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Ian Ippolito came from the world of tech entrepreneurship. He had run a couple of companies and started some companies, some more successful than others. He had a few failures but over the years he had built up a bunch of different companies. In 2013 Ian sold a company called VWorker. It was an online marketplace that was sold to a company called Freelancer. He enjoyed a nice exit and found it was time to move from being a tech entrepreneur to his new job,  managing the finances of his family. He had to really get up to speed and had always been investing while an entrepreneur, but his job was his primary thing and he had invested passively in a whole bunch of things but had never really gotten down deep.

Serious Investing

So at that time he really needed to get serious so he took a look at his entire portfolio and just redid everything because his risk was totally off. He had neglected a bunch of things and so started looking at stocks and bonds and traditional investments which were OK. But he also wanted to branch out to other things including branching out to peer to peer lending. Ian looked at Lending Club and Funding Circle which do business loans, and that's what led him to real estate crowdfunding.  When he discovered it he thought, wow, they're taking the idea of lending to peer to peer lending which is a good one but a lot of times is based on an asset that's not collateralized so you don't have any protection or if the person defaults on the loan they're gone. But now we're putting it into real estate so if you're doing debt it might be collateralized or you know you've got equity and then you've got this tangible piece of property behind it. And he was really intrigued by it.

This was in 2013, when Ian began in CFRE and at that time there weren't that many sites but they exploded really quickly. Everyone was really excited about the idea. It was kind of like a big explosion and then it kind of winnowed back and then another kind of growth spurt. But back then there were some of the names that people are familiar with today. One of his favorite sites was FundRise and Patch of Land was around back then.  A lot of the sites changed over time or changed their business models or maybe they changed their underwriting or whatever but those were some of them back then.

Due Diligence

Beforehand Ian had owned some rental properties so had knowledge of what being a landlord involved. He had invested in a couple of passive deals with varying success and had gotten into a one deal right just before the Great Recession. He invested passively with a syndication and just the bad timing didn't understand what he was getting into and didn't understand how to evaluate the terms of the deal. Looking back, it was something he never would have gotten into. Thankfully he didn't lose any money but it took about 12 years to break even. It wasn't something he wanted to repeat and he decided when he got into CFRE that he was going to do a lot more research to learn a lot more about what was going on inside and kind of up his game.

He came across a deal, did some research and contacted the sponsor directly.  It was investment in residential real estate and that was their business model. The minimum was pretty high – in the hundreds of thousands and came with a beast of a PPM. It was just a huge thing. He took it to and attorney because, well the thing you do is when you get these things is you need to take them to an attorney to evaluate them. And this is really important. He learned how difficult it is for people starting out because he didn’t know who to bring it to so he asked around who's a good attorney that understands real estate.  And the guy he chose to take a look at it, after charging him all of the usual fees and everything, told him ‘There are some things in this contract that limit your rights [but he couldn't say if they were typical or out of line]. So if you trust this person, then maybe it's fine to go ahead. If not then maybe you shouldn’t.’

Doing the Work

This wasn't what Ian was looking for.  He wanted someone would had evaluated 100’s of these and could tell him that the terms look good or don't and so the experience was a kind of a wakeup call because he had to educate himself. It was hard for to find that type of expertise he needed to get to do it.  He found everything to be interesting but it was overwhelming because he there were debt funds, and equity, and they're investing in senior housing, or they're investing in apartments as well. What's the difference?  Some are value added, some are opportunistic.  It was really difficult at the beginning to piece together the relative risks and so he needed to create a coherent overall portfolio strategy and just going through the platforms and just taking it deal by deal which maybe is the way most people do it and that was the way he was doing it was just not working.

