Amazon Headquarters

With the recent announcement that Amazon will be constructing a second headquarters expected to bring 50,000 highly paid jobs to a major American city on the Eastern side of the country, real estate investors have started to pay attention. That’s because a major employer like that is bound to cause an impact on the local housing market. With America’s aging housing supply and relative lack of new construction, this means the fix-and-flip market is going to see a major surge in demand in any city that is selected as a destination. In an article originally published on Business Insider, Miles Deamer, Director of Investments at AlphaFlow, provided some interesting facts and figures with relation to the top city choices for Amazon. Here are the five that seem the most likely given today’s housing and business environments.

1. Pittsburgh, Pennsylvania

If there was ever a city that combined the resources Amazon will need with the housing supply that will be demanded by an influx of new workers and an environment like the home headquarters in Seattle, it’s Pittsburgh. Located on the western side of Pennsylvania, it is geographically centralized. The fact that it is inland in a Great Lakes state means that there is little to block growth in the city, and the success of other tech giants’ satellite offices in the city makes it a likely candidate. As Sturm points out, “The influx of well-paying jobs has contributed to a hot real estate market. Brookline, a South Hills community with easy access to the city’s subway line, has transformed in recent years to house both working professionals and students.”

2. Cincinnati, Ohio

Located a bit further south than Pittsburg, near the border of Ohio and Kentucky, Cincinnati is home to 2 million. It’s also one of the most affordable large American cities to live in, which would make it easy for incoming workers with competitive salaries to purchase. The median home value currently sits at just $152,500, and that is in a town where over half the real estate lies above the $100,000 mark. Other notable firms in town include Proctor & Gamble and Kroger.

3. Atlanta, Georgia

Atlanta has become known as a destination city for Millennials because of its lack of natural boundaries to growth, its investment in infrastructure, and its vibrant cultural events and offerings. The city invested heavily in new parks and light rail, but a housing shortage has been plaguing the area for the last couple of years. Almost half the housing stock costs more than $200,000, but employees in the tech center are likely to be able to afford that price, and the city’s investments closely mirror those that Amazon has pushed to achieve in Seattle.

 4. Austin, Texas

Another destination city popular with younger and more educated workers, Austin is also home to the famous South by Southwest festival, which combines music, art, and tech culture in a large-scale annual event that has come to be known as the destination for people looking to get a start in the tech industry. Building permit filings are up about a third over last year, too, so not only will there be a workforce ready to take on the challenge of staffing Amazon’s second headquarters, there will also be a housing market ready to handle the influx of new homebuyers.

5. Nashville, Tennessee

Long known as a destination for country music artists looking to make it in the industry, Nashville also boasts a healthy population base and a business-friendly environment that make it a top contender for Amazon. As Ray Sturm points out, it has a lot of real estate development opportunity in West End and Midtown, where access to the downtown area is leading to an increase in demand.   Read the original article in its entirety over at Business Insider.
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  What Is A Bridge Loan?   If you have been looking at the products available for commercial and residential real estate loans, you have probably encountered the term bridge loan before. Unless you’ve had to apply for one, though, you might not realize what bridge loans are or how they are used.  These are short-term loans designed to allow borrowers to: In the case of investing in bridge loans, the third reason is the most common. These are the loans mostly used by “house flippers”; real estate investors who purchase and rehabilitate properties before reselling them. They represent a great investment opportunity too, and if you are interested in getting into real estate lending as an investment, you need to know how investing in a bridge loan – or portfolios of bridge loans – can provide you with a great return in a relatively short amount of time.

Bridge Loan Features

Before deciding to take the plunge and starting to invest in bridge loans, it’s important to understand the pros and cons,  and exactly how these products work for the lender, and by extension, the investor who is investing in the loans.

Other Types Of Bridge Debt

If you are looking for bridge loan investment opportunities, it’s important to understand the diversity of the investment opportunities available. Residential bridge debt is one major category of these loans readily available to individual investors. However, there are other types of bridge loans. Some are used by real estate investors operating in the multifamily and commercial space, and others are used by companies buying and developing new facilities for their own use, or as a stopgap while other financing is sought. Each of these types of bridge debt brings with it unique risks and opportunities, so it is important to understand the specific types you invest in and to balance your investments.

The Future Of Bridge Debt

These loans have been powerful instruments allowing for economic development to a wide variety of businesses for many years. It’s not likely that will change anytime soon, but what is likely is that there will be fluctuation in the demand for basic residential bridge loans in various states, cities, and neighborhoods. That’s because residential property investment is its own business with its own very local cycles. By diversifying into a range of bridge debt, though, investors can reap the rewards of the high-interest rates while opening themselves up to more investment opportunities in any market. Advance your investing knowledge by understanding the tax implications around another investment avenue: real estate crowdfunding. Free eBook Download   What’s the economic driver in your city? In San Francisco, it’s technology companies. In L.A., it’s the movie industry. In New Orleans, it’s the port. In Atlanta—don’t let all the Coca-Cola signs fool you—it’s real estate and it always has been.

