or common equity- where the investors enjoy not only cash flows and dividend but also get a share of the upside when the property is sold.

Deals are underwritten for their financials, legal due diligence, operator background, and location background and other risk factors and all information is uploaded to the website along with the property offered. The marketplace platform thus connects both the sponsors and the investors over the website in a transparent manner. RealtyShares platform, on the one hand, assists the investors to invest their funds so as to earn a maximum return with minimum risks; and on the other side, it enables real estate sponsors to sell equity or raise debt in their properties at better rates.

The Company can get a loan funded in 10 working days and has a 99% success rate in closing the deals launched on its website so far. If the deal submitted is not completely funded, then the investors in that deal receive back the funds they had pledged. Minimum investment allowed through the platform is just $1000 per deal and $5000 for a portfolio. After making the investments, investors have an online 24×7 access to the dashboard of the company to monitor the earning history of their investments and also obtain tax-related information at the year end.

Diversification

The choice remains with the investors as to invest in a group of properties, or to invest in a particular property. Investors also have the choice to invest their funds either through equity or debt. The investors may even specify their particular choice for the type of real estate investment. The Company focuses on single family, multi-family, retail, self-storage and commercial sites and has even handled a hotel deal in the state of Ohio.

Regulation

RealtyShares aims to invest only in those US States that have legalized crowdfunding in real estate sector either through legislation or regulatory action. The Company is not registered with Securities and Exchange Commission (SEC) but it gets its deals executed through an SEC-registered broker-dealer who also complies with the regulations of Financial Industry Regulatory Authority, a non-governmental organization that regulates member brokerage firms and exchange markets. The Company has procured licenses to lend in States where it is so required, including in California.

Volumes and business model

More than $100mil in investments have been made through the platform to date.  The approval rate for applicant’s deal to be listed on the platform is 5%, showcasing the company’s strict standards of underwriting. RealtyShares charges 1-1.5% of the deal value as platform fee. Other fees may be applicable to sponsors or borrowers. An “over-raise” one-time fee to cover initial investment related legal fees and other specific expenses is also charged. As regards the real estate loans, RealtyShares enjoys the margin spread between what rate is charged to the borrower and what rate is paid to the investors.

RealtyShares Equity Fund

The Company launched its first Diversified Marketplace Equity Fund during the 2nd week of April 2016 focusing on large investors. The fund was built by the same team which built Lending Club’s direct fund and took the fund from $8m to $1bil in size.

As more real estate crowdfunding platforms are created operators now have a choice of which platform to market on. In order to attract the best deals RealtyShares believes that promising a minimum investment of 40% on day 1 of the marketing campaign will give them an edge.  In addition, captive funds will give the platform a bugger between supply and demand which hardly ever match perfectly.

The minimum investments in this fund is $250,000. The fund aims to invest in fundamentally strong diversified properties, available in the secondary market, in various US cities with populations exceeding 200,000. The investments in this fund will have a 5-year lock-in period. There will be no redemptions before maturity – since redemptions imply valuations and investors exits may adversely impact the value of the real estate holdings of the fund and hurt investors who are staying in the fund.

To avoid adverse selection, the fund will invest in every deal on RealtyShares platform. To avoid concentration the fund will invest for up to a maximum of only 40% of a deal. The earnings projected for the stakeholders in this fund may vary from 6 to 10% in the form of dividends on a quarterly basis. Deals held by the fund are expected to start maturing after about 24 months. The Company shall charge 0.85% of the annualized value as asset management charges. Thus investing through the fund will save investors 0.15 to 0.65% as compared to the platform fees from self-investing directly through RealtyShares. The fund is a unique vehicle as no other Real Estate Crowdfunding website has such a product for investors which directly competes with REITs.

The earnings projected for the stakeholders in this fund may vary from 6 to 10% in the form of dividends on a quarterly basis. Deals held by the fund are expected to start maturing after about 24 months. The Company shall charge 0.85% of the annualized value as asset management charges. Thus investing through the fund will save investors 0.15 to 0.65% as compared to the platform fees from self-investing directly through RealtyShares. The fund is a unique vehicle as no other Real Estate Crowdfunding website has such a product for investors which directly competes with REITs.

While debt is more standardized and steam lined, creating an equity investment fund allows leveraged a lot of data without sacrificing quality. While equity underwriting is more difficult, RealtyShares’s underwriting team is lead by experienced industry insiders with experience as VP at famous firms like BlackRock. And to offer underwriting scale RealtyShares plans to use templates.

Future Prospects

Real estate investing is made difficult due to the large minimum traditional investment, the highly localized market, the ongoing management needs and the lack of liquidity. Realtyshares has demonstrated that its platform provides a unique opportunity to diversify your real estate holdings without having to be a multimillionaire. The start-up is now

The start-up is now adding an institutional fund structure which will allow it to diversify its capital sources and offer a better value to operators to attract better deals. They are thinking of the fund as an Amazon-like product: a good value and low fee product. As of January 2016, there are 198 REITs with a market cap of $857 Billion. Its diversified equity fund is looking to directly “disrupt” the REIT industry and can be a bigger play for the startup than the original retail focused platform.

As of January 2016, there are 198 REITs with a market cap of $857 Billion. Its diversified equity fund is looking to directly “disrupt” the REIT industry and can be a bigger play for the startup than the original retail focused platform.

 

Author: George Popescu

George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master’s Degrees: a Master’s of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master’s in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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