summarizes
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This article is part of a Property Report series looking at small investors and real
estate, from new ways for individuals to buy slices of office towers to how to buy a stake
in an investment home for as little as $50.
Dan Miller became a pioneer of real-estate crowdfunding about eight years ago by
selling stakes in mainstream property such as hotels, apartment buildings and offices
to small-time investors via the internet.
Today, he is focused on property with an environmental bent, backing urban farms in
Detroit and a grain and dairy farm in Pennsylvania’s Amish country.
His new approach reflects a broader midcourse correction for real estate and
crowdfunding, the practice of financing a project by raising small amounts of money
from a large number of people.
Several of the original crowdfunding firms in real estate have gone out of business, or
overhauled their strategies.
Some, like Mr. Miller, switched to focus on assets that appeal to socially and
environmentally conscious investors. After leaving Fundrise, the real-estate
crowdfunding company he co-founded in 2012, he recently launched Steward, which
invests in sustainable farms.
Others are tinkering with the way money is raised. Fundrise, run by Mr. Miller’s
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https://www.wsj.com/articles/crowdfunding-�irms-blow-up-the-model-to-survive-in-real-estate-11578398401
PROPERTY REPORT
Crowdfunding Firms Blow Up the Model
to Survive in Real Estate
An attempt at transforming real-estate investing the way Amazon changed retail is getting
another go
Jan. 7, 2020 7�00 am ET
By Konrad Putzier
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brother Ben Miller, today manages pooled investment funds that take advantage of
crowdfunding laws.
Companies such as AlphaFlow and PeerStreet run websites that match lenders with
investors, primarily institutions but also individuals, looking to buy their loans.
Jamestown LP launched a $50 million fund that is developing major projects in cities
such as Atlanta and marketing on Instagram and Facebook. Its minimum investment:
$2,500.
Some firms are targeting wealthier customers, who can write bigger checks, rather
than younger customers who have smaller bank accounts. New York-based Cadre, for
one, requires a minimum investment of $50,000.
Many of the firms focusing on larger investors increasingly resemble those that existed
long before crowdfunding, such as private real-estate funds, real-estate investment
trusts and old-school syndication.
Real-estate crowdfunding is “a revolution that ended up replacing the old guard with
the same thing, which unfortunately happens more often than you would think,” Dan
Miller
said.
Crowdfunding grew through startups such as Kickstarter that gave tiny businesses,
struggling rock bands and others a way to appeal for funds in exchange for such things
as coffee mugs and T-shirts.
Starting in 2012, crowdfunding startups sold stakes as small as a few thousand dollars
in commercial property. New regulations paved the way for real-estate investment
firms to raise money across the country through Facebook ads and other social media.
Proponents thought a tactic that could raise large sums while lowering marketing costs
would transform real-estate investing the way Airbnb changed hospitality or Amazon
changed retail.
But as the economy rebounded, more money flooded into real estate and developers
suddenly had plenty of cheap funding choices. That often left crowdfunding firms with
riskier, less-appealing projects that couldn’t get money elsewhere—a tough sell to
SHARE YOUR THOUGHTS
Would you participate in real estate crowdfunding? Why or why not? Join the
conversation below.
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investors.
For regulatory reasons, most firms limited their fundraising to people with an income
of more than $200,000 or a net worth of more than $1 million, excluding their primary
residence. The hope was that enough of these people, known as accredited investors,
were itching to buy stakes in commercial real estate—hitherto an exclusive pastime of
the very rich.
But these people already
had ways to invest in real
estate, for example by
buying a rental apartment
or shares in a real-estate
investment trust, and
crowdfunding firms have
struggled to convince
them their model is
superior.
“Democratizing real estate
sounds great and it’s
inspiring, but it’s tough
when you go up against
the titans of Wall Street,”
said Ray Sturm, a co-
founder of the now-
defunct real-estate
crowdfunding company
RealtyShares and chief
executive of AlphaFlow.
IFunding, one of the first firms to offer real-estate crowdfunding, was also one of the
first to shut. RealtyShares, which raised about $60 million in venture capital, closed
shop in 2018.
Rodrigo Niño, chief executive of Prodigy Network, which says it has raised money for
five Manhattan real-estate projects, resigned in the fall amid lawsuits from an unhappy
investor and former employees. Mr. Niño and Prodigy didn’t respond to requests for
comment.
But other crowdfunding companies continue to grow, and observers are optimistic that
Dan Miller, founder and CEO of Steward
PHOTO: DARREN BRADE
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the model has a future, even if it takes time.
“I’m a believer, even if maybe the first wave didn’t turn out as planned,” Dan Miller
said.
Write to Konrad Putzier at konrad.putzier@wsj.com
Copyright © 2020 Dow Jones & Company, Inc. All Rights Reserved
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https://www.wsj.com/articles/point-click-own-�irms-transform-how-to-buy-investment-homes-11578398400
PROPERTY REPORT
Point, Click, Own: Firms Transform How
to Buy Investment Homes
Real estate startups exploit new technologies and data on house rentals developed after
the housing bust
This article is part of a Property Report package looking at small investors and real
estate, from new ways for individuals to buy slices of office towers to how real estate
crowdfunding is changing to survive.
Buying a home as an investment property has long been too complex or daunting a
process for all but the wealthy. Thanks to a group of real estate startups, that may be
changing.
