CrowdStreet gives accredited investors an opportunity to invest in high-level commercial real estate deals with a relatively small investment. Where commercial real estate investing once required multi-million dollar investments, real estate crowdfunding platforms, like CrowdStreet, enable investors to participate in projects with just a few thousand dollars.
CrowdStreet also enables investors to partake in complex commercial real estate deals without any direct involvement. Property deals are managed entirely by deal sponsors, allowing investors hassle-free participation in the profits.
What is CrowdStreet?
CrowdStreet is a real estate crowdfunding platform. That’s an investment site where real estate sponsors offer investments for investors to invest in. Most commonly, investors purchase a partial interest in an individual commercial property, or in a fund that invests in personal property.
While CrowdStreet’s investment methodology may seem similar to a real estate investment trust (REIT), there are significant differences.
A REIT functions something like a mutual fund that holds a portfolio of investment properties. They can either be publicly traded on major financial exchanges (public REIT), or privately-issued REITs offered by an organization, but not available to be purchased or sold on public exchanges.
Once the investor purchases a position, he or she will have no control over the investments within the REIT. The trust will buy, hold, and sell properties as it deems appropriate. Investors will be entitled to periodic dividends as well as distributions of capital gains (if any) when properties held within the fund are sold for a gain.
By contrast, CrowdStreet offers an opportunity to invest in individual commercial properties. These can be apartment complexes, office buildings, retail space, warehouses, hotels, and other large projects. The main exclusion from CrowdStreet are individual residential properties.
Investors can choose the specific properties they want to invest in through the CrowdStreet Marketplace. That provides an opportunity to choose the investments with the best combination of projected returns and property characteristics.
But CrowdStreet investors are not limited to individual property deals. The platform offers specialized investment funds that hold multiple properties offered by various sponsors. These funds are more like non-public REITs. They give investors an opportunity to diversify across several properties with a single investment.
For larger investors, those with at least $250,000 to invest, CrowdStreet also offers custom portfolios. This is a management service provided by CrowdStreet Advisors that will enable investors to include a mix of funds and individual deals within their portfolios.
How Long has CrowdStreet Been in Business and Who Founded It?
CrowdStreet has been in business since 2013. The platform was developed shortly after the Jumpstart Our Business Startups (JOBS) Act was passed in 2012. That made CrowdStreet one of the first real estate crowd platforms to come out of the JOBS Act.
The company was founded by Tore Steen and Darren Powderly, who had a goal of making commercial real estate investments available to more people. Their hope was to provide investors with an opportunity to reduce their investment dependence on Wall Street. Commercial real estate can be a useful way for investors to diversify a portfolio composed largely of stocks and bonds.
Tore Steen serves as CrowdStreet’s chief executive officer, while Darren Powderly serves as Vice President, Capital Markets. While Steen’s background is in Internet and software, Powderly, has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. The two produce a winning combination of technology and real estate experience, the basic foundation of real estate crowdfunding.
Since the platform was launched, CrowdStreet has closed 540 commercial real estate investment offerings, of which 63 have been fully realized (completed and paid out). That includes $2.4 billion in capital raised, with $275 million in total funds returned to investors.
How Does CrowdStreet Work?
If you are an accredited investor (see Who Can Invest in CrowdStreet below), you can sign up for the platform free of charge. Once there, you will have access to the CrowdStreet Marketplace where you can select individual property deals you want to invest in. The minimum investment on most deals is $25,000, but it could be more on certain deals.
Individual property deals are offered by sponsors, who are real estate professionals who create and manage the deals.
But not all deals offered by the sponsors are accepted. CrowdStreet first performs a strict vetting process that eliminates 95% of the deals submitted. CrowdStreet limits the deals offered to institutional quality commercial real estate investments with defined business plans from reputable and proven sponsors.
In fact, one of the strongest elements of a CrowdStreet investment is the vetting process they employ with each deal.
The CrowdStreet Vetting Process
CrowdStreet performs a three-step vetting process, designed to screen the sponsor, the property being presented, and the offering terms. That means both individual property investments and the sponsors themselves must go through a rigorous vetting process.
CrowdStreet evaluates the sponsor’s background and investment track record. The sponsor must have a demonstrated capability to carry out their business plan with the highest level of professionalism.
The process includes background checks on any entities and principals within the sponsoring organization. Background checks are performed by CLEAR/Thomson Reuters, which searches for legal events, like bankruptcies and lawsuits. If any are discovered, the sponsor will be required to provide a satisfactory explanation before proceeding.
The next step is the review of the proposed asset. The property investment or fund is evaluated to be sure it aligns with both the sponsor’s background and with the types of investments favored by CrowdStreet investors. An analysis of the feasibility of the sponsor’s business plan is performed, as well as sensitivity analysis to determine how the asset will perform under negative circumstances.
