In my quest to understand all the top real estate crowdfunding platforms, I’ve put together this comprehensive EquityMultiple review.
The NASDAQ is now up over 20% and the S&P 500 is roughly back to even year-to-date. With a strong recovery in stocks, money should be looking for lagging recovery opportunities in real estate.
EquityMultiple actually contacted me back in 2017, a couple months before my first child was born. At the time, I was too focused on ensuring everything went smoothly with my family to pay attention to anything else.
Now, I have all the time in the world between 4:00 am – 7:30 am and after 9:30 pm. With roughly $500,000 in real estate crowdfunding capital returning to me over the next three years, now is the time to do more research.
Here is my EquityMultiple review with answers from Soren Godbersen, Head Of Growth.
Equity Multiple Review
1) How did EquityMultiple start, and how has the company progressed since inception?
EquityMultiple was created with the goal of making real estate investing simple, accessible, and transparent for the self-directed investor. We set out to make investing in high-quality, commercial real estate assets as easy as buying a stock. With each investment, we provide robust diligence on each investment offering and thorough reporting.
Our platform allows accredited investors to passively invest as little as $10,000 in professionally managed real estate across the U.S. So, not only can individual investors access private assets that may offer critical diversification and non-correlated returns versus a traditional portfolio of stocks and bonds, our investors can also create diversified portfolios of real estate across markets and property types.
Since inception in 2015, our investors have participated in over $2.7 billion in real estate transactions. We seek to continually offer opportunities for diversification while adhering to strict underwriting standards. Our platform has accepted only around 5% of the investments that we evaluate.
EquityMultiple offers senior debt, preferred equity, and equity investments for an array of risk/return profiles; and deal flow that spans property types and markets all across the country.
2) How are you different from some of the other real estate crowdfunding platforms out there?
We really pride ourselves on focusing on the investor instead of just being a marketplace.
Our rigorous underwriting, dedicated Investor Relations Team, and in-house Asset Management services mean that we’re guiding our investors and our investments through the entire lifecycle. We’re focusing on strong returns, preservation of capital, and providing transparent reporting the whole way.
As I mentioned we also offer diversification across a number of dimensions. Our senior debt and mezzanine debt investments entitle our investors to a flat rate of return, with payment priority, over a relatively short hold period (typically 8 to 24 months).
Our common equity investments enable investors to tap into upside of high-performing investments. Finally, our preferred equity investments offer a bit of a hybrid – payment priority over common equity, a flat-rate preferred return, and entitlement to some upside if the investment performs well.
We offer investments into core CRE asset classes (multifamily, office, and industrial) as well as more niche asset classes like self-storage, assisted living facilities, or car washes, that may offer a recession-resistant investment thesis.
Most other platforms don’t offer this breadth of investment offerings. We have also recently been focused on Private Fund products. This brings our investors even greater options for diversification. Below is an EquityMultiple review of our valuation proposition.
*As of Q2 2020. Past performance is not a guarantee of future results
**Source: NAREIT (total returns from 1999 – 2018)
3) You mentioned a breakdown of debt versus preferred equity versus equity investments. What percentage of the deals are equity versus debt? What is the range of returns for each?
Our goal is always to offer a diversity of deals across the capital stack i.e. senior debt, mezzanine debt, preferred equity, common equity. We do this for a few reasons.
For one, so that our investors can diversify across hold periods and risk/return profiles and “ladder” maturities across our deals. Just like you might diversify across treasuries, bonds, and income-producing stocks according to your return objectives and risk tolerance, our diversity of deals across the capital stack allows our investors to tailor their real estate portfolio to fit their appetite for payment priority and shorter hold periods versus upside potential and appreciation.
We also maintain a balanced approach so that investors with a particular risk/return profile in mind can find something that works for them.
Our mix of investments will also vary based on larger market dynamics. At this time last year when the consensus was that we were at or near the top of the market, we prioritized preferred equity and debt investments where our investors were better protected from a fluctuation in property values.
The market is obviously changing right now and our focus is changing with it. We continue to see near-term opportunities in preferred equity and debt, as well as diversified real estate funds, but as asset prices start to drop, we’ll shift our focus into equity where there is more potential for upside.