He wanted to understand what he was getting into; yes, the return looks great but how much risk taking and of course the sponsor doesn't tell you. So Ian took some time to figure out which investments he wanted to go through and thought maybe a good shortcut would be start with the platform's first because there were so many at that point and it had exploded and he thought he could find the ones he liked. That way he could weed out a whole bunch to start with and once he found the good platforms, I could start digging into the deals. So that was the way he looked at the different platforms. And there was nothing out there on the internet that would explain it which would have been the easy way. He realized he was going to have to figure this out himself. He had his research assistant help out and together they contacted every single one of the platforms, talking to the people involved. He talked to other investors asking how was their experience on the platforms.

Coming to Conclusions

He looked at their legal setups. If they go bankrupt what's going to happen? So just looking at what are their fees and comparing them to the other ones. So he started looking at all of these different things and it was just really for himself, putting it together over a couple months until he felt pretty confident that he had found those he liked and those he didn’t. Then people started asking him for it and then another pretty soon he found it was too much answering individuals and so he just put it out on a Web site. And that's how it all got started.

Listen to Ian while reading the transcript

227 Ian Ippolito, The Real Estate Crowd Funding Review

Well so I came from the world of tech entrepreneurship. I had run a couple of companies and started some company some more successful than others. I had a few failures but over the years I had built up a bunch of different companies. And in 2013 I sold a company called VWorker. It was an online marketplace. And I sold that to a company called Freelancer. And so I had a nice exit and it was time to kind of move from being that tech entrepreneur to my new job was managing the finances of the family. And so I had to really get up to speed. I had always been investing you know as an entrepreneur. But my job was my primary thing and I invested passively in a whole bunch of things but had never really gotten down deep.

So at that time I was like you know what I really need to get serious so I took a look at my entire portfolio and just redid everything I mean my risk was totally off. I had neglected a bunch of things and started looking at stocks bonds and traditional investments and they were OK. But I also wanted to branch out to other things I wanted to branch out to peer to peer lending, alternative stuff and the peer to peer lending, I was looking at Lending Club and Funding Circle which does business loans. And that's what kind of led me to real estate crowdfunding when I discovered it and I thought wow they're taking the idea of peer to peer lending which is a good one but a lot of times is based on an asset that's not collateralized so you don't have any protection or if the person defaults on the loan they're gone. But now we're putting it into real estate so if you're doing debt it might be collateralized or you know you've got equity and then you've got this tangible piece of property behind it. And I was really intrigued by it.

So when was that actually, approximately when was it that you discovered real estate crowdfunding.

Real estate crowdfunding? It was I think it was around 2013.

So really soon after the JOBS Act.

Yes. Yes it was very fresh.

So at that time, who were the main players at that time. How did you come across it because that just weren't that many were there Ian,.

Well, you know what, there weren't that many at that beginning but they exploded really quickly. I mean everyone was really excited about the idea. It was kind of like a big explosion and then it kind of winnowed back and then another kind of growth spurt. But back then there were some of the names that people are familiar with today. I'm trying to think. Back then, one of my favorite sites was FundRise. It was a Patch of Land was around back then and a lot of the sites changed over time that it changed their business models or maybe they changed their underwriting or whatever but those were some of them back then.

And so what did you do then. How did you figure out that this was something you were interested in. I understand the connection between peer to peer lending, uncollateralized and now suddenly you've got collateralized lending in a way. But what was it, how did you bridge the gap into real estate. What was your knowledge of the real estate before.

That's a good question. Well beforehand you know I own some rental properties so I had knowledge of being like a landlord and I had invested in a couple of passive deals which had varying success. I had gotten into a one deal right around, it was just before the Great Recession. A couple of years before that I invested passively with syndication and just the bad timing didn't understand what I was getting into didn't understand how to evaluate the terms of the deal. Looking back something I never would have gotten into. And thankfully I didn't lose any money but it took I want to say about 12 years to break even on that one. So it wasn't something I want to repeat. So I realized when I got into this I going to do a lot more research to learn a lot more about what was going on inside and kind of up my game.

So let me ask you a question about that deal. Tell me just a little bit in the context of crowdfunding. What was that deal about. You knew the owner presumably, or the sponsor.