Finally, CrowdStreet reviews the terms of the offering, as well as associated documents, against their standard investor deal terms criteria matrix. The results are provided to the sponsor, who can either adjust the terms of the deal to comply with CrowdStreet’s required criteria, or to reject the offer completely.
In total, each investment is subject to a 26-point objective review process by the CrowdStreet investment team to ensure it meets the company’s requirements.
Only once a deal and its sponsor clear the vetting process is the deal offered to investors on the CrowdStreet Marketplace.
Investing in CrowdStreet Deals
As of the time of this writing, CrowdStreet is offering potential investments in eight individual properties, as well as multiple self-storage locations and Private Managed Accounts by CrowdStreet Advisors. Investments are available for accredited investors in all 50 states.
When you invest in an individual deal with CrowdStreet you must understand it’s a long-term investment. CrowdStreet indicates the average term of a deal, from initiation to full realization, averages 2.4 years. A scan of completed deals shows the holding period can range between a low of 0.6 years to a high of 5 years.
Because each individual deal is unique, you’ll need to carefully examine the terms of each, with the understanding that the listed targeted holding period is only a projection. The actual term can be shorter or longer.
Once you commit funds to an investment, you will not be able to draw them out. Your initial investment, plus any capital gains on the disposition of the property, will be paid out at the end of the term. Expect your money will be tied up for at least the projected targeted holding period.
RELATED: CrowdStreet Review: Crowdfunded Real Estate for Accredited Investors
How Does CrowdStreet Make Money?
CrowdStreet uses several methods to earn revenue:
They sell their software as a subscription to real estate sponsors. The software reduces the administrative work and costs, while increasing effectiveness in managing multiple deals and investors.
They charge a fee to sponsors to raise money on the platform. This is commonly known as the cost of capital, for which CrowdStreet provides technology to raise money quickly and cost-effectively.
While these fees are not charged directly to investors, they are built into the real estate deals investors participate in. That will lower the net revenue investors will earn, but it will not need to be paid out of pocket. (But note that published investment returns are net of these fees.)
Exactly what the fees will be within each investment will depend on whether you are participating in an individual property deal or a fund.
Cost of capital fees associated with individual deals can include any of the following:
- Design fee – 3% of hard costs
- Construction management fee – 5% of hard costs
- Asset management fee – varies by deal
- Property management fee – 2% of the effective gross income
- Financing fee – 1% of loan proceeds
Fees that may be included with CrowdStreet funds include:
- Offering management fee – 1.5% annually, but paid monthly
- Acquisition fee – 2% of the gross purchase price
- Refinance fee – 0.50% to 1.00% of the new loan amount
- Disposition fee – 2% of the sale price
- Development fee – 5% on new construction
- Affiliate fee – varies my investment
CrowdStreet does have one direct fee, but it’s one that’s completely optional. As an investor, you can choose to get extra help from a CrowdStreet Advisor, who will charge you a fee.
Do People Make Money on CrowdStreet?
As an investor, you can make money in one of two ways – dividends or capital appreciation. In most cases, you’ll get the benefit of both.
Dividends represent periodic distributions of net rental income (gross rents less operating expenses related to the property).
Capital appreciation is the net profit on the sale of an investment property, if any. It can be either an individual property you invest in, or one that’s held within a fund.
Investment deals are typically held for several years, though some may be fully realized after just a few months. The property is purchased, sometimes renovated or upgraded, fully rented out, then held for a certain amount of time which the sponsor determines will produce the optimal price upon sale.
Once the property is sold, the investor’s original investment, plus any capital appreciation, are distributed to the investor. The amount of the distribution that exceeds the investor’s initial investment represents the capital appreciation on the deal.
Though funds often pay dividends, they can also pay out capital appreciation when properties held within the fund have been sold at a gain.
CrowdStreet claims the average annual return on their investments is 17.3% on fully realized deals. However, investment returns are never guaranteed, and vary substantially from one deal to another.
Who Can Invest in CrowdStreet?
Because of the high reward/high risk nature of CrowdStreet investments, participants are required to be accredited investors. Those are investors determined to have both the financial wherewithal and the investment experience necessary to participate in sophisticated real estate deals.
As an accredited investor, you must meet certain criteria, found on the Securities and Exchange Commission's resource cite Investor.gov. You must qualify based on one of the following:
You have earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expect the same for the current year, or
You have a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of your primary residence), or
Have in good standing a Series 7, 65 or 82 license.
CrowdStreet does require you to verify your accredited investor status. That will require either a letter from a qualified, independent third-party verifier, like a CPA, attorney, or financial advisor. The letter must be uploaded to your CrowdStreet account.
If you do use an independent third-party to verify your accredited investor status, it must be done on an Investor Verification Letter Template, which is available for download on the CrowdStreet website.
Alternatively, you can use VerifyInvestor, which is an independent service that can prove your accredited investor status. There is a fee to use this service, but it can be done directly from the CrowdStreet Transaction Center.
You can get started with CrowdStreet today with this link.