Atlanta Real Estate Market Analysis

Atlanta, Georgia: Growth Engine Of The Southeast

As a land-central city with no physical barriers impeding suburban sprawl, Atlanta has seen a huge influx of investment in commercial, multi-family, and single family buildings in the last 24 months. This trend is confirmed by the HomeUnion 2017 Single Family Rental report where single family home new permit requests grew only modestly but multi-family permit requests continue a growth trend started back in 2011. The AlphaFlow Investment team recently visited Atlanta and spent time driving across the region to interview local residents and lenders to see what’s driving the growth in this market. While online market reports and survey data are helpful, there is no comparison to kicking the tires and viewing a region’s dynamics and key trends first hand.

What Makes The Atlanta Real Estate Market So Healthy?

Below are some trends in the Atlanta real estate market for every investor to know about: 1) Millennials Moving To Atlanta 2) Shortage Of Housing Inventory In Town If you want to know about home sales in Atlanta, then the Atlanta Realtors is where to look and they make this handy infographic as part of their June Market Brief, the most recent one available.  
Atlanta realtors market brief - click for full length image

Atlanta realtors market brief – click for full-length image

  The Numbers: Where You Want to Live Where You Want to Invest These are all ‘in town’ neighborhoods. ‘In town’ in Atlanta means inside I-285, the Perimeter that circles the city. Many people, not just millennials, want to move in town closer to the city and its amenities. There are simply not enough homes for everyone that wants to live there. Housing supply dropped 4.9% over June 2016, per Market Brief, and inventory sits at a low 3.2 months. Housing starts are well below peak levels according to HomeUnion, which they attribute to low margins for entry level homes and high land costs. House flippers have noticed the shortage too. In Atlanta, flips were just under 8% of all home sales in 2016, above the national average of 6.1%. 3) New Cities Forming Most of Atlanta and these most desirable neighborhoods are in 2 counties: Fulton and Dekalb. These 2 counties have seen at least 5 new cities form in the last 5 years. Motivation for forming new cities include more local control and taking some power and revenue away from the county government, who they see as inept or inefficient at running their county. New cities include Brookhaven, Sandy Springs, Dunwoody and Tucker, all of which are good areas for living, investing or both. Many of these new cities need the tax base that comes from residential property taxes to run their new city government. The result is a welcoming environment for remodelers, rehabbers, builders, infill housing and anything that takes the existing land/property and makes it more valuable.

Understanding Atlanta’s Key Areas And Ongoing Projects

Heat And Shortage In The Market

You will often hear in conversation people stating that the Atlanta real estate market is “overheating” or the market has “reached its top”. While this may be true from a holistic standpoint (as one needs to be more prudent in their analysis, stress testing, and investment selection) real estate is, at its core, a local industry and needs to be evaluated at a neighborhood level, not only from a macro view. Atlanta’s real estate market may look overheated from an outside general view, but is backed by good fundamentals when you dig into its local trends at a neighborhood level. When there is a housing shortage in an attractive city like Atlanta, teardowns, infill housing, and rehab projects start popping up everywhere, and these are exactly the kinds of projects we fund at AlphaFlow.

In Conclusion

These rehab projects are great potential acquisitions for AlphaFlow and we expect to see more coming out of Atlanta for the next few years. Not only do these projects boast attractive yield but they also are accompanied by seasoned local developers who are in tune with neighborhood fundamentals. The AlphaFlow Investment Team will target loans in specific regions of the Atlanta real estate market for our client’s portfolios as we see overall desirability increase with greater public and private investments.  

About the author:

Miles DeamerMiles Deamer is the Director of Investments at AlphaFlow. He is responsible for the acquisition, underwriting and execution of real estate debt investments. Before AlphaFlow, Miles was one of the earliest employees at LendingHome, helping scale the sales, operations, & servicing teams. Early in his career, Miles was a member of the credit team at First Republic Bank (NYSC:FRC) reporting directly to the Chief of Credit. 

Miles received a BS in Real Estate Development from USC where he was a member of a Division I National Championship Water Polo Team.

AlphaFlow Single Family Rental Investment Forum Recap 2017   The AlphaFlow team recently attended the IMN 5th Annual Single Family Rental Investment Forum at the Loew’s Hotel in Miami Beach, Florida. The team met with some of the top industry experts, discussing the current state of the single family rental investment and lending markets. Throughout the conference, we noted one consistent theme– demand for rental properties has increased across the U.S. When individual developers, financing partners, and take-out investors are all seeing smoke, there’s fire. There are three core elements that are contributing to this major shift: market conditions, demand drivers, and supply suppression.

Market Conditions

Let’s dig a little deeper, starting with the understanding of why limited market conditions are impacting single family rental units. Across the United States, we are seeing low saving rates, income stagnation, and an unprecedented rise in student loan debt. With little to no savings, the vast majority of Americans are unable to save up the 20% down payment needed to purchase a home. Renting naturally becomes the next best option. This is a download of the opening day keynote presentation.

