A secular growth trend in the real estate market and a growing US economy is expected to be a strong tailwind for real estate financing companies and should have a commensurable positive effect on asset management companies in the space. AlphaFlow, a California registered investment advisor, is amongst the first and fastest growing automated real estate investment services in the US. The company launched operations in 2015. Its first avatar was focused on bringing consolidated reporting, transparency, and insights to real-estate crowdfunding investments on multiple platforms. The company, under Founder and CEO Ray Sturm (formerly founder of RealtyShares), has now graduated to cutting-edge algorithmic investing.
Meet The New AlphaFlow
The company has raised a total of $6.4 million with $4.1 million coming in the latest funding round (September 2017). The round was led by Hedge Fund titan Steven Cohen’s Point72 Ventures while other marquee names likes Social Capital and Y Combinator also joined in the raise. The funds are being deployed to build infrastructure, develop underwriting resources, finance partnerships with leading online lenders & investors, and to update the company’s technology.
AlphaFlow launched the industry’s first fund allowing investors to diversify their portfolios through multiple real estate loans with an option to reinvest earnings automatically. Investors now have a true opportunity to diversify.
In March 2017, AlphaFlow launched an Automated Investment Platform incorporating SMA (Separately Managed Accounts) and artificial intelligence technology offering portfolio optimization and diversification services in a way that each client has his unique asset portfolio at minimal cost. This relieved clients from the hassle of managing their portfolios as the entire administration and monitoring is in the hands of experienced professionals.
The AlphaFlow Working Model
AlphaFlow is working on an asset management model and not a marketplace lending model. The company stands out from the crowd because its investments are spread across 75-100 loans aiming at net returns of 8-10% and targeting lower LTVs.
Loans are purchased/underwritten from lending platforms after performing a detailed due diligence process. Each client’s portfolio is under automatic review on a daily basis to keep it diversified. Loan underwriting is not a fully automated process, however. The algorithm and allocation methodology used are proprietary while loans not fulfilling predefined criteria are rejected. This ensures that the fund is not on an auto-underwriting mode and every loan is analyzed to evaluate suitability for client’s portfolio.
The platform charges a fee of 1% on invested capital and its loans are usually for a tenure of 6-12 months. The minimum investment amount is $10,000 for each investor. AlphaFlow currently has over 280 investors on board.
Normally, loans are repaid earlier than the credit period sanctioned, where AlphaFlow’s automatic system re-balances the entire portfolio. Also, the portfolio of each client is re-balanced with the addition of new loans to the platform.
The Current Scenario
Sturm shares his thoughts on the real estate crowdfunding industry freely. “Most platforms are facing challenges related to managing customer acquisition costs (CAC),” he says, “which have started topping $5,000. Growing competition further fuels the CAC. Though VC funding has been strong in the segment, this has shifted the balance towards institutional investors as compared to originally empowering retail investors. The winner in the space will be the one who can control his CAC and develop an artificial intelligence-powered underwriting technology.”
With sufficient capital in hand, AlphaFlow is now looking for partnerships with online lenders to expand its business reach. Its criteria for selecting partners is to focus on their underwriting technology, reporting infrastructure, and transparency. Another challenge the industry as a whole is facing is that it has become harder to determine which lender is doing better. For an investor, it is fundamental to their job, but transparency has taken a hit in the current ecosystem.
A changing economic environment will lead to shifting trends in the housing market, in terms of job growth, affordability, increased demand, and nominal interest rates. Credit models need to be able to stomach this shift. AlphaFlow is still building out its technology, but the solution developed has helped it lower delinquency rates by more than 80 percent as compared to the rest of the industry. Also, most platforms talk about the need to synthesize information using AI and machine learning, but few have done it well.
Real estate crowdfunding firms will need artificial intelligence to analyze all the data points on scale, and it will soon become uneconomical to hire a massive team to execute all these repetitive tasks. Moreover, profitability is not the function of growth alone. AI-empowered smart underwriting will be the key differentiator, Sturm believes. He shares that it is always easy to grow by underwriting bad deals, but it is suicide in the long run when capital deployed is not able to hit target returns or, even worse, if principal is destroyed during the process.
AlphaFlow became a Registered Investment Advisor to showcase to investors that it is on their side and that it has a fiduciary duty to protect their interests. Serious players in the segment will have to move in this direction to achieve scale in the asset management industry and better serve their customers.
Although AlphaFlow is doing well with its present underwriting model and clients are satisfied with the results, it is always searching for improvements that can be incorporated into the system. It is also considering multiple avenues to get a diversified exposure in the real estate industry. It might go for a combination of debt and equity deals for better exposure. Different duration debt deals may be targeted (2 or 3 years tenure) with a locked interest rate of 5 percent. To be a market-driven company, strategies will need to be reframed accordingly.
Integration of blockchain technology can transform the entire operational aspect of the real estate industry. But Sturm believes it is still a long way from maturing enough for real estate investing. The technology is currently not on his road map, but he might get interested if someone is able to introduce a breakthrough product.
To achieve scale and a strong position in the industry, AlphaFlow will keep investing in data science and engineering. In today’s fintech world, that is the only moat a business can cross.
Written by Heena Dhir.