Analysis News

How to put real-estate crowdfunding on steroids

The US real estate crowdfunding investments market at $1.5bil is 10% of the size of unsecured personal p2p loan market. However the returns are usually higher and the loans are secured with real-estate collateral. Why is this and will it change?

Reporting issues in RE crowd market

AlphaFlow’s ( http://www.alphaflow.com/ ) founders Ray Sturm and Bogdan Cirlig noticed that crowdfunding real-estate investors are seeking diversification which then creates a reporting issue for investors who deployed capital on multiple p2p and crowdfunding platforms. Unlike in p2p personal loans investment, investors appreciate having a 1st lien collateral against real estate, but no single real estate crowdfunding platform offers enough diversification. Each Real-Estate crowdfunding (RE crowd) platform has its own reporting structure, key performance indicators, and payment schedules. Sturm, one of two founders of leading RE crowd platform Realty Shares, noted that investors had challenges effectively tracking their portfolios. AlphaFlow was found in September 2015 with one goal: to bring consolidated reporting, transparency and insights to real-estate crowdfunding investments on multiple platforms.

With AlphaFlow’s Consolidated Dashboard, investors can track in a single place every investment. AlphaFlow interfaces with the industry’s leading platforms LendingHome, AssetAvenue, Patch of Land, PeerStreet, Sharestates and to a lesser degree may include 1-2 investments on other platforms too.

Transparency of data

An unexpected difference between RE crowd and unsecured p2p personal loans is the transparency and data availability.  Unlike Lending Club which makes enormous amounts of data available on their website, none of the RE crowd platforms make any deal performance data available to anybody who is not an investor in that particular deal. AlphaFlow being connected to numerous platforms and collecting data for its customers about many different deals is de facto creating the first RE crowd data repository with across platform performance data and key numbers. In fact Alpha Flow is collecting more than 23,000 metrics across all the platforms.

We speculate that RE crowd platforms are concerned about publishing this data in order not to facilitate potential new market entrants. After all, there are more than 300 unsecured p2p lenders to only 10 to 20 RE crowd platforms out there and one has to wander how much did Lending Club’s policy of open books help Lending Club’s competitors. However the Lending Club open books policy did help build immediate credibility for the sector which is right now an order of magnitude larger to the $1-1.5bil RE crowd sector.

Starting a fund for diversification

As a natural step AlphaFlow then turned to starting its own fund to allow investors who continue seeking diversification to invest in multiple RE crowd platforms through a single structure. It took about 3 months to setup the fund and a few tens of thousands of dollars. Down the line, Sturm hopes to even offer to the investors diversification beyond RE crowd and approach funds such as Blue Elephant, Nexlend, and Victory Park to deploy capital in other crowdfunding and p2p asset classes as well. In real-estate as well the more complex capital stack composed of preferred equity, common equity, senior debt and mezz debt also offer further future potential diversification.

AlphaFlow’s first fund launched on January 19 2016. Within five hours, AlphaFlow had over $1 million in pledges from investors. This first platform focused on the $1.5 billion crowdfunding real estate industry, which is expected to double in 2016 to $2-$2.5bil in investment. The ultimate goal is true diversification. Alpha Flow offers investment in RE crowd backed real-estate deal in United State only. Unlike the unsecured personal loans market all deals here have a 1st lien against real-estate properties with an LTV ration of maximum 75% and a 12 to 18 months maturity.

Alpha Flow under 3.c.1 and 3.c.7 rules caters only to accredited individual investors and qualified institutional investors like family offices who invest a minimum of $25K. AlphaFlow opens the door to RE crowd investment  offering diversification to about 100 properties with as little as a $25k investment which in the past was not big enough for true diversification beyond a maximum of 5 properties. AlphaFlow expect investors to earn returns approximately net IRR in the 9 to10% range while holding real-estate 1st lien secured loans. This can be compared with the average 7-8% returns for Lending Club investors who from a risk profile also hold, instead, unsecured personal notes.

Currently for this fund, AlphaFlow’s investor fees consist of 1 percent of AUM in management fee and no performance fee. Compare this to a new-fund industry-standard of 0 percent management fee and 10 percent performance fee. In addition Alpha Flow has a 9 percent hurdle rate. This first fund will be maxed at $10 million. The fund is managed and invested by AlphaFlow’s experienced founders who have underwritten numerous real estate crowdfunded investments.

Borrowers and investors profiles

The demand for capital from operators on RE crowd platforms is strong. Borrowers are typically professional “flippers,” those that buys a house, fixes it up, and then “flips” it for a profit. Borrowers need funds quickly, and this is a benefit of RE crowd platforms. The turnaround time is much faster than a typical Wells Fargo loan, approximately a week. In addition, most traditional lenders will not lend more than five to 10 mortgages per year to one person, so the availability of RE crowd funds, with no such restriction, is another benefit for professional flippers.

AlphaFlow’s typical investor is one of two types. The first type consists of accredited investors who actively participate in the market, making 4-5 investments per year. Many of these investors, especially right now, are moving from the stock market to real estate crowdfunding, which has less volatility but similar returns. Accredited investors are not as costly for the fund because there are fewer regulatory hurdles to working with them. The second type of investors are family office and hedge funds who have not yet participated in the crowdfunding real estate market due to the lack of transparency from the RE crowd industry and sufficient diversification from single RE crowd platforms. Large investors want to be present in hundreds of real-estate deals and AlphaFlow can now provide this.

Future plans

AlphaFlow hopes to launch a personal loan fund next. In a $15 billion industry, it is about ten times the size of the P2P real estate market. However, personal loan fund rates fluctuate with the market while real estate P2P loan rates tend to stay stabilize a bit higher.

AlphaFlow has a total of approx. $3 mil in commitments at this time and they expect a single closing. They expect their first investment to be deployed by the middle of February 2016, this month.

According to Sturm, “From day 1, helping investors has been our central mandate at AlphaFlow.” In a short time, AlphaFlow has done just that with informed P2P investing through transparency.

Author : 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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