Demand Drivers

On the demand side of the equation, strong job growth and low unemployment are giving Millennials (individuals born between 1982 and 2004) the option to leave their family home sooner. Unlike prior generations, Millennials care more about the proximity to, or availability of, amenities over the size of a house. This group then pushes toward dense urban centers where the price to purchase a first-time home is much more expensive, thus renting is the primary option. Across the nation, we are seeing Millennials migrate for good paying first-time jobs. Areas such as the Pacific Northwest are showing strong signs of economic growth, attracting recent college graduates. Other areas to note include:

Supply Suppression

Supply suppression, caused by low inventory, a minimal number of distressed units, and low national building permits are factors contributing to a squeeze in new single family rental units coming online. Since the 2008 market collapse, very little ground up construction (building a property from an undeveloped parcel of land) has occurred, primarily as a result of tighter lending practices as the industry was still digesting Dodd-Frank and QM (qualified mortgage) policies. Low supply has also been exacerbated as the price to develop new homes has increased. Builders today are hard fought to build for under $200K as costs have increased for local building permits, labor, and raw materials. A great example of this is currently seen in the Dallas market, where a majority of new construction is built in the $300K-$400K range, targeting Millennial first time home buyers.

Fix-and-Flip Market Inventory

As interest rates slowly rise and inventory thins, we are seeing fix-and-flip developers begin to change their approach in selecting properties to buy. Coming out of 2008, developers had a plethora of potential properties to purchase out of foreclosure or from borrowers in duress. In previous years a developer would purchase a property at a discount, complete some light cosmetic rehab and sell the property, netting 25%+ returns. In today’s market, however, finding discounted deals is extremely cumbersome pushing developers to count on their rehab improvements (over the acquisition cost) to net the returns they desire. We are seeing four markets in particular where developers are still able to obtain somewhat of a discount upon purchase: Illinois, New Jersey, New York and Ohio. Since these states operate under Judicial foreclosure ruling, properties foreclosed on years ago are finally coming to market, presenting developers with attractive acquisition deals.

What This Means To AF Loan Acquisition

We see no reason to anticipate any decrease in demand for rentals in the near future. In fact, as interest rates begin to increase and credit starts to tighten, this will only further exacerbate supply constraints as financing options become more expensive. For real estate investors, this market climate presents some interesting investment options. For fix-and-flip developers, this presents another viable exit strategy after the rehab portion of a project is complete. With more developers counting on their rehab to bolster a property’s exit price, AlphaFlow is reviewing all scopes of work (SOW) with greater scrutiny and making sure the anticipated updates are in line with the surrounding market. Furthermore, we are limiting exposure to novice developers and no longer purchasing loans from first-time developers. Instead, we are selecting loans with more seasoned developers, at a lower yield. Regarding new markets to enter, we will continue to monitor “where” and “how” potential deals are sourced by developers. We will continue to focus on market drivers such as diversity of employment base and millennial migratory habits to help guide our loan acquisition strategy as we believe these are forward leading indicators of market health.

About the author:

Miles DeamerMiles Deamer is the Director of Investments at AlphaFlow. He is responsible for the acquisition, underwriting and execution of real estate debt investments. Before AlphaFlow, Miles was one of the earliest employees at LendingHome, helping scale the sales, operations, & servicing teams. Early in his career, Miles was a member of the credit team at First Republic Bank (NYSC:FRC) reporting directly to the Chief of Credit. 

Miles received a BS in Real Estate Development from USC where he was a member of a Division I National Championship Water Polo Team.

Rising Rates   As of the printing of this article the Federal Reserve had raised its benchmark lending rate a quarter point. There are an additional two rate hikes projected by most analysts for 2017. While the increased rate hike is an indicator of a strengthening economy, what do higher interest rates augur for commercial real estate investment trends and how do investors evaluate the rate hike vis a vis their investment portfolios? Here are a few subplots as interest rates march upward. Rates rise in response to good news. It’s important to keep in mind that the anticipated rate hikes are in response to sustained GDP growth, improved consumer confidence, healthy job creation forecasts, and employment settling at or near capacity levels. After moving cautiously for years, the Fed’s hints of rate hikes mean a robust conviction that the economy has made a full recovery, and is operating at or near productive capacity. From this standpoint, CRE investors should not be too disheartened by looming rate hikes; strong rental housing demand, a healthy retail sector, and stimulus in manufacturing should help grow demand for all types of commercial real estate. An eye toward secondary markets. As Fed Chairman Janet Yellen noted during her February meeting with the Open Market Committee in February, there are some concerns of frothiness in high-density core markets, where inpouring of foreign investment and a glut of supply continue to compress cap rates. With a rising cost of debt capital, it may become more critical than ever to pursue opportunities in non-gateway cities. Fortunately, there are a handful of secondary markets – such as Austin, Denver, and Seattle – experiencing above-average overall population growth, driven by an influx of millennial professionals who will drive multifamily, retail, and office demand for the foreseeable future. Watch for Movements in the Regulatory Environment. With Republicans in control of the executive and legislative branches, the future of several Dodd-Frank-era regulations are in question. In particular, the rule requiring commercial mortgage-backed security issuers to retain five percent of the credit risk on issued securities. Should this rule stand, traditional lenders may be constrained, compounding the increased cost of debt capital stemming from rising rates. This could expand opportunity for hard money lenders and yield more margin opportunities for real estate crowdfunding platforms and their investors. With higher interest rates, inflation becomes a wildcard. While rising rates typically have the eventual effect of tempering inflation, it’s likely that the underlying growth and consumer confidence driving the Fed’s decision will also mean higher rates of inflation in the short and medium term – growth and a relatively high velocity of money should push prices up in the short term before monetary policy reins in growth and inflation. CRE investors should keep a close eye on price movements. Managers should be ready, able, and willing to push rents upward in response to rising interest rates and inflation. Flat long term leases are suboptimal in this environment, and won’t create as much value on a relative basis. What About Cap Rates? There’s a common misperception that cap rates and interest rates move in lockstep – in other words, that rising interest rates will have a negative effect on pricing and increase cap rates, ceteris paribus. While it’s true that cap rates and interest rates (using 10 year treasury yields as a proxy) show a modest correlation of 0.7, correlation does not imply causation – cap rates are influenced by a wider network of variables beyond interest rates, including real estate market fundamentals, investor appetite for risk, and capital flows. NPI transaction cap rate and U.S. 10-year Treasury yields   The more critical takeaway is that any corresponding increase in cap rates stemming from an interest rate hike (as consequence of increased cost of capital) is likely to be mitigated over time. The effect of an increased “exit cap rate” on return diminishes over time, as the compounding effect of net operating income (NOI) carries more weight. This is all to say that rising interest rates may have some impact on cap rates, but it should not be substantial in the long run – investors can protect themselves against the risk of rising cap rates by pursuing longer-hold projects. IRR differentials for 4 exit cap rate scenarios  

