Raising Real Estate Capital with Crowdfunding
When raising capital, real estate investors often graduate from personal contacts to complex partnerships or institutions. Another option to consider is crowdfunding. On this Best Ever Show podcast, real estate investor and CEO Chris Rawley explains the power of crowdfunding as a capital source and how to tell if it’s the right option for you.
About Chris Rawley
Chris Rawley has been a professional real estate investor for over 20 years. His portfolio includes single-family, multifamily, and commercial properties. He currently focuses on income-producing agriculture as an opportunity for passive investing. His platform, Harvest Returns, matches quality agriculture deals with investors to raise much-needed capital for U.S. farmers.
If you’re doing real estate investing, the conventional funding path usually goes like this. You first use your own money and then approach friends, family, and business contacts for passive investing. When those sources run dry, you may turn to institutional funding or spend considerable time developing partnerships from scratch. Institutions have a high lending threshold and are suited for larger commercial properties such as retail shopping centers. They also come with significant oversight and conditions.
Many individuals engaged in commercial investing have quality deals that don’t meet institutional criteria. Crowdfunding provides a robust, flexible funding alternative. As the deal sponsor, you have access to suitable investors. You also gain legal and regulatory resources that would cost you considerable time and money to build on your own.
Advantages of Crowdfunding
Assembling a syndication deal involves adhering to complex financial regulations and drafting the requisite documents. If you do it yourself, you spend significant time and money on accounting, tax, and legal services. You need to understand the role of the various oversight agencies such as the SEC and hire the right experts. The beauty of crowdfunding is that the platforms handle much of this groundwork for you.
Each platform differs in the type and amount of guidance it provides. For example, Harvest Returns offers its sponsors the benefit of the legwork Chris initially did for his real estate ventures. His business spent considerable money to have securities attorneys put all legal and regulatory requirements in place. As a result, his platform’s listing sponsors benefit directly from this expertise and documentation. They still need to learn the legal environment, but they do not start from scratch and slow the deal.
Another major advantage of crowdfunding is the built-in pool of investors. You don’t have to find and vet your backers. You also have access to a more extensive and diverse group that you would likely discover independently. When the platform accepts your listing, you are guaranteed eyes on your project. You are not guaranteed quick results, but your deal will have the attention of the right audience. This alone is gold for commercial investing.
Crowdfunding may be right for you if:
- You have exhausted non-institutional resources.
- You have a successful track record.
- You have a niche asset class, such as income-producing agriculture.
- You have a partially funded deal that could benefit from additional investors.
Choose the Right Platform
Crowdfunding investment platforms took off around 2015 and today offer diverse opportunities for various real estate asset classes. You can find platforms tailored to single-family flips, wholesaling, and commercial projects such as retail shopping centers. You can also find options for specialized assets such as specific financial instruments or agriculture.
Chris advises beginning by defining the type of investor you are. Do you fix and flip houses? Do you wholesale apartment buildings? Are you targeting niche real estate markets such as sustainable development? You want to identify the crowdfunding platforms catering to your project niche and research each one to find the best fit.
Most platforms expect sponsors to list exclusively with them rather than attempt to raise funding on several sites. This requirement eases regulatory compliance, and you will likely sign an agreement with the platform you finally choose. A way to feel more comfortable about exclusivity is to speak with other sponsors who have succeeded on that platform. Most sites are happy to provide references. Chris suggests you be wary of any platform that won’t do so.
Your next step is to determine if you qualify for the platforms you’re interested in. They have listing criteria that syndication sponsors must meet. They also differ in the resources they offer, such as regulatory forms. Your best bet is to reach out to them and learn their guidelines and support for sponsors. Most have sales and marketing teams to provide information and perhaps speak with you about your particular situation. Established platforms have more stringent listing criteria, while smaller or newer players often have more flexible requirements.
For their part, investors are looking to mitigate risk. They examine each deal in light of questions such as:
- Is this project viable?
- What return can I expect?
- Can this sponsor deliver results?
- Can I safeguard capital gains or income?
- What are the tax implications?
Chris stresses that many investors want to make personal connections and to believe that their capital helps the greater good. If you can demonstrate how your project will benefit the local community or causes such as sustainable farming, your support will grow.
As with any deal, investors look for strong fundamentals. Platforms differ in their due diligence procedures, but you always want to prepare a solid business case and be ready to speak to it.
Build Your Team and Track Record
Investors want to see that a sponsor has a successful track record. As Chris puts it, they don’t want to invest in a newbie’s mistakes. You are best off trying crowdfunding after you have done at least a few successful deals.
For investors, a sponsor’s experience is often the differentiator between two similar offerings. Even a short track record builds credibility. Before attempting crowdfunding, do one or two syndications on your own, either with personal contacts or an established partner.
A credible sponsor has a strong team as well as a track record as an active investor. Investors want to see that you have accounting and legal experts as well as any other business advisers appropriate for your asset class. This shows that you have some experience, are serious, and run your active investing as a business.
Present a Winning Deal
Many platforms conduct a thorough background check on potential sponsors before moving forward with them. They examine the deal’s structure and numbers to determine if it is a viable investment.
Each platform has requirements for putting your listing in front of investors. Your listing needs to differentiate itself from other concurrent offerings. At a minimum, it should include essential details about your project, such as location and asset type. Also, your platform may ask you to provide supplementary information for investors such as a business plan or pitch deck.
Once the raise is underway for your project, potential investors want a thorough understanding of the deal and expected return. Some platforms handle all of the interfacing for you and cater more to passive investing. Others treat the process more as active investing. You might host a webinar or answer questions in a formal round table for the active investor who wants a voice in your project.
Chris has found that people respond well to webinars, as they can interact with the sponsor and ask live questions. They can also meet the members of the sponsor’s team, such as the attorney or CPA. In Chris’s words, the process lends tangibility to the deal and builds trust.
Crowdfunding for Agriculture Investing
The food supply and related issues are hot topics today, and many investors are curious about agriculture opportunities. Crowdfunding is a good option because the platforms present you with curated projects appropriate for your goals. Chris’s platform structures agriculture deals similarly to the real estate deals he’s done for years. They have debt offerings from 7% to 12% and equity deals in the teens. They also offer opportunities in AgTech, which is the application of computer technology to farming. These offerings are higher risk but offer potentially greater returns as much as 40%.
Unlike most real estate, agricultural properties are unique. Each farm is distinctive and should be evaluated on its own merits. Indoor projects have gained momentum and include vertical and hydroponic farms. These options allow more locally grown produce and some refuge from climate and transportation infrastructure impacts. Successful investments enjoy a high rate of return.
Chris keeps the minimum investment in his projects as low as $5,000. This threshold allows more investors to participate and to diversify their portfolios. As for farmers interested in funding sources other than banks, Chris urges them to reach out to his team.
Crowdfunding for syndication is a relatively new and evolving space with numerous platforms catering to all asset classes. If you’re ready to move beyond personal capital, take a look at what it has to offer. Not only might you fund your next deal, but you might also find lucrative investment opportunities you never knew existed.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.