The buzz around real estate crowdfunding has coincided with changing trends in the property investment landscape, leaving some difficult choices for investors
Real estate investors are having a much harder time than they used to. The space is just more crowded and so it’s more competitive when it comes to finding good deals.
Over the past five years, Sharestates co-founder and CEO Allen Shayanfekr has noticed that property investment trends don’t follow a straight line; instead, they change over time.
“When we first started, we were seeing more borrowers focusing on residential one to four family fix and flip. Over time as that market started to get more competitive and as our borrowers evolved, they started focusing on larger projects. They started getting into multifamily and mixed-use projects in core urban markets,” he said, adding that there was yet another shift to a pretty heavy focus on luxury homes, luxury apartments, and other high end class I products.
In the past year, however, Shayanfekr has seen investors look away from those high-end products more towards B- and C-type of products. People have been looking for opportunities in multifamily, workforce housing, and mixed-use spaces, specifically in the southeast region. There’s a need for more moderate housing for the everyday person, and that’s a good bet for everyone at the moment.
In fact, capital has continued to flow into market to finance some of these deals that perhaps were somewhat out of reach. The private lending space has grown tremendously, and Shayanfekr thinks that it’s going to continue to see growth throughout this year and the next, following the general market trends.
Although the crowdfunding space has become more mainstream in general, it’s hasn’t followed the same trajectory in the real estate lending space. Sharestates is an online lending platform, and Shayanfekr says that it’s actually seen a bit of a retraction from a few years ago, when there were dozens upon dozens of crowdfunding platforms. Despite the buzz around crowdfunding, the crowdfunding debt space isn’t growing as much as everybody thinks it is.
“There’s only really been a few select players that had been able to properly capitalize on it and build the right type of platform and used the right resources to build those platforms to garner the interest of the individual investor,” Shayanfekr said. “A lot of crowdfunding platforms underestimated how much work it would take to build a platform for retail investors. How much work would actually go into the investor relations side of answering their questions and giving them the reporting they need and creating a presentation that was easy to digest . . . giving them enough information that they felt comfortable making an investment but also not giving them too much information.”
Today, you can count crowdfunding programs on one hand, and even some that started out as purely crowdfunding platforms have shifted to using more institutional capital with whole loan investors rather than multiple investors. Sharestates started with purely a retail component and then eventually started bringing on institutions, to today where about 60% of their loans are institutional and about 40% of their loans on the fractional side.
A lot of companies took large venture capital checks, he said, and faced with the pressure to grow like crazy, they ended up spending like crazy but ultimately never figured out how to get to profitability.
“We kind of went the opposite. We never raised that type of capital early on in our business and I think it forced us, as a bootstrapped business, to be penny conscious and to grow responsibly,” he said.
Given the flood of players in the space and the moving parts involved, Shayanfekr recommends investors should really ask tough and pointed questions of the company that they’re working with, especially in the online lending arena and when multiple investors are involved.
“We just made a conscious decision to just stick with it and never abandon that mission. And it's worked out nicely for us because it's also helped us create more flexible lending guidelines. It's definitely more expensive. It definitely takes more work, but I think in the long term, it is the right answer.”