No I actually didn't. I had read about them in the Wall Street Journal or something like that. I'd seen them somewhere technically. And so yeah I mean you're not supposed to promote but somehow that got an article out there and I had done the research to look them up and figure out where they were. And I contacted them so I don't think they're violating laws there. So it was investment in residential real estate and that was their business model. And I think the minimum was pretty high. I can't remember, I mean compared to crowdfunding. You might get in it 5,000 to 100,00. This was in the hundreds of thousands. A beast of a PPM. I mean it was just a huge thing. I remember I took that to my attorney. OK well the thing you do is when you get these things you need to take them to an attorney to evaluate them. So I took that to my attorney. And you know this is really important. I can see how difficult it is for people starting out because I don't know who to bring it to so I asked around you know who's a good attorney that understands real estate brought it to this attorney and they took a look at it and after charging me all of the usual fees and everything. The end result was well if you trust this person it's probably going to go ahead if not don't let me read it.

Don't need to read it, don't need to read it, but if you trust the guy go ahead. Right.

Yes. The kind of the point of view like there is a lot of things in here that are not ideal but if you trust that trust of you go ahead and if not, don't. And that wasn't what I was looking for I was looking for hey I've evaluated 100 of these and these terms look good. These terms don't and that was also kind of a wakeup call cause I have to educate myself on that stuff. It was hard for me to find that type of expertise I needed to get to do it.

Very interesting. OK so then you started to see these crowdfund sites. What were the first things that appealed to you.

I mean everything was interesting to me but it was kind of overwhelming because I was like oh well there's these debt funds, and there's equity and they're investing in senior housing they're investing in apartments as well. What's the difference? Some are value added some are some are opportunistic like how risky is this and it was really difficult at the beginning to piece together and kind of I needed to create a coherent overall portfolio strategy and just going through the platforms and just taking it deal by deal which maybe is the way most people do it and that was the way I was doing it was just not working. You know I need to understand what I'm getting into; yes, the return looks great but how much risk taking and of course the sponsor doesn't tell you.

Ok and then you started to evaluate deals and platforms right. How did you come up with the idea for the crowdfunding real estate review.

OK so what it was was I was like OK I'm just going to take some time now to figure out which investments I want to go through. And I thought well you know maybe a good shortcut would be start with the platform's first because there were so many at this point and it had exploded and I thought I could find the ones I like. There's going to be a few that I like, there is probably most of them don't. And that way I can kind of weed out a whole bunch to start with and once I find the good platforms, I can start digging into the deals. So that was the way I looked at the different platforms. And there was nothing out there on the internet that would explain it which would have been the easy way. I was like OK well I'm going to have to figure this out myself. So I had my research assistant helped me out. We basically contacted every single one of the platforms I talked to the people involved. I talked to I interviewed other investors. How was your experience on this platform. I took a look at their legal setup. If they go bankrupt what's going to happen. So just looking at what are their fees like this how does that compare to the other ones. What's their structure. So I started looking at all of these different things and it was just really for myself. Put it together. Took a couple months and I was like okay I feel pretty confident; I know which ones I like, and which ones I don't. And what happened is then people started asking me for it so I had one person asking for it I was like OK here's all the information. And then another pretty soon I was like OK this is too much. I'll just put it out on a Web site. And so that's how it all got started.

People started asking you what you were what you were doing.

Yes. They were like Hey could you share. I'm looking at crowdfunding. I'm thinking this platform. What do you think of that. After answering a whole bunch of times it's kind of like it would be a lot easier just to put it out on a Web site.

And then you started investing as well presumably.

Yes. And I was investing at the same time. Exactly.

So how were you beginning to decide on deals? Now here you are having struggled to penetrate a beast of a PPM. How were you able to start to figure out all the ins and outs of real estate equity finance.

