AlphaFlow - Informed P2P Investing

“Now that you’ve left RealtyShares, what do you really think of the real estate crowdfunding industry and the various platforms?” That is the most common question I’ve received from our accredited investors, venture capitalists, and deal sponsors. In response, I’ve created a series of posts to share my insider’s perspective on the industry and the players. Not only will I answer this most frequently asked question, but I’ll share how I’d look at deals, and how I might build my own portfolio.
3 things I’m keeping an eye on in real estate crowdfunding:

  1. Deal Discipline
    Many of these platforms have done extremely well in building robust sourcing pipelines and groups of active investors, like you. The result of this success for many platforms has been additional rounds of venture capital, in some cases taken at valuations you’d rarely see in other industries for companies with the same performance metrics.
    That means more resources for these companies, but it also creates two potential areas to watch: (1) Big rounds come with huge expectations, and (2) Large raises can create desperation from competitors who worry about being left behind. While fundraising for RealtyShares, I met with a number of VC firms and they usually drilled down on 3 KPIs (Key Performance Indicators): dollars raised, number of deals closed, and registered investors. Marketing can help to solve the last one, but some platforms may be tempted to lower the underwriting bar in order to help boost the first two metrics. Will they? This leads to the next item I’m watching.
  2. The Feedback Loop
    Unlike some other P2P investment categories, like consumer debt investors have been able to access on Lending Club and Prosper, real estate often has a longer feedback loop (i.e. do these investments perform as advertised?). Some sites focused more on short-term fix-and-flips, for which results came in a matter of months. Others have done multi-year deals – many as long as 10 years – so we’ll need more time to see how those perform. As deals mature, though, we’re going to get a clearer picture of which platforms and even sponsors have the best results compared to what they projected. As an investor, if you were looking to add multifamily to your portfolio, wouldn’t you want to know which platform has done the best job of underwriting these? Me too. I’ll be watching this closely.
  3. New Platforms
    As early players like Fundrise and Realty Mogul continue to prove out real estate crowdfunding, we’re seeing the entrance of many new platforms looking to tap into this market. Some are being launched by those with phenomenal industry experience and see an opportunity to create niche products that aren’t being addressed adequately yet (e.g. 1031 exchanges and SD IRA investing). It’s getting tougher to identify who is real vs who has just slapped a website together, but I think a year from now platforms that don’t even exist today will be major players offering strong investment opportunities. I’ll be watching, and I’ll share those I think are particularly interesting.

Want an insider’s perspective? Email me your question and I’ll try to address it here. I’d love to hear from you!

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About the author:

Ray Sturm, CEORay Sturm is a leading entrepreneur in financial technology, and is currently the CEO of AlphaFlow. Prior to launching AlphaFlow, he founded RealtyShares, one of the P2P industry’s top platforms for real estate investing. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.

Ray has a BBA-Finance from the University of Notre Dame and a JD/MBA from the University of Chicago.

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