Conclusion

For investors in online real estate (crowdfunding) platforms, the chief consideration should be whether the platform’s real estate team is considering these factors, and whether the originators behind the platform’s constituent projects have experience through business cycles, and can make wise investments and management decisions in a fluid interest rate and regulatory environment.   About the author: EquityMultiple EQUITYMULTIPLE is an online marketplace for private real estate transactions. It enables individual and institutional investors to invest alongside the market’s most sophisticated sponsors in many commercial real estate assets. EQUITYMULTIPLE was launched in February 2015 and is based in New York, United States.

NYC

We recently sent investors in AlphaFlow Fund 1 their first quarterly update, sharing both information on the Fund and our commentary on the market. We wanted to highlight a number of key points for all of our members:

May 2016

We are pleased to let you know that AlphaFlow Fund 1, LP (“Fund 1”) is now fully invested and earning returns. The Fund 1 portfolio now contains 77 loans with a weighted average return of 10.0% (net of AlphaFlow’s 1% AUM fee) and a weighted average LTV of 68.6%, with all loans secured by first liens on the underlying properties. The Fund 1 portfolio is invested across 5 different platforms, with investments in 20 states across the country. As such, the Fund 1 portfolio is currently more diversified than 98.5% of AlphaFlow portfolios of users invested in the real estate crowdfunding industry.

Commentary
Platforms:
AlphaFlow Fund 1 ultimately invested across five real estate crowdfunding platforms after reviewing potential investments across eight different platforms. AlphaFlow may choose to work with additional platforms in the future, but at this point we found these five platforms to have the combination of underwriting processes, risk-adjusted returns, and procedures / performance in handling delinquencies / defaults that best fits our desired investment profile.

Platforms in AlphaFlow Fund 1:
Fund That Flip
LendingHome
Patch of Land
PeerStreet
Sharestates

Market
During the course of investing Fund 1, we experienced a shift in the riskiness of loans. We had the ability to invest Fund 1 much quicker if we simply looked for 10%+ investments with LTVs at 75% or below. However, we chose to forego many of these investment opportunities, as too often we were presented with inexperienced rehabbers (often doing their first project ever) undertaking significant construction plans in competitive markets.
Given the proliferation of platforms in the space, it’s not surprising that better borrowers who last year may have paid 11% or 12% interest for their loans are now paying 8% or 9%. Ultimately, today’s 12% borrower is rarely as creditworthy in our eyes as what we saw only one year ago, so we expect to see a measured increase in defaults across the industry.
Real estate prices are on an upswing, but there are questions as to its sustainability. One way to evaluate this risk is to measure the median home price in the U.S. vs median family income. As the chart below illustrates, we’re currently above the historical average (by ~1.5 standard deviations). Compared to the last bubble, we appear safe. In financial circles this situation is often referred to as an echo bubble. That is, a belief that we’re still in safe territory because of how much worse it was in 2006, and thus believing we’re still far from a bubble, even if we’re actually in a smaller one today.

How Prices Getting Carried Away

That said, interest rates today are significantly lower than during the last bubble (both in the U.S. and worldwide). As such, higher real estate prices still look more attractive than they did in the past. In addition, with interest rates so low around the world, we expect U.S. real estate prices to be supported by foreign capital looking for relatively safe asset-backed investment opportunities. Given all of these factors, we believe we are still 1.5-2.5 years away from the housing market peaking.
Moving forward into AlphaFlow Diversification Fund 2, LP, we plan to invest more capital in lower-rate loans that we are finding to be relatively attractive on a risk-adjusted basis. The supply of these is very strong, and they generally have borrowers with significantly more experience and allow us to invest more in what we find to be attractive geographies.

Portfolio
Our aggregate portfolio in AlphaFlow Fund 1 consists of 77 loans, all of which are secured by first liens.

Maturity Schedule

 

Delinquency Schedule

 

Below is the list of loans contained in AlphaFlow Fund 1.

