Out-of-the-box investors, risk takers, and experienced real estate speculators will appreciate this crowdfunding platform. We’ll explain how EquityMultiple can provide the portfolio diversification you may be looking for.
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Real estate crowdfunding offers investors an opportunity to invest in sophisticated real estate deals that were previously unavailable to the average investor. You can now invest in commercial real estate deals, including office buildings, apartment buildings, retail shopping centers, and other types of non-residential properties. These deals are both higher return and higher risk than typical residential real estate investing, and therefore restrict the type of investors who can participate.
EquityMultiple is a prominent commercial real estate crowdfunding platform, that gives you the opportunity to invest in commercial property with an investment of as little as $5,000. Their team of seasoned real estate professionals carefully evaluates potential deals, making sure you’re investing in only the highest quality properties available.
It’s an opportunity for you to diversify your portfolio beyond stocks, bonds, and real estate investment trusts. Commercial real estate is a high return investment, that can provide a greater level of diversification for more sophisticated investors.
Founded in 2002, EquityMultiple is an online real estate investment crowdfunding platform, dedicated to raising investment capital. EquityMultiple is backed by Mission Capital, a technology-forward real estate capital markets firm. The two firms have combined their diligence and consulting services to allow their client base liquidity and an optimized portfolio strategy throughout the credit cycle.
EquityMultiple has closed more than $700 million in real estate transactions. They work with both new and experienced investors, and their goal is to simplify the investment process by combining it with technology.
When you invest with EquityMultiple, you’re investing in commercial real estate. Unlike many real estate crowdfunding platforms, which may invest in small projects, like single family residential properties, such as fix-and-flips, EquityMultiple invest primarily in much larger deals. For example, a typical real estate project will be between $500,000 and $2 million. As an investor, you can buy incremental investments in these deals.
In order to participate, you must be an accredited investor. That means you must qualify based on income and assets. Naturally, an accredited investor is on the higher end of the wealth scale. This is because investing in commercial real estate tends to be a high risk venture. It’s best suited for those who are both familiar with such investments, and have the financial strength to weather losing money.
The minimum investment required is $5,000, but most deals will require a minimum of $10,000 to participate. EquityMultiple also offers IRA accounts, and they require a minimum of $20,000 to open.
You can participate no matter where you live. EquityMultiple operates in all 50 states.
As is typical with real estate crowdfunding platforms, when you make an investment it isn’t in the actual real estate. Instead, the platform creates an LLC for each deal. You will invest in a share of the LLC.
EquityMultiple offers the following 3 investment structures:
Syndicated debt. These are loans you help to fund on a particular real estate deal. The typical expected annual return is between 7% and 12%. Income payments can be paid out either monthly or quarterly throughout the term of the loan.
The typical long term will be between 6 months and 24 months. The loan-to-value (LTV) ratio will be 50% and 75% of the value of the underlying property. Each first lien loan is secured by a mortgage or deed of trust on the property.
Preferred equity. These deals usually offer a fixed rate of return throughout the term of the loan. But they may also provide an additional return when the investment is paid off. For example, preferred equity is expected to provide a return of between 7% and 12% annually. But with the additional return, the total return is more likely to be between 10% and 14% per year.
The typical term of preferred equity deals is between one and three years. The advantage of this structure is that you’ll be entitled to repayment of your investment before straight equity holders and project sponsors are paid.
Income payments are generally set up on either a fixed monthly or quarterly basis, throughout the term of the deal. The additional accrued return will be paid when the investment is paid off, and the principle is returned to investors.
Common equity. As the name implies, these deals do not offer a fixed rate of return. They do however expect an internal rate of return of at least 14%. Both the return on investment and the frequency of payment will be based on the performance of the underlying investment.
The typical term of a common equity deal is between three years and seven years. Though these deals have the potential for larger returns than preferred equity or syndicated debt, you are the last party to be paid in the deal. That gives you very limited downside protection.
Deal Selection Criteria and Vetting
As noted earlier, EquityMultiple restricts investments to larger projects, at a minimum of $500,000 each. With a minimum investment of $10,000 in each deal, you can spread a $100,000 investment across 10 different individual deals. Additional investment shares are typically offered in increments a $5,000 above the minimum initial investment.
Each deal ranges in term from 12 months to 10 years.
The company is highly selective in the deals they accept for funding. Though they may review hundreds of individual deals each year, they typically accept only about 10% for funding activity. This is to ensure that the deals accepted are the highest quality for their investors.
Projects are evaluated using stress test underwriting assumptions, as well as the review of key legal documents and third party reports. They also give close consideration to the structure of each transaction.
One of the advantages with this platform is that when they select deals, they partially invest with their own funds. That means they are aligning their own interests with those of the investors on the platform.
They make it their policy to work with highly regarded organizations, including:
- National and regional lenders with significant experience
- Real estate companies operating in thriving primary, secondary, and/or tertiary markets
- Sponsors with a proven record of meeting and exceeding return projections. This is a network bolstered by long-term clients of EquityMultiple’s strategic partner, Mission Capital.
Properties selected include:
- Commercial properties in thriving markets, with current cash flow
- Short-term loans and preferred equity investments giving investors a strong annual percentage rate or preferred current return
- Value-add projects with construction components and more aggressive business plans
The Diversification Advantage of Real Estate Crowdfunding with EquityMultiple
Since EquityMultiple offers deals in all 50 states, you have an opportunity not only to spread your investment portfolio across different deals, but also to diversify geographically. For example, you can choose to invest in deals located in specific property markets that you judge to be superior to others. Alternatively, you may simply decide to invest in various geographic locations, to avoid concentrating too heavily in one or two markets.
You can also diversify your portfolio across various asset types, cash flow profiles, as well as between debt and equity investments.
