Realty Mogul Review Real Estate Crowdfunding
|Value of Deals Done:||USD $338 Million Raised for 350+ projects|
|Minimum Investment:||$1000 to $50,000 +|
|Investment Time Period:||debt: 1-0 years, equity: 3-10 years|
|Estimated Fees:||3% up front, plus 1-2% annual fee, plus deal specific fees|
|Property Types:||diverse, increasing focus on multifamily apartments|
|Debt / Equity Deals:||both|
|Accredited Status Required:||yes (except for REITs)|
|Employees:||80 (2015 Stats)|
|Capital Raised (Company):||VC Backed $41 Million|
About the company
RealtyMogul is one of the pioneers of crowdfunded property; it was founded in 2012 and launched in 2013, in Los Angeles. Jillienne Helman, co-founder and CEO, was formerly a VP at Union Bank, with expertise in strategic wealth management and real estate; Justin Hughes, co-founder, is a California realtor.
This year, RealtyMogul has made two significant hires. In January 2018 Chris Fraley, already interim Chief Investment Officer, was made permanent CIO. He was formerly a partner at Rockwood Capital, a privately held real estate company (https://www.businesswire.com/news/home/20180110005179/en/RealtyMogul-Hires-New-Chief-Investment-Officer). Aaron Halfacre was also recruited to the position of president; he formerly worked for student housing REIT Campus Crest, bought out by Harrison Street Real Estate in 2015 (https://www.reuters.com/article/us-campus-cres-m-a-harrisonstreet-idUSKCN0SA2S520151016).
While RealtyMogul started well, the last couple of years have seen some foreclosures (more details below) and a shift in emphasis towards the REITs, and the company seems to be expanding less aggressively than was earlier the case. It’s possible the two new hires will improve the platform’s competitiveness and bring a larger choice of investments to market, so we’ll be watching carefully to see how things pan out.
Two capital raisings in 2014 and 2015 provided $9m and $35m of capital, respectively. The firm remains privately held, and Sorenson Capital, which led the second capital raising, has a place on the board. The company raised a further $1.5m in September 2016, but has not further increased its capital (https://www.crunchbase.com/funding_round/realty-mogul-series-unknown–fe495ba8).
While RealtyMogul’s base has always been on the west coast, it added offices in Salt Lake City, Atlanta, and New York, growing to over 80 employees in 2015: A more recent employee figure is not available.
The company claims that 140,000 individual investors have registered on the platform. It has raised over $338m for 350-plus properties, valued at over $2bn in total (https://www.realtymogul.com/resource-center/faqs), and has also returned $65m to investors since inception.
Types of deals
RealtyMogul offers a diverse range of deals, with a relatively conservative policy of focusing on real estate that is already generating cash flow or will do so in the very short term. It is not involved in the market for ground-up construction or land. It offers both equity and debt investment opportunities; in line with its conservative strategy, debt is usually either senior debt or first position, so investors have first claim to proceeds in event of foreclosure. Most debt is short term in nature, with no more than three years to repayment.
After foreclosing on two problem loans in 2017, the company no longer makes hard money loans for short term renovation (‘fix and flip’).
While RealtyMogul offers opportunities in office buildings, retail, self-storage, medical, hospitality and industrial properties, it has demonstrated particular strength in the multifamily marketplace.
As well as offering direct investment in both individual properties and property portfolios to accredited investors, RealtyMogul manages two non-traded REITs which are available to non-accredited investors. MogulREIT I, launched in August 2016, is a broadly invested fund which now has over $25m invested, with a focus on deals which will enable consistent cash distributions to investors. Its original minimum investment of $2,500 was reduced to $1,000 in December 2016.
MogulREIT II, launched in September 2017 (https://www.therealestatecrowdfundingreview.com/realtymogul-mogulreit-i-and-ii), concentrates on multifamily apartment communities. Both REITs were launched as blind pool funds with no existing investments. RealtyMogul claims to have been the first crowdfunded real estate platform to have offered a sidecar vehicle.