Fund 1 Portfolio - 1

 

Fund 1 Portfolio - 2


This AlphaFlow Fund 1 Portfolio Fact Sheet and Market Analysis is a summary highlighting key points in the May 2016 AlphaFlow Fund 1 Quarterly Updated letter from AlphaFlow Fund 1, LLC (“Fund 1”) to its investors.
This document does not constitute an offer to sell or the solicitation of an offer to buy any security, product, service or fund. This document is for informational purposes only and is not intended to be, and must not be, taken as the basis for an investment decision. The information contained herein may not be used, reproduced or distributed to others, in whole or in part for any purpose without the prior written consent of AlphaFlow, Inc. (“AlphaFlow”). Neither AlphaFlow nor any of its affiliates is under any obligation to inform you if any of this information becomes inaccurate. No representations is made as to the accuracy and completeness of information obtained from third parties. This document is qualified in its entirety by the Offering Memorandum of AlphaFlow Diversification Fund 2, LLC (“Fund 2”), which should be carefully read prior to any investment in Fund 2, a successor fund to Fund 1.
This document has been prepared for prospective investors who are legally eligible and are suitable to invest in the type of investment described herein. Generally, prospective investors would include investors who are “accredited investors” under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and verified pursuant to rule 506(c) of Regulation D promulgated under the Securities Act. An investment in Fund 2 is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks inherent in such an investment. It is the responsibility of any prospective investor to satisfy itself as to full compliance with applicable laws and regulations of any relevant jurisdiction. For a description of certain risk factors associated with an investment in Fund 2, please refer to the “Risk Factors and Conflicts of Interest” section of the Fund 2 Offering Memorandum.
Interests in Fund 2 have not been and will not be registered under the securities laws of any U.S. State or Non-U.S. Jurisdiction, and have not been recommended or approved by any U.S. federal or state or any non-U.S. securities commission or regulatory authority. Furthermore, the foregoing authorities have not passed upon the accuracy or determined the adequacy of the information contained herein.
Past performance is not indicative of future results. Any AlphaFlow Fund 1 investments listed herein are being provided for informational purposes only. Investments in real estate loans may result in the loss of principal. There can be no assurance that Fund 2 will be able to achieve the same portfolio composition and underlying loan terms as Fund 1.
These materials contain projections and other forward-looking statements. Any statements that are not historical facts are forward-looking statements that involve risks and are inherently uncertain. Sentences or phrases that use such words as “believe,” “anticipate,” “plan,” “may,” “hope,” “can,” “will,” “expect,” “should,” “goal,” “objective,” “projected” and similar expressions also identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Projections and other forward-looking statements, including statements regarding AlphaFlow’s assessment of the market, are by their nature uncertain insofar as actual realized returns or the projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, errors in strategy execution, acts of God and other developments. There can be no assurance that projections and other forward-looking information will not change based on subsequent developments and without further notice, and no assurance can be given as to outcome. You should not place undue reliance on forward-looking statements, including forecasts and projections, and statements regarding the assessment of the market, which speak only as of the date referenced herein.
These materials do not constitute legal, tax, financial or other advice. The legal, tax and other consequences of any proposed transaction may differ for each recipient as a result of, among other things, the particular financial situation of, and the laws and regulations applicable to, each recipient. You should consult your own legal counsel, accountants and other advisors regarding the information contained herein and the transactions described hereby.

AlphaFlow
This piece was originally published by Lend Academy HERE.

Real estate crowdfunding has absolutely exploded since opening up to investors in 2013 (see Part 1 here). I see that growth – 150% per year the last 3 years! – continuing and with that comes amazing innovation and challenging consequences. I wanted to share 5 important things you’ll see come to real estate crowdfunding in the next year:

1. Automated Underwriting

A number of platforms raised enormous rounds of venture capital in 2015. Many of these rounds were much larger than their performance metrics might garner in other industries. Fintech is hot right now though, and P2P/crowdfunding is on fire. However, large rounds come with similarly big expectations. If real estate platforms are to hit hyper growth, as Lending Club did around 2010 and Prosper did soon after Aaron Vermut and Ron Suber took the helm in 2013, you’ll see one big change. Specifically, I think you’ll see many more companies adopt some form of automated underwriting that allows them to evaluate exponentially more applications without growing their headcount proportionally. PeerStreet is a leader here, utilizing sophisticated data analytics that co-founder Brett Crosby honed at Google. To truly demonstrate the “tech” in fintech and not simply build real estate companies with websites, more platforms will move towards automated underwriting.

2. Auto-Invest

While Lending Club and Prosper offer very different products than the real estate platforms, they are nevertheless the world leaders in P2P investing. As such, many of us studied them closely in our earliest days as we looked for the roadmap to success. Most investors on these platforms that I know – at least those not in the P2P industry – choose to use automated loan picking instead of pouring through thousands of loans themselves. As the real estate crowdfunding market has started to pick up and sites have increased volume, many have begun to launch their own versions. Actually executing this in real estate is proving to be much more difficult than many founders expected though. The real estate platforms are working with tiny statistical sample sizes and long feedback loops compared to the massive wave of loans Lending Club can pour through in developing its grading system. Add in a lack of standardized metrics between platforms, and it’s going to be a tremendous challenge. For those who pull it off though, it could produce an inflection point in the ability to quickly fund deals! I’ll think you’ll see many try in the coming year.