I wish I could just have just gone to an attorney and you know probably if I'd known the right attorney you know I could have had that access but I didn't have that luxury. So I basically just started reading and I read it read as many as I could. After you read 30 or 40 you start to see oh there's patterns here that are occurring over and over again. And then you realize that's a little bit different. No that's not super great of a term or you know that's pretty questionable or I'd be I'm liable for a lot more than actually the money I'm putting it or whatever it is. It was really just I went into a whole bunch of these things and just started looking over and over again and seeing which ones I liked and which ones I didn't.

So that's the PPMs. What about the mechanics of real estate itself, when a developer is talking about an IRR or a preferred returns or entitlements or they're doing a value add or a ground up. How did you get behind understanding the ins and outs of real estate. You mentioned that you'd had a couple of deals before. Presumably the deal you're looking at...

Yes, I had that as you were saying you're like it's not the same thing. I got into that passive deal. I had my own rental properties which helped a lot. Understanding the cap rates and operating, net operating income and all that sort of stuff but still I had to learn about promotes, like you said, IRR. I went online. I wish there was some source back then that was kind of like what you have which is putting it all together into one place. Unfortunately there was not anything like that. So I kind of did it the way that I learned to do my stock market perform and my mutual fund. I read everything out there and read everything and digested it can't understand it and then just repeating over and over again each investment doing the same thing over and over again. Eventually I figured it out.

So tell me what trends have you seen on the platforms. Well let's say What trends have you seen in the platforms themselves but also in the listings that the platforms have, does that make sense. How have the platforms grown and how have the types of deals that they list changed or stayed the same. What have you seen changed.

Definitely lots of change on both. So the platform started off. There was kind of the initial explosion where everyone was trying to get into it and people were raising a ton of money from venture capital. And so it was explosion of platforms a very exciting time. Then there was kind of a period where if you remember there was a scandal with LendingClub and there was a financial accounting scandal. And maybe they did some things that were improper. And when that happened all of a sudden the entire Fintech space was no longer as desirable to investors. All of a sudden these companies that were raising a ton of money couldn't raise their second round or the third round. So a bunch of companies started they were laying off people massive layoffs or they were shutting down. So there was a kind of like a contraction.

And then we had that kind of thing. I think what we're seeing right now in the last year and a half is like another expansion that's being done in a different way because of that VC capital is no longer flowing in. Instead people are actually turning to the newer crowdfunding rules that allow crowdfunding platforms themselves to raise funding for themselves versus with the investments. And we're seeing a new round of expansion to the ones that are successful on that.

Who's doing that Ian?

Well you've got Fundrise you've got Groundfloor just announced that I think I forget how many millions they were trying to raise. They supposedly have successfully raised whatever their target was and now they're doubling or tripling their goal. So this is a great way for a company that maybe had trouble with the VC market or VCs aren't the best thing for a company that is not going to explode and because it pushes companies to do that. So this is kind of like a slower growth model. So it seems like there's a lot of appetite for it. People are buying up these shares left and right I mean all those deals filled very quickly. So yeah it's a very interesting.

These are crowdfunding raises for the platforms themselves.

Exactly. For equity in the platform. So it's a speculative investment where it's not a real estate deal where people are going to get income coming in on a regular basis. You're hoping for some sort of exit at the end or maybe the platform was sold to somebody else and maybe did an IPO. And then at that point then the person hopefully is going to see a return on their money.

Now what about the kinds of deals that you've seen over the last five years.

Well it's not been totally positive. The deals back then were much better the deals were higher yielding they were taking less risk and as the cycle has aged the risk has been ratcheting up the yields have been going down. Each maybe quarter its been getting a little bit worse and worse. So a deal that would be considered maybe a good deal in 2018 would probably be a deal that maybe would not be such a great deal way back then. So these there's so much money right now that's just chasing not enough deals. And you know there's definitely it has deteriorated.

So tell me specifically how have the yields changed in the last five years. What were they like in 2013 and how are they looking now.

