2,800 crowdsourcing and crowdfunding sites
Editor's Note: We recently got in touch with Jilliene Helman of Realty Mogul, a real estate crowdfunding portal for accredited investors, who told us about her platform, how it works, and its success thus far. For the latest news, follow Realty Mogul on Twitter at @Realty_Mogul.
Anton Root, Crowdsourcing.org: Can you start off by telling me a bit about the site and how the idea for it first came about?
Jilliene Helman, Realty Mogul CEO: Realty Mogul is a marketplace for accredited investors to pool money online and buy shares of pre-vetted real estate investments. The idea came about from an economic opportunity and legal opportunity. From an economic perspective, we’re coming out of a recession and it’s very challenging for people to find investments with current cash flow. Banks are paying less than one percent – my family had this challenge. So I started investing in real estate notes. I invested some family money, and we were generating some pretty decent returns – eight to ten percent net on our investments. We were getting current cash flow, and when you compare that with one percent at the bank, it made a lot more sense.
About the same time, which was early last year, the JOBS Act passed. I said, “I think that we have this great opportunity to ride this political wave and change around crowdfunding and the JOBS Act, while simultaneously providing an answer to what’s going on in the economy.”
Were you a real estate broker before this, or anything related to that? What’s your own background?
My background is in commercial banking. I spent a number of years at Union Bank, the majority of my time there was spent in wealth management. I come from a wealth management background, working with high net worth individuals to structure unique portfolios, based on their situation.
What exactly is your site’s role in connecting potential investors with real estate opportunities? What are the services you guys offer?
We’ve built technology to allow investors to invest in real estate, from start to finish, online. We bring pre-vetted, curated real estate investments to our investor base. We’re pretty stringent on our investor base – we’re only open to accredited investors today because of the legislation, so we have some requirements around that. We allow them to do the entire transaction process online, so they can find their legal documents online, fund online, and have 24/7 access to an investor dashboard to watch how their funds are working for them.
Who is it that screens the real estate opportunities? Is it your own in-house team, or do you outsource that to another company?
We do it all in-house. First, we do an analysis on the real estate company and the principals who are involved in the transaction, including background and criminal checks. Then, we do an analysis on the property, using proprietary methods we use for due diligence. We are looking at things like the vacancy rates, projected income and expense growth, and sale assumptions for the property. That being said, there’s always risk for any investment. We don’t say that there’s no risk, we’re very, very clear with our investors that there’s real risk, and we don’t know how [an investment] will perform. Past performance is not an indicator of future performance, and we’re very careful about making sure our investors understand that and understand the risk.
I know there’s a $5,000 minimum for how much an investor can invest, but is there a cap?
There’s no cap, an investor can take the entire investment opportunity if they choose to do so.
What’s the activity been thus far? I know you guys started out only recently, but can you give me a sense of how many properties you’ve listed and funded, how many investors you have registered, things like that?
Yes, we have a few thousand accredited investors, and a few thousand unaccredited investors – we’re only actively working with accredited investors. We funded our first eight properties, we’ve got others in the works, but I’m not at liberty to speak about them. We’ve been in business a little over three months, funded our first $2 million in transactions, and are looking to continue to do so as we move forward.
Have you sold any of the properties? Have any of the investors exited?
Yeah, we’ve had two exits so far, two of our loans have been repaid in full. One paid ten percent annualized to investors, and the other paid eight percent annualized to investors. So, we are seeing transactions turn over. We also pay monthly distributions on all of our loans, so we’ve made tens of thousands of dollars of distributions already, and will continue to do so in the foreseeable future.
Are you guys most active in any particular region? You mentioned you funded eight properties – are these mostly in California?
We’re based out of Beverly Hills in California, so we’ve done a number of transactions in [the state]. We also have part of our team in the Seattle, Washington market, so we’ve also done transactions in Washington. We’re doing a more national rollout with more properties now.