3. Defaults

There’s a Pavlovian influence to growing up in a bull market, and many founders haven’t seen the ugliness of a true down cycle. Instead, they’ve been rewarded for taking risks over the last few years and felt most burned by the investments they did NOT make. The result is some platforms underwriting deals at risk levels (i.e. LTV) you’d never see experienced real estate lenders touch. At a certain point, even in a bull market, the law of numbers kicks in and defaults happen even in the best of circumstances. How the industry handles these will be key.

Experienced investors understand that not all deals go well. When deals fall behind or go into default on any of the industry’s major platforms, I tend to get the announcement forwarded to me from a number of our customers. Their reactions are typically tied to one very important item: transparency. Platforms who openly and continually communicate with their investors tend to earn patience. Letting investors know exactly what’s going on, why the situation came to be, and what the platform will do to maximize their recovery can go a long way to building loyalty.

Unfortunately, this hasn’t always been the case, as some platforms – even some of the more popular ones – have seen defaults pile up. Many of these defaults will help to sharpen underwriting in the industry. That said, in a venture-fueled environment where growth may be paramount to performance in the short-run at some platforms, I’m reminded of Upton Sinclair’s quote: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

4. New Distribution Channels

As we discussed in Part 1, there has been a proliferation of real estate crowdfunding platforms, with close to 230 in the world today! I’m hearing about customer acquisition costs at platforms moving north of $5,000. Ridiculous numbers like that simply aren’t sustainable, and so platforms are looking to new distribution channels. With investors so fragmented, it wasn’t difficult to convince a number of top platforms to publish their deals on AlphaFlow, and today we have a healthy waitlist of those looking to connect.

You’re also finding new ways to invest. In November 2015, Fundrise launched a new investment vehicle – dubbed an eREIT – to invest in commercial real estate. Non-accredited investors can also participate, opening up an entirely new market of people who now have access. In February, AlphaFlow launched the industry’s first multi-platform fund, giving investors a way to passively build a portfolio of 75-100 deals with one investment. I think you’ll see a number of additional funds announced in the coming year as platforms work to expand beyond early adopters who were eager to actively invest, and tap into the majority of investors who prefer to participate passively.

5. Mobile Technology

Like everything in technology, you’re seeing real estate crowdfunding going mobile as well. In Q4, Access launched an app that they’re calling “Tinder for Investments.” In 2014, mobile overtook desktop usage. It’s moving slower in real estate crowdfunding though for two primary reasons: (1) the demographics of the investors today are skewed towards those still using desktops over mobile for actually transacting, and (2) given the size of these investments, they’re not often quick decisions made while sitting at a Starbucks or between meetings on your phone. I think mobile will start to make a dent, but it will come more in reporting and monitoring than in actually transacting.

Conclusion

As one of the early founders in the space, I can say that I couldn’t have imagined we’d get where we are as an industry this quickly. I continue to be impressed with the growth, innovation, and most of all, the people in the industry. I think you’ll see some growing pains this year, but real estate crowdfunding is ultimately poised to continue its meteoric rise. I’m excited for the day when we look back and wonder how real estate wasn’t in everyone’s portfolio, when crowdfunding makes it so easy!

AlphaFlow This piece was originally published by Lend Academy HERE. As one of the founders of RealtyShares, I remember the dawn of real estate crowdfunding in 2013. There were only a handful of real platforms and simply getting people to sign up for our websites – never mind actually investing – was an enormous struggle. Oh how things have changed! Launching AlphaFlow last fall gave me the opportunity to step back and start to look at the industry as a whole. From the number of platforms, to the tremendous growth in crossing $2.5 billion of crowdfunded dollars last year, to the world class founders like Jilliene Helman and Brew Johnson leading incredible companies, it’s exhilarating to see real estate crowdfunding begin to truly make an impact! Looking back on the industry, I wanted to share 5 observations from what’s happening in real estate crowdfunding today. 1. Multiple platforms reaching new heights In the industry’s early days, we often needed weeks or months to fund a property. In our first six months at RealtyShares, we barely crossed $500k in total crowdfunded dollars. In the next six weeks, we doubled that and took off with much of the rest of the industry. Today, at least 4 real estate crowdfunding platforms have entered the “Century Club” after having funded more than $100 million: Realty Mogul, Sharestates, Patch of Land, and RealtyShares. A number of other rising stars like PeerStreet have quickly built incredible investor demand and will be there soon. 2. Big Investments As real estate crowdfunding exploded, so did investor interest. Venture capitalists saw what is clearly an enormous market – the annual real estate market is about $500 billion – and poured massive investments into the space. About a year ago, LendingHome closed a $70 million Series C. A few months later, Realty Mogul announced a very impressive $35 million Series B. In early 2016, at a time when every headline seemed to announce the end of venture capital and proclaim that the era of large raises is over, RealtyShares announced a $17 million Series B. Good businesses will always get funded, regardless of the venture environment. Silicon Valley’s top venture firms have made it clear that they’re believers in the promise of real estate crowdfunding. Large rounds come with enormous expectations though. Many skeptics believe the industry is in fact overfunded. I agree with Mark Suster in that overfunding early is dangerous, but it’s ok once product/market fit happens (insider tip: when you see a platform launch all sorts of complicated new products while not really winning with any of them, it’s a good sign that they’re overfunded and don’t have the discipline that comes with a tight budget). Only time will tell how these investments pan out. 3. Proliferation of Platforms A growing industry supported by significant venture capital interest will always attract new startups. While total crowdfunding dollars grew about 6x from 2013 to 2015, the number of platforms grew ~10x during that same 3 year period to over 230 platforms worldwide. In other industries, you might say these new players are all “me-too” copycats. You might even say they’re “fast-followers.” I believe it’s more nuanced here. When you dig into the real estate industry, you realize that the space is inherently fragmented. In mortgages, for example, the top player (Wells Fargo) only has about 12.5% of the market. In fact, the top 10 players only have 40% combined! These new players have one big trait in common though . . . 4. The Emergence of Specialization New platforms aren’t trying to do what we did at RealtyShares, where we offered both debt and equity and a variety of asset classes from our earliest days. Conversely, you’re seeing specialization in new players like Fund That Flip, which has tremendous experience in underwriting single family residential debt. Others like Apple Pie Capital bring expertise for those looking to invest in franchises. Patch of Land has expanded beyond its early short term debt product by expanding to include medium-term products – a thoughtful evolution rather than revolution in its offerings. Real estate crowdfunding may prove to be the exception, but the rest of the real estate industry tells us that you won’t find a winner-take-all anyway BUT that the industry is large enough to support multiple giants. 5. Institutional Capital Like with Lending Club, the early mission of real estate crowdfunding was to give access to a new asset class to the masses. Those managing institutional capital though are paid to find great investment opportunities, and as the industry gained both size and a tremendous track record, hedge funds came calling. In the industry’s early days, you saw a few institutional deals announced but those firms have told me that most of their capital was never actually deployed. That’s not the case today. In February, Sharestates announced a $60 million partnership with an east coast private equity firm. The news came just weeks after Patch of Land signed a $250 million forward flow agreement with a credit fund. Institutional capital has also helped break records, as Realty Mogul executed a $49 million bridge loan with Elite Street Capital in November. Conclusion Real estate crowdfunding has come a long way since a handful of us launched platforms in 2013. Given the size of the industry though, the industry certainly has more opportunity in front of it than behind it. In Part 2 we’ll take a look into what’s next for real estate crowdfunding and what you’ll see in the coming year!

