Real estate crowdfunding has opened up property investment to a larger pool of investors, enabling individuals to buy stakes in rental properties and share in the revenue that those properties generate without having to help manage the properties.
At least two of these services are also eyeing the possibility of enabling investors to buy stakes in owner-occupied homes. In those cases, investors would share in the appreciation or depreciation of home values.
Now, one crowdfunder, Realty Mogul, says that it has demonstrated another benefit that its burgeoning business offers: increased transparency.
Because the company oversees the flow of money involved in deals that it arranges, the startup was able to gauge the range of fees and returns associated with investments in “real estate syndication” deals — deals that involve pooling capital to purchase property, the specialty of crowdfunders.
According to Realty Mogul CEO Jilliene Helman, her company’s analysis exposes a “massive, highly fragmented market that’s completely nonstandard,” showing great variability in both the net returns that investors are earning on syndication deals, as well as the fees that they are paying real estate investments firms to oversee the deals.
Helman said that data like the range of property management fees charged by firms that manage real estate syndication deals has traditionally been hard to dig up. That’s because companies typically can’t directly access the transaction data of a multitude of real estate investment companies, she said.
“You could probably talk to 50 or 100 operators. What they tell you and what they actually do in their documentation could be separate things,” she said about attempting to calculate average fees charged by real estate investment firms.
“It’s been this very opaque marketplace where nobody has good guidance on what is market rate.”
After shining a light on those elusive metrics, Helman said Realty Mogul discovered “immense ranges” in fees that real estate investment companies charge clients.
For instance, property management fees — fees paid to an investment firm for services like rent collection and tenant acquisition — ranged from 2.25 to 8.5 percent, and averaged 4.05 percent, according to Realty Mogul’s study.
Meanwhile, acquisition fees — fees paid to an investment firm for purchasing properties that are part of a syndication investment — ranged from 0.59 to 5 percent, and averaged 1.79 percent. The most common acquisition fee was 1 percent, the data showed.
Helman argues that by disclosing such data, crowdfunders may bring discipline to the real estate syndication market, enabling investors to make better-informed decisions and making it harder for investment firms to overcharge investors.
“When real estate companies look at this, they should say: ‘The market rate is 1 percent. We should probably be at 1 percent if we want to have a great ability to do this transaction,” Helman said of firms that could operate in a future environment where real estate syndication statistics are more readily available.
The analysis also suggests that investors in real estate syndication have been hauling in enviable returns in the last year.
After fees, investors in transactions arranged by Realty Mogul and structured as preferred equity earned a preferred return of 8.5 percent with returns ranging from 5 to 12 percent.
Realty Mogul’s findings are based on 32 deals that Realty Mogul facilitated over the last 11 months, and involved 25 real estate investment companies. Those deals were worth more than $375 million, according to the company.
For now, such data may pique only the interest of wealthy investors, since they alone can participate in deals set up by real estate crowdfunders.
But that could change.
When the Securities and Exchange Commission finalizes regulations implementing the Jumpstart Our Business Startups Act (JOBS Act), average investors may also be permitted to participate in deals like those facilitated by Realty Mogul.
The JOBS Act has been the impetus for the sprouting of crowdfunders in a myriad of industries, including real estate, according to many industry observers.
Realty Mogul is one of 13 companies participating in Inman News’ real estate tech startup accelerator program, Inman Incubator.
“That’s an idea we’ve kicked around quite a bit,” RealtyShares CEO Nav Athwal recently told Inman News when asked if his real estate crowdfunder would accept cash from non-accredited investors if the SEC interprets the JOBS Act as allowing it. “We want to, but we’ll be careful about our approach to it.”