RealtyMogul focuses on the following real estate assets as investment opportunities:
- Retail shopping centers
- Multifamily buildings
- Industrial sites
- Medical facilities
- Hospitality venues
- Communities of single family homes
RealtyMogul was set up to enable investors to access the benefits of property investment and diversification for a low minimum outlay, and it’s kept that promise. The minimum investment for both REITs is $1,000. Minimum investment for other deals on the platform is deal-specific and can range from $1,000 up to $50,000 at the top end.
RealtyMogul does not charge a fee for joining the site. The REITs charge a 3% upfront fee, which is higher than the industry average, but there is no performance-related fee.
For direct investments, fees are specific to each deal, and are reported under a number of headings, so it is difficult to give an average overall figure. However, the fees are shown transparently in the details for each deal, so investors can see quite clearly what they will be paying; they may add up to 10% overall. Investors will also pay 1-2% annually based on their invested capital.
Investment Time Frame
When RealtyMogul invests in loans, it picks investments of 1-10 years duration, mainly towards the shorter end of that scale. Equity investments are made on a 3-10-year time frame. The distribution policy for each type of investment reflects the different time frame, with loans paying out monthly, and equity on a quarterly basis.
Do you need to be an accredited investor?
While anyone can invest in the REITs (though the quantum of investment may be limited in the case of investors with lower income and net assets), direct investments on the platform are limited to accredited investors.
Notable Projects / Example deals
In 2014 RealtyMogul raised $1.5m from 85 investors towards the first crowdfunded hotel, the Hard Rock Hotel Palm Springs, with a minimum investment of $10,000. At the time, a return of 15-17% over five years was expected, and shareholders also enjoy a number of perks such as 25% off room rates (https://eu.usatoday.com/story/dispatches/2014/04/16/hard-rock-hotel-palm-springs-crowd-funding/7789073/).
RealtyMogul has now participated in six transactions with Comunidad Realty Partners, a real estate investor specializing in multifamily apartments in areas with large Hispanic populations. April 2018 saw RealtyMogul close a $2.75m equity investment in a $11.9m portfolio of multifamily apartments in Plano, Texas, representing 156 residential units. MogulREIT II also participated in this investment (https://www.propertyfundsworld.com/2018/04/06/262959/realtymogul-closes-usd275m-equity-investment-plano-multifamily-portfolio).
In May 2018, MogulREIT I closed a $4.9m investment in two shopping centers in Waterbury, CT and Orange County, CA. Details of the expected returns are not available, but they are intended to enable MogulREIT I to achieve an 8% annualized return while also diversifying its portfolio (https://www.propertyfundsworld.com/2018/05/11/264105/realtymogul’s-mogulreit-i-closes-usd49m-investment-two-retail-shopping-centres).
How does it work?
Real estate developers apply for equity or debt funding from RealtyMogul. The company evaluates the property and the sponsor or borrower, including criminal record checks; RealtyMogul’s underwriting process is rigorous and only a small proportion of investment opportunities are taken onto the platform.
Using the platform is as simple as using, say, an online broker; available investments can be browsed and purchased. An investor dashboard shows current investments, portfolio allocation, and total distributions. Watchlist and waitlist functions are also available.
The mechanism for equity investment is slightly more complex; investors buy shares in a RealtyMogul LLC, which in its turn holds shares in the LLC that holds title to the property. The advantage of this structure to the sponsor is the administrative ease of dealing with a single major investor (the RealtyMogul LLC), which minimizes overhead; RealtyMogul takes on board the task of communicating with and making distributions to the individual investors in the property. The RealtyMogul LLC is a ‘pass-through’ entity, so it is not taxed but passes all earnings through to the investor. However, because the investor does not hold title directly in the property, there is less protection afforded if RealtyMogul becomes insolvent.
- RealtyMogul is a well-funded platform with significant VC support.
- The platform is easy to use, with an investor dashboard that lets investors monitor their portfolios 24/7.
- All documentation can be executed online.
- The investment process is simple, removing much of the complexity that’s associated with real estate deals.
- The minimum investment, at $1,000, is not large, enabling investors to diversify their real estate portfolios via the platform.RealtyMogul is highly selective; only 2% of opportunities that come in to the company make it through to the platform (https://www.realtymogul.com/resource-center/articles/what-is-zero-based-underwriting-and-how-does-realtymogulcom-do-it).