AlphaFlow

This piece was originally published by the Lending Times

On March 2nd, Dynamics Capital put together a great real estate crowdfunding conference in Los Angeles. In attendance were some of the industry’s top platforms, including Realty Mogul, Patch of Land, PeerStreet, and AssetAvenue.

I was fortunate to attend as well and present one of the keynote presentations. As one of the two founders of RealtyShares, I was responsible for the financial underwriting behind most of our deals in our first 18 months, and so got to know the sponsor perspective very well. Today I’m the CEO of AlphaFlow, where we help investors build and manage P2P portfolios. Given both of these roles, you can say I’ve seen things from both sides of the table.

Below are 5 particularly interesting takeaways from the conference:

Competition

In many industries, the competition would be the other platforms. However, in the real estate crowdfunding world, that’s simply not the case. When you compare the size of the industry (~$2.5 billion worldwide in 2015) to the entire real estate investment market, it’s clear that growing the crowdfunding pie has much more potential than fighting for a bigger slice of what’s there today. The biggest competition is still the lack of awareness. Most sponsors in the industry weren’t as interested in hearing the differences between CrowdStreet and RealtyShares as just understanding how crowdfunding works. Education and creating awareness are still top priorities. (These are likely still top priorities for much larger industry players like Lending Club and Prosper!)

Transparency

“Transparency is critical.” I say this all the time when working with my investors, but the sponsors are also very interested in transparency around their side of the marketplace. Given we’re seen as an independent 3rd party, AlphaFlow often gets emails from sponsors soliciting our opinion on a particular platform. They’re asking questions whose answers I’m not sure the platforms are actually tracking yet. For example: “How long does it take the average deal to fund?” or “What is the average return your platform has offered on funded deals by asset class?” As platforms grow and need to move beyond early adopters, knowing their metrics is going to be critical to converting sponsors unfamiliar with the space and less eager to try something new.

More and more platforms

When we did our first deals at RealtyShares in 2013, there were only a few other platforms that were actually active in the market. There were dozens of fancy landing pages but most had no substance behind them and many were a side project of a real estate broker. Today, it feels like I’m hearing from 1-2 new platforms per week with founders who have impressive credentials and solid backers. For the most part, new entrants have some niche and aren’t trying to compete with platforms like Realty Mogul, which fund a variety of asset classes with both debt and equity. Greater specialization can mean good things for investors, as long as these sites can fund their deals. You’re also seeing powerhouses like LendingHome, which built a great business with institutional investors, enter the crowdfunding space as well.

Pre-Qualifying

During a panel that included four top platforms, someone in the audience asked if he could call the platform to see if he’d qualify prior to actually bringing a deal. David Manshoory of AssetAvenue noted that doing so is already possible on his platform, but that’s probably the exception today. Most platforms have been, like all startups, resource constrained and so valuable hours needed to be spent on assessing actual business opportunities vs potential. Large funding rounds also bring an eye towards the future and long-term growth, so I expect we’ll see more platforms vying to be the funding choice of sponsors even before they have a deal to fund.