A couple of examples. I'm not naming names. I'll just say that for example you would find on a particular platform you could find conservatively underwritten debt deals so that maybe 65 percent loan to value or less first position a residential flip or something. And that would be yielding double digits. So now to get something conservative like that is very difficult unless it's some sort of more speculative like some sort of huge construction project or something that's not going to be double digits, most likely going to be maybe like 9 percent or something like that or eight and more likely even less. The other the other way that there was a change just on the debt side.

It's just that back then prices were cheaper. So because prices were cheaper it just made all the underwriting that much easier. Now prices have gone up but we've had a really good run now as a result of the great performance of all those old investments. Now a lot of the properties are really expensive. So it gets harder to find the good deals.

So how do you find them.

I mean I do a bunch of things you know I subscribe to all the crowdfunding sites and I'm constantly having new deals come to me a lot in recent times. Just at this age we are in the cycle you know, it's not going to last forever at some point it's going to end and there's going to be a downturn. And for me what I want to be in at this stage of the cycle is I want a very experienced sponsor who's gone through a downturn and not lost money; that's what I want to see. And it's difficult to find it on a crowd funding site. Probably 95 percent of investments if not more. So I end up networking with people I go to investor groups people that I talk to ask Hey what are you investing in. And that's where I find deals also.

So you underwrite a lot of deals you spend how much of your time do you spend looking at deals.

A lot of time looking. Because a lot of the deals just don't don't work out, I'm spending... That's my job my job is basically you know working on the investments so I spend a good portion of my day doing that.

Right now a little bit about the crowdfund funding real estate review and what it is and how you operate.

Ok. Yes so basically I created this place where I put the ratings of the different platforms out there so everyone could see them. Once I did that people were like hey what about the non accredited platforms that were springing up like OK so I did a ranking of those that up there and then I just started talking about things like real estate news as it were come in and be like blogging about it. Here's my opinion about this or my views about that and that kind of grew to a following. I think there's people were subscribing to that there's I believe maybe about 1600 or 1700 people who subscribe regularly. The site is getting I can't remember the last time that maybe 7000 or 8000 visitors a month. So it's quite a few people are starting to come follow.

And then what's happened is you know I wrote something a little bit negative about one of the sites and it actually wasn't a, it was an investment on a site and I felt that they were being very deceptive in their marketing and I felt they were giving a guarantee that they couldn't give. There's no such thing as a guarantee really on investing. There's always risk. Anyway I wrote about that and they threatened to sue me. They looked up every single address I've ever been at. And they sent their threats to it. I mean they went they went all out and they said you know you need to take this down and it sounds like well you know this is a political thing I'm doing I'm doing it for free. I'm not making any money off of this I'm just doing it to share it with people because I enjoy it. I thought well you know I'm going to have to I have to shut it down. I have to find some other way to get the information out there or do something else. And I thought well I'm going to do what I would do is I will create a private investor only forum on the Web site and I'll vet the people that come in to make sure that they are truly investors and not associated with the platform and then that way I and also the people themselves feel free to share information. Whether it's positive or negative. But to share it freely. And so that's the other part of the real estate crowdfunding review there's a private club where people are vetted and people are free to share both positive and negative information. I have I've been able to negotiate a bunch of specials for the club where people can get in reduced minimums for these different different sponsors because they want that business. And it's just a place for people, when I find a new deal I post it in there. And it's just something that's not on the public website.

And have you found the input that you've received personally from the members of your club to be useful in your underwriting of deals.

I mean I think every single time someone asks a question it's like it's helpful. It may be something I've thought of before but a lot of times it might be something that puts me in deeper or maybe at first I think that's an annoying question. And then I think about it and I'm like no that person has a great point and I dig in deeper. So yes you know I think that kind of give and take is really important and investor on their own is kind of in a little chamber and so to have other points of view. I think that's really powerful.

Have you actually had anybody uncover something that was a deal killer that you've not found before in a deal that you posted on the membership section.