- While the REITs aren’t traded, redemptions are handled on a quarterly basis, making it possible to liquidate a position in the medium term if it becomes necessary.
- RealtyMogul’s offering is diverse, with both equity and debt across the whole gamut of commercial and residential real estate.
- Investments are intended to be cash generative in the short term, which will suit investors wishing to create strong and predictable income streams. Quarterly/ monthly distributions make t hise a strong platform for income investors.
- Recently, RealtyMogul has focused more on non-accredited investors through the REITs. The number of opportunities available to accredited investors could fall.
- Direct property investment via the platform is only available to accredited investors. To qualify, investors need either to earn $200,000 or more a year, or to have a net worth in excess of $1m (excluding their principal residence).
- The deal-specific nature of fees for accredited investors makes it difficult to compare costs with other platforms. Fees may be on the high side for a real estate platform.
- RealtyMogul has had two foreclosures on hard money deals, slightly worrying given the generally conservative funding strategy.
- Investments are illiquid and there is no secondary market for the direct investments, so they must be held till maturity. The REITs are not quoted on a stock market, but there are quarterly opportunities for redemption.
- There is no bankruptcy protection in place.
Does the platform offer pre-funding?
RealtyMogul doesn’t offer pre-funding. Money is only transferred from investors’ accounts once the investment reaches its funding goal.
What are all the fees for a deal?
Each deal has its own fee structure, so it can be difficult to track overall fees across the site. Deals can include property management fees, profit-sharing incentives for sponsors (‘sponsor promote’), asset management fees, and interest on borrowings paid to other partners or affiliates. These can quickly add up to 10%, so investors should trawl the documentation and ensure they understand the fee structure in depth. With the REITs, RealtyMogul charges a 3% upfront fee and 1% annual fee. There is no performance-related fee.
Does the site take a loss if investors lose?
Technically, RealtyMogul does not take a loss if its investors lose out, and its FAQ is quite clear about the risks investors take and the possibility of loss. However, in the case of two foreclosures, the company has not only kept investors informed, but also ensured that their principal was repaid, and they paid no extra costs of foreclosure. Clearly the company is actively concerned that investors should have a positive return.
Is the company VC backed?
Canaan Partners and Sorenson, respectively, led two equity capital raises in 2014 and 2015. Rob Rueckert of Sorenson has a place on RealtyMogul’s board (http://www.sorensoncapital.com/company/realty-mogul/). Microsoft Accelerator is also invested in the company.
Does the site do direct investments?
RealtyMogul allows accredited investors to invest directly in real estate projects as well as offering its REITs, so they can pick specific investments to suit their portfolios and investment objectives. However, these investments are through an indirect vehicle (as explained above).
There has been a decline in the number of individual property offerings and the platform seems to have slowed down over the last couple of years, perhaps as a result of increasing competition. Since origination has always been a key strength of RealtyMogul, this is worrying. It suggests the platform may be focusing more on its two REITs than on originating deals for accredited investors. An increasing proportion of deals appear to be in the multifamily apartment market, which is not the highest quality property market; it’s possible that RealtyMogul is no longer able to source the best quality deals (alternatively, it may have identified an undervalued sector).
We suspect 2018 could be a make-or-break year. If the platform is able to source new deals and start growing again, it’s well funded and its ease of use should make it an attractive option for investors; if deal flow remains limited, the platform will start to lose market share and could end up looking marginal.
Is there any bankruptcy protection?
RealtyMogul doesn’t offer full bankrupcty protection (https://www.therealestatecrowdfundingreview.com/how-we-created-the-site-rankings) and has not appointed replacement servicers in advance, so in the event that the company went out of business, investors’ funds could be tied up for a while. RealtyMogul does say that it has a contingency strategy in place, which is one justification for its initial fees. It has identified a preferred vendor to service loans in the event of bankruptcy; equity investments would be managed by a national bank with a specialty in REITs, or another business could be appointed to take over the operation. While it’s good that there is a contingency plan, this falls some way short of full bankruptcy protection for RealtyMogul investors.
Note also that the indirect holding structure (mentioned above) makes investors’ rights less easy to assert in the event of a corporate failure.