The Meaning of an Approval

With most crowdfunding sites, approving a sponsor’s deal simply means that it will go up on the platform to be funded (or not) by investors. Even if sites have confidence in their ability to execute, there is still uncertainty around the timing required. In the earliest days, we often got weeks or months to fund a deal. That’s not the case today though, as sponsors look for certainty of capital. The result is more and more platforms, like Patch of Land, pre-funding deals and then effectively selling off their own positions on the platform. Over time, you’ll see more platforms following Patch’s lead; others may not, but they’ll need an exceptional track record to instill the same confidence in a sponsor eager to close his deal.

photo-1443827423664-eac70d49dd0dAs the sun rises on 2016, I wanted to share 10 predictions on Real Estate Crowdfunding for this year. Given AlphaFlow’s place in the ecosystem though, I’ll concede that these are not only predictions but also some items we plan to help bring to fruition.

  1. Automated Underwriting: A number of platforms raised enormous rounds of venture capital in 2015. Many of these rounds were much larger than their performance metrics might garner in other industries. Fintech is hot right now though, and P2P/crowdfunding is on fire. Large rounds come with similarly big expectations though. If RE platforms are to hit hyper growth, as Lending Club did around 2010 and Prosper did soon after Aaron Vermut and Ron Suber took the helm in 2013, you’ll see one big change. Specifically, I think you’ll see many more companies adopt some form of automated underwriting that allows them to evaluate exponentially more applications without growing their headcount proportionally. I’ll write more on this soon.
  2. Make Room at the Top: I think at least 2 of the top 6 real estate crowdfunding platforms a year from today will be names unfamiliar to crowdfunding investors today. We’re in partnership discussions with a couple of large firms that I never thought would entertain crowdfunding, and I have to believe there are many more thinking about it.
  3. Consolidation? People often speculate about platforms merging. I’m not sold that we’ll see that yet in 2016. Too many platforms – even those I think are struggling to figure out an identity – have raised too much money to need to consider that path just yet. In 2017 though, Steve McLaughlin and FT Partners may be working their magic for a well-funded platform (see #7).Money-House-see-saw
  4. Do What You Do Best: In the last post, we referenced Ron Suber’s seesaw metaphor for marketplaces, in which platforms shift between having too much capital or too much product to fund. I think we’ll see more platforms focus on sourcing investment opportunities and will work with institutional capital and other firms, like AlphaFlow, to consolidate their investment sources and streamline distribution. I’m talking my own book here, of course, but we launched AlphaFlow because we think it’s the best thing for both platforms and investors in a fragmented P2P world.
  5. Lipstick Will Come Off of a Very Ugly Pig: A lawyer once described the industry nightmare not as a deal going bad, as that’s just part of investing. Rather, she said finding that a deal was backed by “an appraisal that turns out to have been written in crayon” was the doomsday scenario. I think processes at the platforms have improved a lot over the last year, but I think cutting corners on an early deal will come to light in 2016.
  6. Industry Standards: Go to five platforms and you’ll find five different ways of presenting a deal. Five different opinions on what’s important to disclose and what isn’t. Five different ways of reporting after an investment has been made. That’s a huge pain point for investors and is simply unsustainable. From more standardized reporting, which AlphaFlow is providing today, to companies like Accredify providing accreditation for Rule 506(C) offerings, 2016 is the year where the industry moves towards uniform standards. splash pot
  7. Don’t Splash the Pot: Venture capitalists are raising more capital than ever for their funds. That said, there are also a number of strategic investors (a fancy name for the venture arms of corporations) that have lots of cash and a low cost of capital. I’ve been in more than one meeting in which the investor said something to the effect of, “I get that you’re trying to raise [x] dollars. Could we just go take the whole market if we invested 5 times that amount and blow everyone away?” There’s a reason experienced VCs don’t adhere to this tactic, but I think in 2016 you’ll see a strategic investor employee just this type of rationale and over-fund some platform.
  8. Focus on What You Underwrite Best: As we dig through the numbers, it’s interesting to see how some of the biggest platforms have abysmal track records in underwriting certain asset classes and fantastic track records in others. I’m not sure if the platform themselves are even tracking these projected vs actual numbers, but our users have been and they’re noticing. While some platforms will likely continue to offer a variety of asset classes, I think you’ll see them dig deeper into asset classes where they’ve had the most success.
  9. Moving Beyond Adolescence: In our last post, I suggested 2015 might be called the teen years for real estate crowdfunding. 2016 is time to grow up, and that is going to bring a number of new opportunities for investors. Not only in where they invest, but also in how they can invest. From aggregators to investment vehicles, investors will see a new suite of offerings that give them increased transparency and more options. We’ll announce our first step in that direction soon.rsz_bonds
  10. Fixed Income Dominates: I think we’ll see a strong shift to fixed income (debt) offerings over equity deals in 2016. While some platforms are doing a better underwriting job than others (e.g. RealCrowd, led by real estate veteran Adam Hooper), from a 30,000 foot perspective, cash-on-cash returns for equity deals have usually been below what was projected (see #8). Between this and general uncertainty about fixed income in 2016, I think you’ll see a significant growth in first lien real estate debt. Firms like Patch of Land, which focus on this product, may benefit if they can demonstrate specialization as a result of their focus.

If you’ve got thoughts on what’s going to happen in 2016, I’d love to hear them – Ray@alphaflow.com. Happy New Year!

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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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