Not all of the deals that I've been looking at just because usually I kind of take the lead on those. There have been some where people have found things and I was like OK I'm done with that one. There have been some that have done that.

The power of the crowd in a way right. Crowd intelligence.

Yes. Yes exactly.

In view of where we are now in the real estate cycle. What are your aspirations for the crowdfunding real estate review. Where do you think it's headed and where do you think the market's headed Ian?

Good question. Well I wish I could read I can predict the market I can't but I think I can say with certainty that there's going to be a downturn coming up eventually. I suspect that we're closer to the downturn than we are to the last one. So I'm kind of positioning the real estate crowdfunding review. It really is about focusing on the investments I'm interested in which are these conservative investments, sponsors who have experience doing multiple cycles have not lost investor money or maybe they are debt funds that are very conservatively underwritten. Maybe they are real estate funds which is maybe a little bit too boring for some people but for me it's perfect for this part of the cycle. So a lot of the focus is on those kind of things a very conservative mindset trying to preserve principle not trying to extend too much and with the idea that hey after the downturn maybe there's going to be some opportunities there. And have some cash and some dry powder might be a really good thing.

So once you invest in the deal but you can't exit until the sponsor liquidates the asset. Right.

Yes generally yes. I mean some of these debt funds will have as low as like a six month hold period after which you can exit. But of course just like anything else there's always limitations. If everything went downhill they could always cut off the withdrawals. But theoretically yes some of these you can get out of earlier.

So how do you keep your powder dry. That means restricting active investments at the moment.

Yes that's exactly it I mean I have a certain amount to allocate that I have open to new investments. I've got a decent amount in debt funds which I feel as long as everything doesn't go completely downhill. I should at least be able to draw some of that money to put into new things and I just keep a bunch of cash equivalents which I keep in ladder CDs and then if it's ready whenever I need it.

And that's to take advantage of any downturn in opportunistic deals that you might see.

Yes. Yes exactly.

Have you given any thought to actually developing real estate yourself or are you happy being a passive investor in other people's deals.

I love being a passive investor. My father is a developer and I see how much work that is and how much expertise it requires. Maybe maybe sometime in the future. For me right now at this stage in the cycle no way; the start of that cycle maybe I would consider it, but right now, no.

What are the key daily habits that you have that make you and your business successful.

Well something that I do now that I never did before because I've never had a time to do it before. When I was an entrepreneur it was just go go go go go, but something I do now is that when I wake up in the morning, I don't just jump out of bed. I kind of sit there for a few minutes while I'm kind of in that in-between state and I find it's very powerful actually to kind of focus on what I want to get done for the day. And it also if there's problem problems that kind of come to my mind and a lot of times I can in that very relaxed state I can kind of come up with a solution that maybe I might not come up with if I'm trying to think really purposely hard. So I do that, yes for three yes. The other thing that I like to do I've found as good is the idea of eating a frog which is I read this in a book. But basically the idea is that, take the hardest thing that is on your list and just get it done first thing in the morning. And what I found is that because a lot has put off the hard stuff and then my list will just go up and up and up and then it gets pretty discouraging. If I take one, if I eat one frog a day, it's amazing how the rest of the day just goes by really quickly.

I love that expression. I've never heard that before. It's really good.

Eating a frog. Yup. Then the third thing is just that I read a lot. In investments I read a lot of just about everywhere I go I was always taking the nation. I want to understand the world. You know what's going on and it's all kind of synergistic and I might be reading The Economist and it's talking about some other country. But eventually it all comes back and a lot of them like oh you know I was reading all about that and that affects this real estate investment that just constantly be open to new information is really good.

All right. Well actually thank you for giving me free but I had three different questions. I'm more than happy because those are all fascinating insights that I think. I think eating a frog is a stroke of genius. I'm going to stop trying to I've read that two more questions two more questions. Only only one part.