And once again, with a typical minimum investment of $10,000 per deal, you can invest your portfolio across several different deals. You can even choose to diversify the specific types of commercial deals you invest in.
Given that the entire investment process takes place online, you can manage your portfolio in a way similar to traditional investment brokerages, where you might invest in stocks and bonds. Unlike direct real estate investing, you never have to “get your hands dirty.” EquityMultiple does all the leg work for you, and your job is simply to fund your account, and select the deals you want to participate in.
Investment earnings are received directly through ACH bank transfers. You can view quarterly investor updates on asset performance to stay on top of your holdings.
When you invest with EquityMultiple–or any other real estate crowdfunding platform – you should be aware that investment liquidity is extremely limited. In most cases, you’ll remain in the investment until it matures or pays out.
However, EquityMultiple does make it possible to transfer ownership of your investment on a very limited basis. You can do this by transferring your investment to another investor on the platform. The company is careful to advise that this is handled strictly on a case-by-case basis, and is never guaranteed.
This lack of liquidity is one of the major reasons why real estate crowdfunding typically requires investors to be accredited. Like all types of real estate, real estate crowdfunding deals are generally long-term investments. You must be prepared to commit your funds for the duration of the deal.
EquityMultiple has a two tiered fee structure. They collect an annual fee of 0.5%, but they also collect 10% of the profits generated on a completed deal.
As an investor, you can reach EquityMultiple either by phone or by email. Phone contact is available Monday through Friday, from 9:00 AM to 6:00 PM, Eastern Time. Email contact is available at [email protected]
You can open an account either individually, or jointly. You’ll need to complete an online application, as will your co-applicant. With a joint account, the joint holder will need to electronically sign a limited power of attorney, that authorizes you to make all decisions regarding the account.
You must register on the platform in order to participate, and that starts by creating an account. After you register, you’ll receive an email confirmation, and you can then begin browsing the investments available. You can also review diligence information, ask questions, and complete the funding process online.
Funding is handled by secure ACH, by linking an existing bank account to your EquityMultiple account. The transfer of funds may begin after your bank account has been verified by confirming two micro deposits, which will appear in your bank account in one to three business days after you begin the linking process. But the platform also accommodates funding by either check or wire.
Funds are held in a segregated account at Bank of America, where they are FDIC insured for up to $250,000 per depositor.
In addition to being an accredited investor, you must also generally be a U.S. citizen, with a U.S. tax identification number. However, some investors are legal residents of the United States, or foreign nationals who own or partially own an investing entity incorporated in the United States.
EquityMultiple is for investors who are looking for a greater level of diversification in their portfolios. It’s an opportunity to invest in commercial real estate, which is normally a venture reserved for people who specialize in that field. But it’s also an investment that has a history of producing above average returns, and EquityMultiple will give you an opportunity to participate in those profits.
As noted earlier, you must be an accredited investor. But you must also be a risk taker. Commercial real estate is not for typical investors. You have to have a general understanding of the intricacies of commercial real estate, as well as the best ways to diversify across different areas of the sector.
It’s also important that you don’t hold a majority of your portfolio in commercial real estate. It’s good for those who are looking for a diversification into a different type of investment, but retain most of their assets in more traditional investments.
You must meet the criteria for an accredited investor to participate on EquityMultiple and most other crowdfunding platforms.
EquityMultiple also isn’t for investors with a low risk tolerance. If the prospect of losing some or all of your investment in a particular real estate deal makes you uncomfortable, this is not the type of investment vehicle for you.
Also, even though EquityMultiple carefully analyzes and vets all deals, you still need to be aware of the risks, as well as the necessity of diversifying your commercial real estate holdings across different markets, deal types, and properties.
EquityMultiple and RealtyShares are similar real estate crowdfunding platforms. Both enable you to invest in commercial real estate. However, RealtyShares enables you to also invest in smaller real estate deals, like fix-and-flips.
Both platforms also give you the ability to invest either in debt or equity-based deals. Both also accept less than 10% of the deals available, as a result of strict underwriting guidelines. And both require that you are an accredited investor.
But there are two areas where RealtyShares offers advantages over EquityMultiple:
- RealtyShares will even allow you to offer a deal of your choice to be funded through the platform.
- You can invest either in slices of larger deals, or fully fund a single deal.
However, where RealtyShares offers investments in only 41 states, EquityMultiple covers all 50. That will give you greater geographic diversification, which can be a major factor when it comes to commercial real estate investing.
EquityMultiple also enables you to invest with a minimum of $5,000. RealtyShares requires a minimum of $10,000.
There’s also a difference in fees between the two platforms, though direct comparison is difficult due to the structure of EquityMultiple’s fees.
RealtyShares typically charges 1% on equity deals, and as much as 2% on debt deals, EquityMultiple charges a flat fee of 0.5% on both types. However, EquityMultiple also takes 10% of the profit on equity deals, but only at the end of the deal.
It’s hard to judge which fee structure will be more advantageous. EquityMultiple will work better on an annual basis, and possibly even on a multi-year deal. But much will depend on the profits at the end of the deal, which will vary in each particular situation.
In the end, the primary difference between the two may be in the specific types of investments. If you prefer smaller deals, such as single family properties, RealtyShares will be the preferred platform. But if you’d rather invest in larger commercial projects, EquityMultiple will be the better choice.
If you qualify as an accredited investor, and you’re looking to hold a small slice of your portfolio in commercial real estate, EquityMultiple is an excellent place to do it. They invest specifically in larger commercial properties, of higher quality. The returns can be higher than what you can expect from real estate investment trusts, due to the nature and structure of the deals.
If you’d like more information, or if you’d like to sign up for the service, check out the EquityMultiple website.