Founded in 2012, RealtyMogul offers accredited investors a way to invest in debt or equity commercial real estate. They provide investors with access to thoroughly vetted opportunities, rigorous underwriting, and high-touch customer service through licensed investment professionals. This post will discuss: how does RealtyMogul select their deals?
RealtyMogul enables investors to participate in a wide range of real estate investments across the country (I am partial to our nation's heartland), many of which are commercial deals that are often times in the 10s of millions of dollars range and traditionally out of reach for the average investor.
When you invest, you typically do so by purchasing shares in a RealtyMogul limited liability company (LLC) that in turn invests into an LLC or Limited Partnership (LP) that holds title to the real property.
Investing in this way minimizes overhead for the investment sponsors and provides access to more investment opportunities, as well as streamlined reporting of distributions through the platform.
Given they have higher barriers for whom they do business, it feels like they really are focused on hitting singles and doubles instead of home runs, which is more in line with how I like to operate my own business.
How Does RealtyMogul Select Their Deals?
Before acquiring or investing in any commercial real estate, there are many critical pieces of information that need to be reviewed. In real estate circles, this analysis is called due diligence.
Any operator, investor, or lender should dig deep to determine the viability of the property’s business plan.
RealtyMogul selects their deals carefully. They perform due diligence on behalf of their investors thoroughly. Here are five core criteria they consider during their due diligence process.
1: The Real Estate Company (Sponsor)
The first thing that one should look at when analyzing an investment is the real estate company involved in the project. This is also known as a sponsor, who is an individual or real estate company that will acquire the real estate and execute on a business plan.
Key factors include:
- Background and credit, bad actor checks and determination of any pending litigation and other items of concern;
- List of all assets the real estate company has acquired, what were the assets, when were they purchased and for how much, when/if they were sold and for how much;
- Comparison of proposed investment to prior investments for parity of scope and proximity to existing held assets. Has the real estate company executed on similar business plans, do they have the requisite experience in the asset class under review and in the markets where the investment is to be made;
- References from lenders, investors and/or business associates;
- Common industry
connections,found through sources like LinkedIn;
- A website that is professional, informative and illustrative of expertise in the market and with the asset class being acquired;
- The size of the company and number of years in business;
- The résumé and experience of the management team;
- Relationships with the property management company and the leasing agents being used.
2: The Market Environment
The second thing RealtyMogul uses to select deals is the market environment. When looking at a real estate investment, they carefully consider the local market of the property. Realtors often say that the only thing that matters is “location, location, location” and not without good reason.
Key factors include:
- Is the market growing and by how much, as well as what are the upwards trends for the market;
- What industries are in the market, is it only one industry or many, and how will these jobs fare in a downturn;
- Are median incomes rising in the market;
- What is the age of the population in the market;
- Are property values in the market higher than they have ever been or is there upside to the growth of the property values;
- Does the market have sufficient jobs and other amenities like shopping and restaurants;
- What is the state of the local government, are taxes high or low and are there good schools, roads, and public services;
- What are vacancy rates in the market, what are rental rates, and how
dothese rates compare historically in the market.
3: The Asset Quality
While the real estate company and the market are both important, so too is the asset, or the property itself. It is important to review not just whether it is the right time in the real estate cycle, but also whether it is a good time to purchase the asset.
The asset is so key to the investment that RealtyMogul does an in-person site visit for every investment.
Key factors include:
- What is the asset type and how is it trading in the market;
- Where is the asset located within the market, and what is the ease and desirability of access for tenants;
- What is the age of the asset, does it need significant upgrades and can the income potential of the property support the invested dollar;
- What is the income the property can generate, what are the expenses, and does it generate net income;
- Is the property properly priced compared to similar assets in the market;
- What is the replacement cost of the asset;
- Does the asset have any functional obsolesce, meaning the asset is not as useful as it once was;
- Who will the tenants of the property be and can the property meet their specific needs;
- What are the vacancy rates for the asset, what are the rental rates for the asset, are the vacancy rate and rental rates higher or lower than the rest of the market, and how does the asset compare to the rest of the market.
4: Capital Structure
When investing in commercial real estate, the capital structure must be looked at closely as it directly impacts the return.
Commercial real estate is often purchased with a mortgage, resulting in both debt and equity on the deal.
Moreover, real estate companies can further complicate the capital structure of a transaction by adding a combination of a second lien, preferred equity or mezzanine debt as a layer of capital in between the senior mortgage and the common equity. The terms of each of the slices of capital have material impacts on the others.
Key RealtyMogul select factors include:
- How much debt is on the property, how large is the loan compared to the value of the asset;
- Is the sponsor a guarantor on the property or is the loan nonrecourse;
- Who is the lender on the property, are they institutional or private;
- What are the fees on the transaction;
- What do the loan documents say regarding factors that cause a default;
- What are the rates and terms of the senior loan, the preferred equity, the mezzanine debt and/or the common equity;
- Is the transaction levered (with debt or
subdebt) or not and if so, how high is the leverage;
- What is the priority of payments;
- Who has control over the
5: Risk and Return
The last, but not least, thing that an investor should look at when determining whether to invest in an opportunity is the risk/return of the project.
Key factors include:
- How risky is the deal overall, what are the risks and how likely are these risks to occur;
- Where are we in the real estate cycle, is the asset being bought at the top or bottom of the market;
- Does the expected return match the expected return of other similar assets in the market;
- Are there other investments that have
better expectedreturns for less risk.
Once it is determined that each of the elements of a transaction are on point, on balance and strong enough to accomplish the stated investment goals, it is worth considering making an investment in the opportunity.
RealtyMogul Selects The Best Deals
Learning how does RealtyMogul select their deals provides clarity and confidence. Here is how stringent RealtyMogul is with their due diligence process. RealtyMogul selects only the best deals after running through a stringent vetting process.
1) Pre-Vetted Investments — Less than 10% of the deals first shown on the RealtyMogul make it through to their platform for their investors. RealtyMogul's due diligence vetting goes through the sponsors history, track record, and individual backgrounds to ensure deals have the highest chance of providing a positive return.
2) Simple Investment Process — Real estate crowdfunding is taking off largely due to its ease of investing. RealtyMogul’s platform allows investors to thoroughly analyze a deal with the research provided. An investor can view pictures, videos, and even ask the sponsors questions before making an investment.
3) More Focused Than REITs — A publicly traded REIT generally has dozens, if not hundreds of properties in its portfolio. It’s harder to invest in specific areas of the country, such as the heartland, or the east coast, or the west coast with a REIT. Real estate crowdfunding with RealtyMogul allows you to be much more surgical in your investments.
4) Low Investment Minimum – Instead of coming up with a $200,000 downpayment for a median priced San Francisco or NYC property and borrowing $1,000,000, you can invest as little as $10,000 in a property on the RealtyMogul platform to gain exposure.
Sign up with RealtyMogul today for free and explore how online REITs or private placements could fit into your investment objectives and provide your suitable clients a valuable investment opportunity.
About the Author: Sam worked in investment banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. When Sam isn't writing, he spends time playing tennis, and taking care of his kids.