What types of commercial properties are most available for investors? Based on our unscientific (but nevertheless educated) poll of several crowdfunding and investing sites, investors prefer value-add specified offerings with targeted IRR settling mostly in the mid-teens and a typical hold time of 5 years. The average capital raise for offerings on the sites we surveyed was in the $3.5 million to $5 million range, with some hitting $20 million or more. Minimum investment amounts ranged from $25,000 to $50,000.
What are Investors Looking For?
A look at CrowdStreet’s marketplace offerings as of Oct. 30, 2017, provides a good overview. Of 28 listed offerings, 18 were value-add specified offerings and 5 were debt and/or equity offerings. Others included income fund, adaptive reuse, self-storage and retail.
The majority of the value-add assets were multifamily with some hospitality, industrial, student housing and office. Targeted IRR for this group ranged from 12% to 25.4% with a 5-year investment period for most. Others ranged from 2 years to 10 years. Annual cash-on-cash yield generally fell into the 7%-12% range.
In the wake of the JOBS Act, when advertising for investors became legal under Regulation D, Rule 506(c), crowdfunding platforms like these have sprung up to meet investor demand for access to the types of investments that institutions, pension funds and other larger entities have secretly enjoyed for years. No matter their size, in today’s market investors are looking for high cash returns, tax advantages and equity growth. Many also prefer the hard asset of real estate, as opposed to stocks, bonds, etc., and the ability to use leverage in their deals to enhance investor returns.
Another plus that has arisen post-JOBS Act is that with platforms posting their deals online, investors and syndicators have a gauge to see what others are doing that they never had when all such offerings were “private” under the original Regulation D, Rule 506 [now 506(b)], which is still alive and well. As a refresher, Rule 506(b) doesn’t allow any form of advertising or solicitation, but you can include both Accredited and Sophisticated Investors, and there are a lot more Sophisticated Investors than there are Accredited, so there is still a need for private offerings under this rule for those willing to take the time to develop pre-existing relationships before making offers to investors.
The way these crowdfunding platforms operate is that they develop a database of investors and then allow experienced syndicators to post their Rule 506(c) or Regulation A+ deals (those that can legally be advertised) on their platforms. The platform blasts the posted deals to its database of investors and otherwise helps promote the offering on behalf of the syndicator (for a fee, of course).
It goes without saying that any investing carries risk, so an investor should always do due diligence on any prospective deals, whether they are posted on a crowdfunding platform or offered by a friend, family member or acquaintance. And it never hurts to seek the counsel of qualified tax, financial and legal experts as well.
(We discussed this in greater detail during our November 2017 educational teleseminar. Click here to access our archives of previous recordings.)