Don't worry. I'm sorry. OK. So what has been the hardest lesson that you have learned in real estate.

Well hard yes I mean I've learned some hard lessons. Mean the first one I was lucky to get out without losing money that I talked about earlier was that my heart is. Well you know what I think it was because it took over a decade for me. I was losing money the whole time until it finally broke even at the end. I'd pay taxes too. So yeah I think I think an important lesson in that one which was if you don't understand timing because I say if I don't understand timing I don't understand fully what I'm getting into. I don't understand the asset class. I don't understand what's the worst that could happen but it probably shouldn't be investing something.

That's a lesson I took away from that OK and then the third question last question if you could give one piece of advice to somebody who has not yet invested in real estate and crowdfunded real estate deals but is considering investing. What would that advice be.

It's just learn as much as you can. The temptation is to look at the IRR and say wow that's a really let's compare that to my CD. Oh that's fantastic. Let me just throw it into the yielding deal and probably about a third of the people that I talked to are coming from that mindset and things are going great now because the economy is humming. Everything's fine. But at some point that's going to be the case and there's going to be a bunch of unhappy people. So I hope people take the time to learn as much as possible look before they really understand the risks. If the person doesn't understand the downside of what could happen and really understand that not just the sponsor what can go wrong but do a stress test on the investment and simulate the last recession and see if you like it or if all of a sudden now you know your stomach is up in your throat and you're like whoa that's pretty scary. So those are the things I recommend.

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In the Beginning

To get going he just started reading and read as much as he could. And he found that after reading 30 or 40 PPMs you start to see patterns that are occurring over and over again. And then you notice something that's a little bit different; No, that's not super great of a term or you know that's pretty questionable or he’d find deals where investors were liable for a lot more than actually the money they were putting in or whatever it is. He went into a whole bunch of these things and just started looking over and over again and seeing which ones he liked and which ones he didn't.

To learn about the art of real estate, Ian went online. He wished there had been some source back then that put it all together into one place but unfortunately there was not anything like that. So he did it the way that he had learned to do his stock market investing and his mutual funds. He read everything out there and digested it, repeating over and over again each investment doing the same thing over and over again until, eventually, he figured it out.

Since the Beginning

There definitely has been lots of change in the industry in just a few short years.  There was kind of the initial explosion where everyone was trying to get into it and people were raising a ton of money from venture capital. And there was an explosion of platforms and it was a very exciting time. Then there was kind of a period where if you remember there was a scandal with LendingClub and there was a financial accounting scandal. And maybe they did some things that were improper. And when that happened all of a sudden the entire Fintech space was no longer as desirable to investors. All of a sudden these companies that were raising a ton of money couldn't raise their second round or the third round. So a bunch of companies started they were laying off people massive layoffs or they were shutting down. So there was a kind of a contraction.

What we're seeing right now in the last year and a half is like another expansion that's being done in a different way because of that VC capital is no longer flowing in. Instead people are actually turning to the newer crowdfunding rules that allow crowdfunding platforms themselves to raise funding for themselves versus with the investments. And we're seeing a new round of expansion to the ones that are successful on that.  Sites like Fundrise  and you've got Groundfloor raising millions for their own corporate development.  This is a great way for a company that maybe had trouble with the VC market or VCs aren't the best thing for a company that is not going to explode and because it pushes companies to do that. So this is kind of like a slower growth model. It seems like there's a lot of appetite for it. People are buying up these shares left and right with all these deals filling up very quickly.

Of course, investing in equity in the platform is a speculative investment where it's not a real estate deal where people are going to get income coming in on a regular basis. You're hoping for some sort of exit at the end or maybe the platform was sold to somebody else and maybe did an IPO. And then at that point then the person hopefully is going to see a return on their money.