I saw that you guys are connected with Microsoft, is that the reason why you have a Seattle team?
Yeah, we did Microsoft Accelerator powered by TechStars, so we have a lot of connections up in that Seattle market, which made it a good place for us to be.
Crowdfunding that’s more catered to particular neighborhood or region has been touted as a way to help prevent fraud, since it’s harder to fake a brick and mortar business (or property) than an online business. Does this also apply to your site? Do you encourage investors to invest in their own backyards?
You know, we see a little bit of both. We see investors who invest all over, whereas others are located in Los Angeles, and want to invest in Los Angeles. I think there are a lot of benefits to hyperlocality in real estate, but I actually think that we offer a slightly different benefit, which is the ability to offer exposure in multiple geographies. It can be easier to invest in your own backyard, with your own connections, than it may be to invest outside of your own backyard. So one of the benefits that I think we bring to the table is, in addition to hyperlocal investing, we actually also let investors get diversification across a bunch of different geographies.
What are your revenue streams? I assume you take a cut on profits made by your investors, but are there any other services you charge for?
On our loan transactions, we charge a spread – we are like a typical lender in that capacity – whereby we’re originating loans at a higher interest rate than what we’re passing to investors. That’s our profit model, currently.
When you say 'currently,' are you implying that you’ll unroll other revenue streams in the future?
It depends on what happens in the market. We’re pretty confident in what we’re doing right now, but it just depends on what we see in the market, and also how regulations change with the JOBS Act.
I wanted to ask about that – it seems like the JOBS Act inspired you to start the company, so do you plan to open this up to unaccredited investors when the regulations are finalized?
It depends on what the regulations say. We certainly want to do as much as we can possibly do with a wider variety of investors, but we’re really waiting on the regulations to make a final decision. Without having full information from the SEC and other regulatory bodies, it’s too early for us to make a determination. Our hope is that the legislation comes out in a very favorable way for companies like ours, but we really can’t speculate until we review it.
Is there anything specific you want the SEC to address?
There are a couple of things that I think will really help investors, and they are still being decided as part of the regulations. One of the things in the regulations right now is that portals are not going to be able to provide investment advice and are not going to be able to provide advice specific to individual investors. In some ways, I think that actually harms the investor. That’s probably the biggest one that’s in the legislation right now that would be very good for investor protection, if [portals] were able to [offer guidance].
Can you talk about why you think real estate is a good fit for crowdfunding – obviously, you’re only working with accredited investors, but why do you think this is a good space to be in?
I think it’s a good space because of two things. One, risk and reward; and two, cash flow. From a risk and reward standpoint, we’re not going to have transactions that return 150 percent. Crowdfunding for startups may have a transaction that does, but our anticipation is that our transactions will be a good balance of risk and reward. They’ll have strong returns, but will definitely be less risky than investing in startups. There are different elements of risk, and when you look at the curve of risk and reward, I think that real estate is really well-positioned on that curve.
The other thing is cash flow. One of my biggest concerns about crowdfunding for different asset classes – small businesses, or startups – is the lack of cash flow. To have a cash event for a startup, that company needs to get sold, or needs to start issuing distribution. It’s pretty rare that startups receive distribution. Those investors are going to have those funds tied up until there is a sale. Real estate is really different. On our loans, we’re paying monthly interest payments, and on our equity transactions, we’re looking to make quarterly payments. We provide investors with cash flow for the life of the transaction. We also require an exit just like a startup does, but it’s typically easier to sell a piece of property than it is to sell a company, for example. So I think from a risk-reward perspective and from a cash flow perspective, real estate is really well suited to crowdfunding.
What are your plans for the rest of 2013, and beyond that, if you’re willing to speculate?
For us, it’s just about closing transactions. We have a motto in our company that we want to grow quickly but conservatively. What we mean by that is we want to grow quickly and become a big company in the marketplace and build a fantastic brand, but we also want to grow conservatively. We don’t want to do transactions that we don’t think should be funded.