EquityMultiple is a real estate crowdfunding platform for accredited investors. EquityMultiple allows members to invest alongside established real estate investors and developers on large projects. Because the platform pays investors before taking any profit themselves, their end goal is aligned with that of their investors.
Read on to learn more about real estate equity crowdfunding and EquityMultiple.
Why you should diversify your investments
It's easy to find headlines warning of the next stock market crash. Indeed, the stock market over time is a series of crashes and highs. These ups and downs are heart wrenching for all but the most stoic of investors.
Stock markets historically go up, and patient investors come out ahead. However, those who invest a lot in the stock market during its peaks may have to wait years before receiving a positive return on their investments.
Because of this, smart investors diversify where they hold their money. In addition to stocks, bonds, and their own businesses, many wise investors invest in real estate.
Should I invest in real estate?
Real estate is appealing to investors on many levels. First, it's something concrete. You can see it, touch it, believe in it. Stocks and mutual funds tend to be a bit abstract to many people. Second, it adds diversification to an investment portfolio. Nearly everyone owns plenty of stocks and funds in their 401k or IRA. Thankfully, real estate is uncorrelated to the stock market and can act as a hedge against inflation. Finally, and maybe most importantly, real estate can provide higher returns with lower volatility.
Chances are you know somebody who has a rental house or two. This is certainly an effective way to get started, but is it really the best way to invest in real estate? Not only is there risk in owning a single investment, but there are many headaches involved with managing a property.
For investors who have no interest in managing property or risking all of their money on a single property, real estate crowdfunding provides a valuable alternative.
Real estate crowdfunding: The best way to invest in real estate
Up until a few years ago, diversification in real estate required millions of dollars. Then in 2012, crowdfunding for businesses and real estate was opened up to investors. The passage of the JOBS Act (Jumpstart Our Business Startups Act) allowed individual investors unprecedented access to investments historically only available to the wealthy.
Crowdfunding changed everything. Real estate projects that cost millions of dollars were suddenly opened to many investors. No longer did an individual need to buy an entire smaller property, instead they could purchase portions of a larger project. This allowed investors to diversify across many properties. Unfortunately, this newfound freedom brought challenges as well.
Overnight, various investing platforms popped up encouraging accredited investors to trust them with their hard-earned money. This was basically the wild west of crowdfunding. Initially, various platforms were trying different structures and it was unclear which would succeed. Today, enough time has elapsed that we can see which platforms are becoming clear winners for investors.
Investors who like trust and transparency go with EquityMultiple
EquityMultiple is fast becoming one of the most trusted crowdfunding platforms. This platform allows accredited investors to diversify into commercial real estate and multi-family properties. Their focus on transparency is a welcome change from the shroud of secrecy that envelopes many crowdfunding platforms.
EquityMultiple publishes a quarterly report, detailing the performance of every investment on the site. Compare this to most sites, which generally only give a broad (and often exaggerated) indication of performance. This industry leading transparency is only one of the reasons EquityMultiple is becoming a leading real estate crowdfunding platform.
EquityMultiple puts skin in the game
EquityMultiple works with project sponsors and lenders to identify quality projects for investors. First, they thoroughly vet each sponsor or lender to ensure a proven track record of successful projects. Then they perform a rigorous due diligence of each project and its market. To top it off, they show their commitment to the project by often having their own funds in the deals with investors.
Pros and Cons of Investing with EquityMultiple
There are a lot of good reasons to like the EquityMultiple platform. The largest center around the trust and transparency the platform builds with investors. A few “cons” do exist, primarily do to the young age of the platform.
- Access to large commercial projects has never been easier. With as little as $10,000 down investors can participate in multimillion dollar projects.
- Investors can spread risk through diversification of investments. Diversification in location, investment types (debt or equity), and property type (retail, commercial and residential)
- EquityMultiple puts skin in the game by investing alongside investors (through Mission Capital) in all deals. Only the best deals with a high likelihood of success are brought to investors.
- Investors get paid first. EquityMultiple only gets paid after investor money is returned on equity projects. This is yet another incentive for EquityMultiple to bring high performing investments to participants.
- Easy to use platform and simple to join. The platform is well designed, simple to use and verification is quick.
- As with any investment, there is still risk. Investors should perform their own due diligence.
- The site is only a couple of years old. The process is transparent and fees fair, but the company isn't time tested.
- Limited number of new offerings. While the vetting process for sponsors and deals reduces risk for investors, it can also potentially limit the number of new offerings. An investor who wants to spread a lot of funds quickly may be disappointed at the speed new deals become available.
Who can invest with EquityMultiple?
Currently, EquityMultiple is only available to accredited investors who live in the US. To be an accredited investor, you must typically earn over $200k a year or have a net worth over $1 million.
- Review our list of real estate crowdfunding platforms for more options and EquityMultiple alternatives.