The companies enable individuals to assemble a portfolio of rental homes throughout
the country relatively hassle-free. Without ever visiting the properties, investors can
buy and manage homes with a few clicks of a mouse or taps on the phone.
Roofstock, an Oakland, Calif.-based firm founded in 2015, offers an online marketplace
where buyers and sellers trade about 500 rental homes a month in cities such as
Atlanta, Indianapolis and Houston. The homes, which sell for prices ranging from
$50,000 to $400,000, typically come with tenants in place.
REI Nation LLC and JWB Real Estate Capital are getting into what is known as the
turnkey business in regional markets. They buy, upgrade and lease houses, then sell
them to investors.
Other firms are poised to offer investors ways to build their residential portfolios sliver
by sliver. Compound, a startup based in New York, is launching an app this month that
will enable investors to buy small stakes in condominiums in cities such as New York,
January 7, 2020
By Peter Grant
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Miami, Nashville and Austin. The minimum investment: $50.
Compound empowers even investors without much cash “to participate in the growth
of cities where they live and work but can’t afford to buy,” said Janine Yorio, the firm’s
co-founder and chief executive.
The proliferation of the businesses reflects how small investors are searching for fresh
alternatives when ultralow interest rates have made bondholdings less attractive and a
record stock-market run strikes many as vulnerable to a pullback.
Firms like REI and JWB say that investors are getting annual returns after fees and
expenses of 7% to 9%. That compares to the yield on the benchmark 10-year U.S.
Treasury note, which has been stuck below 2% for months. Home buyers also keep any
profit from selling the properties.
“Investors are looking under every rock for ways to have additional cash flow,” said
Paul Pagnato, founder and chief executive of PagnatoKarp Partners, LLC, a Reston, Va.,
firm that advises families on investments. Real estate is particularly conducive to that,
he said.
Homebuying services are also taking advantage of new technologies and data on house
rentals developed after the housing bust. Firms like Blackstone Group Inc. and
Starwood Capital Group bought tens of thousands of houses at discounted prices and
converted them into rentals. Along the way, they figured out how to use the latest
mobile and cloud-computing technology to manage and upgrade homes on a large
scale.
Many of the entrepreneurs behind the new firms learned the business after working at
the larger operations. Roofstock founder Gary Beasley was one of the players behind
A Memphis home sold by REI Nation, which buys, upgrades and leases houses, then sells
them to investors.
PHOTO: REI NATION
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Starwood Waypoint Residential Trust, which went public in 2014.
“We didn’t know when we first started buying homes whether we could do it profitably
on any scale,” he said.
Roofstock, whose financial backers include Bain Capital Ventures, recently started a
new business which enables investors to buy stakes as low as 10% in single family
houses. Roofstock retains at least a 10% stake in each house. The rest of the equity is
divided up among investors.
Each startup operates a bit differently, but many follow a similar formula. In a typical
deal at JWB, the firm buys a house in the Jacksonville, Fla., region and upgrades it for a
total cost of, say, $130,000. JWB also finds a tenant for it paying about $1,175 a month.
Then it sells the tenanted house for $150,000. Investors typically pay with about 20% in
cash and borrow the rest.
Owners can manage the house themselves or hire a local firm. Most use JWB’s
management arm. Rent increases and an eventual sale of the house can boost returns.
But investors shouldn’t expect to make a quick buck by flipping the house soon after
they buy it, cautioned Alex Sifakis, JWB’s president.
“This isn’t a get rich quick scheme,” he said. “You’re buying for market value. We tell
clients they should hold for a minimum of five years or you shouldn’t buy it.”
Even holding it entails risks. Investors who buy houses sight-unseen can be hurt by an
unforeseen maintenance bill or by the vagaries of the rental market. They might even
have to reach into their own pockets if they have borrowed to buy the house, and home
prices tend to flatten or fall during tough economic times.
“You’re getting equity like returns so you need to take some risk,” Mr. Beasley said.
Still, the appeal of a steady return from rental properties is attracting a crowd,
especially as rents rise throughout the U.S.
REI got its start in Memphis, Tenn., developing rental housing for Federal Express
pilots who wanted to invest in single-family homes without the headaches of
management, said Chris Clothier, a partner in the family-owned firm.
Last year, REI sold about 1,000 homes in eight cities. “There are investors that want to
swing the hammers and slap the paint themselves,” Mr. Clothier said. “But there are
way more investors who want to be passive.”
Billy Maloney, a 37-year-old graphic designer in Los Angeles, said he had bought and
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sold investment
properties through
REI to grow his
retirement savings. He
owns a home in
Memphis, one in
Jacksonville and has
bought and sold two in
Cleveland.
“ I’m…thinking like an investor where your money goes further out of state,” he said.
—Laura Kusisto contributed to this article.
Corrections & Amplifications
In a typical turnkey deal, a Jacksonville, Fla., house sold by JWB Real Estate Capital for
$150,000 will rent for about $1,175 per month. An earlier version of this article
incorrectly said it would rent for about $900 a month. (Jan. 7, 2020)
Write to Peter Grant at peter.grant@wsj.com
SHARE YOUR THOUGHTS
What pros and cons do you see to this approach to rental homes?
Join the conversation below.
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