That said, we’ll always look to offer that diversification of position across the capital stack.
To answer your first question, here’s the makeup of our portfolio today, around the midpoint of 2020.
EquityMultiple Review 2020 Portfolio Makeup
- Common/JV Equity: 35%
- Preferred Equity: 43%
- Mezzanine Debt: 9%
- Senior Debt: 13%
Again, the majority of our JV equity investments are longer-dated and still in progress.
As for ranges of target return, the basic breakdown is as follows:
- Senior Debt: 6-11% net return to investors.
- Preferred Equity: 6-12% net current preferred return and 11-17% total net preferred return, including an accrued return portion.
- Common Equity: 14%+ net IRR (target IRRs can vary substantially based on risk factors).
We have also offered a Opportunity Zone Fund, 1031 Exchanges, and Mezzanine or Subordinate Debt investments as well. Therefore, this is not an exhaustive list of structures or target return ranges.
4) What does EquityMultiple charge in fees?
Equity investments are assessed an annual asset management fee of 0.5% – 1.5%. EquityMultiple typically keeps 10% of profits on realized equity investments once investors have received all principal. This helps further align interests as we seek to maximize returns on behalf of investors.
All fees are presented in full transparency within the Investor Documents of each deal. Further, all return targets and forecasts are presented net of fees.
5) What has the impact of COVID-19 been on real estate markets more broadly, and how is it affecting your business specifically?
Obviously, the pandemic has challenged the entire economy. Right now the areas of greatest stress are the obvious places – hospitality and retail. Fortunately, those are properties types where we have limited exposure, particularly retail where COVID-19 has accentuated problems that were already there.
Some industrial properties, on the other hand, are thriving. Most of the real estate market falls somewhere in the middle – tenants are feeling the impact of the pandemic but the ripples of that are only partially being felt by owners so far. Our thesis is that distress is just starting to show in the market and that it will intensify over the next six to twelve months, creating a once-in-a-cycle buying opportunity for investors.
Because we have a nationwide network of well-capitalized operators and sponsor partners, we will be able to quickly seize on opportunities created by asset repricing. In some circumstances, demand shocks will create distressed asset opportunities. Some property owners, borrowers, and in some cases lenders may be forced to liquidate assets.
Searching For Distressed Assets
We are working with a number of quality sponsors — who have had distressed asset investing success for decades — to bring our investors distressed asset opportunities, which we expect will manifest in various ways across numerous markets throughout the downturn and recovery.
On a related note, we do believe that now is a timely moment to pursue private real estate funds. Investors are able to achieve temporal diversification: their capital is invested over time, allowing the fund sponsor to capitalize on optimal buying moments on behalf of our investors.
On a more macro level, we believe that alternative assets like private real estate serve investors well during times of heightened public market volatility. We don’t know what the future holds or what the recovery will look like, but we can expect that volatility will be the norm, not the exception for as long as COVID-19 makes normal economic activity more challenging.
Private real estate investments — like those offered on EquityMultiple — allow investors to tap into returns driven by skilled management and sound investment theses, including distressed asset opportunities.
6) What is the quality-control process EquityMultiple performs before approving a deal?
We really hang our hat on our in-house underwriting practices. Each investment must pass a rigorous, multi-phase diligence process. These are the main steps our team goes through as we look to deliver a highly compelling investing experience:
- Sponsor Vetting. We only work with sponsors and lenders who possess an extensive track record of delivering solid returns. These sponsors must have specific experience within the same asset class, market, and strategy as the investment presented to us.
- Investment-Level Diligence. We analyze hundreds of attributes, stress test the sponsor’s assumptions, and conduct our own return modeling and risk assessment based on a deep dive of market comps and other data sets.
- Investment Structuring. We bring to the table decades of real estate law and finance experience. We work closely with our sponsor partners to structure investments such that they offer our investors compelling potential risk-adjusted returns. In most cases this also entails a preferred return and near-term or immediate cash flow.