Facts, figures, and details 

Primer on Crowd Fund Real Estate

Deal Quality

Deal quality has not been totally positive. The deals earlier on were much better. They were higher yielding and were taking less risk and as the cycle has aged the risk has been ratcheting up the yields have been going down. Each quarter it’s been getting a little bit worse and worse. So a deal that would be considered maybe a good deal in 2018 would probably be a deal that maybe would not be such a great deal earlier on. There's so much money right now that's just chasing not enough deals. And you know definitely it has deteriorated.

For example, you would find on a particular platform you could find conservatively underwritten debt deals so that maybe 65 percent loan to value or less first position a residential flip or something. And that would be yielding double digits. Now to get something conservative like that is very difficult unless it's some sort of more speculative like some sort of huge construction project or something that's not going to be double digits, most likely going to be maybe like 9 percent or something like that or eight and more likely even less. The other way that there was a change just on the debt side. It's just that back then prices were cheaper. So because prices were cheaper it just made all the underwriting that much easier. Now prices have gone up but we've had a really good run now as a result of the great performance of all those old investments. Now a lot of the properties are really expensive. So it gets harder to find the good deals.

Finding the Deals

Ian does a bunch of things to find deals.  He subscribes to all the crowdfunding sites and is constantly having new deals come to him.  Just at this stage we are in the cycle you know, it's not going to last forever at some point it's going to end and there's going to be a downturn. And for Ian what he wants to be in at this stage of the cycle is a very experienced sponsor who's gone through a downturn and not lost money. And it's difficult to find it on a crowd funding site. Probably 95 percent of investments if not more. So he ends up networking with people, going to investor groups and talking to other investors. A lot of the deals just don't work out, but looking for them is Ian’s job, basically working on the investments so he spends a good portion of his day doing that.

The Real Estate Crowd Funding Review

Ian created this place where he puts the ratings of the different platforms out there so everyone could see them. Once he did that people were like hey what about the non-accredited platforms that were springing up.  So he did a ranking of those that up there and then just started talking about things like real estate news as it were coming in and blogging about it; Here's my opinion about this or my views about that.  And that kind of grew to a following.  There are about 1600 or 1700 people who subscribe regularly. The site is getting maybe 7,000 or 8,000 visitors a month. So it's quite a few people are starting to come follow.

And then what's happened is he wrote something a little bit negative about one of the sites and it was an investment on a site and he felt that they were being very deceptive in their marketing and felt they were giving a guarantee that they couldn't give. There's no such thing as a guarantee really on investing. There's always risk. Anyway he wrote about that and they threatened to sue him. They looked up every single address he’d ever been at. And they sent their threats to it. They went all out and they said you need to take this down and it sounds like well you know this is a political thing as Ian was doing it for free he thought well he was going to have to shut it down or find some other way to get the information out there or do something else. So he created a private investor only forum on the Web site and vets the people that come in to make sure that they are truly investors and not associated with the platform and then that way the people themselves feel free to share information. Whether it's positive or negative. But to share it freely.

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Power of the Crowd

Every single time someone asks a question it's helpful. It may be something Ian’s thought of before but a lot of times it might be something that puts him in deeper or maybe at first he thinks that's an annoying question but then he thinks about it and realizes, no that person has a great point and he digs in deeper. That kind of give and take is really important and investors on their own are kind of in a little chamber and so to have other points of view is really powerful.

The Future

Ian thinks that with certainty that there's going to be a downturn coming up eventually and he suspects that we're closer to the next downturn than we are to the last one. He is positioning the real estate crowdfunding review with this in mind and focusing on the investments he’s interested in which are these conservative investments, sponsors who have experience doing multiple cycles who have not lost investor money or maybe they are debt funds that are very conservatively underwritten.  Maybe they are real estate funds which is maybe a little bit too boring for some people but for Ian it's perfect for this part of the cycle. So a lot of the focus is on those kind of things a very conservative mindset trying to preserve principle not trying to extend too much and with the idea that hey after the downturn maybe there's going to be some opportunities there. And have some cash and some dry powder might be a really good thing.

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