Setting up an account on EquityMultiple
The process of opening an account is quite simple. As with most sites, you visit and click sign up. As expected, there are a few extra questions regarding your accredited investor status. Lastly, a confirmation email is sent to your account. Once confirmed, you will have access to view all the deals.
Being able to see the deals without having to input much personal information is a nice touch. In addition, the information needed to perform due diligence is made available as well. You can see the deals and perform due diligence behind the relative safety of anonymity at this point.
Further set up is required to invest in a property. This is still simple. A color scan of a government ID needs to be uploaded, a W-9 tax document electronically signed, and a bank account linked. Then two small deposits are made into your account which need to be verified on the site.
After account verification, you are off and investing!
Types of Real Estate Investments with EquityMultiple
EquityMultiple focuses on investing in commercial real estate. Commercial real estate includes retail property, industrial property, and large residential complexes with greater than four units. This diversity offers several advantages to investing in residential real estate, which only includes residential units of four-plex size or smaller.
Hard numbers drive prices when investing in commercial real estate. In contrast, residential property is often priced arbitrarily. Commercial property is primarily valued by its square footage. For this reason, calculating the return on commercial real estate is generally more certain.
Commercial property often has greater cash flow with less risk. Commercial residential properties have multiple tenants. This stabilizes the cash flow and reduces risk. Meanwhile, retail and industrial properties have significantly longer leases.
The largest drawback to investing in commercial property is the cost of the projects, which can run into the tens of millions. In addition, banks will require 30 percent or more up front – making these projects inaccessible to most investors. This is where crowdfunding platforms like EquityMultiple come into play.
Investing in Debt or Equity?
There are two basic ways that investors can invest money with EquityMultiple: debt purchase and equity investing. Both offer different return potentials and risk.
Most people are familiar with debt investing through a home mortgage. In this case the bank owns the debt note and the homeowner pays the bank. When an investor puts funds into a debt investment on EquityMultiple they are essentially becoming the bank.
Debt investing carries less risk than equity investing, but at the same time has lower potential for gains. Many investors prefer to invest in equity over debt.
In the example of a home mortgage, the homeowner owns the equity. When the house increases in value, the homeowner receives all the gains. The bank's return is limited to the interest on the loan. Equity investing works the same way. The upside potential with equity investing is essentially unlimited!
Investing in equity also has a few other benefits. While a homeowner only sees a gain in the event of a sale, commercial property is collecting rents from tenants. Equity investors get to share in these rents, creating a cash on cash return in addition to gains from an ultimate sale.
With all the enormous potential with equity investing, why would anyone want to invest in debt?
Returns on investments are generally a function of risk. That is, the more risk taken the higher the expected return. Real estate is no different. Equity investing carries greater risk than debt.
Going back to our home mortgage, if the homeowner fails to pay, the bank gets the house. The homeowner (equity owner) gets nothing. Commercial real estate works the same way.
The underlying property protects the debt investors. In a default, the property is sold to pay back the debt. Equity investors on the other hand are the last ones to get anything back.
Commercial real estate typically has a few more layers of debt and equity than this, and investors need to understand their place in the pecking order in the event of a default. Fortunately, Equity Multiple provides some extra layers of security for equity investors.
EquityMultiple reduces risk for equity investors in three major ways:
- They provide thorough vetting of sponsors and only work with sponsors with great track records and projects that have a high likelihood of success.
- They invest their own money alongside investors. This alone makes certain they want projects to succeed.
- EquityMultiple gets paid when an equity project is a success and the investors make money. If the investors don't make money, EquityMultiple doesn't get a fee.
This final one is an important concept in understanding how crowdfunding platforms earn money.
Understanding fee structures
The fees that crowdfunding platforms charge should play a key role in selecting one to invest with. Many platforms charge blanket upfront investment fees. This means that they make money on any deal, whether the sponsor defaults or not. Platforms like this can throw up low quality deals just to move volume. This effectively pushes more risk onto the equity investors.
EquityMultiple only makes money when the investors make money. This encourages them to perform rigorous due diligence on investment opportunities and only bring the best to the investors. Additionally, they do charge a 0.5% asset management fee on cash flowing properties.
A 0.5% fee may seem large to investors used to investing in mutual funds or ETFs. However, those are generally index investments, where as real estate requires thorough due diligence to ensure superior performance.
The bottom line
Every investor's portfolio should have a place for real estate. The more diversification an investor has in number, types, and locations of real estate, the greater chance for market beating returns and reduced risk.
Crowdfunding has quickly become one of the best ways to invest in real estate. There are many platforms that have popped up over the last ten years, but the best ones are becoming clear. EquityMultiple is a rising star in the expanding field of crowdfunding and is one of the best choices for investors looking to diversify with commercial real estate.
Finally, remember that no investment is without risk. Investors are encouraged to perform proper due diligence and select investments that meet their individual investing criteria.
Jesse Blair retired from the corporate world at the age of 42 to live off his investments, spend time with his daughter, and focus on self-improvement. You can follow Jesse's investment experiences at TheIncomeAdventure.com