- Ongoing Asset Management. We monitor ongoing progress of our investments through exit. This means frequent, transparent performance reporting for our investors. We are constantly working with sponsor partners to find solutions to any unforeseen challenges. The paramount goal of maximizing returns for our investors.
Ultimately, all investments must pass a unanimous vote from our Investment Committee. We have accepted fewer than 5% of the investments presented to us.
7) Is the investor investing directly with the sponsor or through an LLC created by EquityMultiple? As for tax documents, do investors receive a K-1 or 1099?
All of our equity and preferred equity investments entail establishment of a special purpose vehicle – in our case, an LLC. This entity invests into each deal, typically as an LP (limited partner). We do this so as to ensure bankruptcy remoteness; if EquityMultiple were ever to cease operations (which of course we do not anticipate) those investment entities would be taken over by a third-party manager.
In each preferred equity or equity investment, we structure the maximum degree of protections possible for our investors. We often also hold some recourse in the unlikely event of any bad faith actions on the part of the sponsor. We believe this is a big benefit of our model versus investing directly with sponsors.
Generally, our investors will receive a K-1 for equity investments and either a 1099 or K-1 for debt or preferred equity investments.
8) What have the results been to date? How has the performance looked in aggregate across EquityMultiple deals?
Over the past 4 years we have offered well over 100 investments across the country. We have had 22 go full cycle so far, with most performing in-line with expectations.
We built a Track Record utility that shows aggregate performance of the portfolio. Anyone can access after creating an account (which is free).
The majority of those 22 realized investments are debt or preferred equity deals. Meaning that our investors were entitled to a contractually established flat rate of return (and a target share of upside in the case of preferred equity investments). As such, our aggregate returns at this point reflect that low-to-mid-teens annualized return range.
We’re still early in the term of many of our equity investments; the range of possible returns for an equity investment is generally much larger. The majority of our equity investments remain on schedule and many are returning regular cash flow to our investors.
I would really encourage anyone who is curious to take a look at the Track Record tool; as our deal volume has ramped up over the past several years we will correspondingly expect to see an increased number of exits in the coming quarters. These exits will be incorporated into our upcoming reporting.
9) What percentage of an investor’s portfolio would you recommend allocating to these types of investments?
We classify the types of investments on EquityMultiple as private, illiquid real estate investments. This is markedly different from investing in a public REIT (real estate investment trust) in that the investments are less liquid. However, partly as a result of that illiquidity, private real estate investments historically have shown less correlation with the stock market.
This is a big reason why institutional investors like the Yale Endowment have been allocated substantially to “alternative assets” like private real estate for a long time.
Studies have shown that allocating a meaningful portion of a portfolio to private-market alternatives can increase risk-adjusted returns over time. We offer individual investors the opportunity to mirror the asset allocation of large institutional investors. Further, thanks to low minimums and ease-of-use, to create a diversified portfolio of private real estate assets.
Though asset allocation strategy should be a function of your risk tolerance and objectives, our position is that individual investors should allocate more in the range of 15-25% to alternatives like private real estate, versus the 0-5% range that is still typical of individual investors. EquityMultiple can help self-directed individual investors close that allocation gap.
For investors just getting started with an investing platform like ours, I would really say ask questions and get comfortable before investing. We present the investment thesis and underwriting of each offering in full detail and offer a streamlined investing process.
For further questions, our Investor Relations Team is always available to answer questions. We want our investors to be fully comfortable with us and with each investment they consider before committing.
I welcome you to explore the EquityMultiple platform today.
EquityMultiple Review Conclusion
Thanks to Soren for providing such in-depth answers to my EquityMultiple review questions. It’s good that EquityMultiple provides a variety of investment offerings for accredited investors. It is also clear they are very focused on due diligence.
The key is to work with experienced sponsors who have successfully invested in distressed asset opportunities before. We should pay attention to these opportunities that arise on EquityMultiple and elsewhere. I’m most interested in their private real estate funds due to the diversification and management oversight aspects.
Readers, I’d love to hear your experience investing with EquityMultiple. What opportunities are you seeing in the real estate crowdfunding space?