Physician on FIRE interviewed CEO Charles Clinton of EquityMultiple, a leading platform for investing in crowdfunded commercial real estate.
I’ve personally invested in a handful of crowdfunded real estate deals. I wouldn’t want to recommend investments to my readers that I wouldn’t be open to investing in, myself.
One of those investments, which happens to be my first, was with EquityMultiple.
I like that they offer a variety of investment types (equity, debt, mezzanine debt), and as you’ll learn, perform extensive due diligence, passing on 90% of investments floated their way. I’m also a fan of their extensive Introduction to Commercial Real Estate Investing and other articles on their Resources tab.
CEO Charles Clinton was kind enough to answer a number of questions I had as an investor who does not know real estate inside and out. Last year, I was a guest in an interview by Soren Godbersen at EquityMultiple, and I’m pleased they were able to return the favor.
EquityMultiple is one of a number of crowdfunded real estate platforms. What sets EquityMultiple apart from the rest?
Correct – we saw the number of real estate crowdfunding platforms operating in the U.S. balloon to over 100 in the years following the JOBS Act. There’s been some consolidation and culling of the herd, and we’ve seen remaining platforms consolidate around a few models as far as what’s provided to the investor:
- Syndication marketplaces, where the Sponsor (the firm originating the investment) is connected with a network of investors through software, but the platform isn’t providing much in the way of intermediate diligence or asset management
- Single-Family loans, whereby the platform provides debt financing for single family fix-and-flips
- ‘eREITs’, a fund of income-producing real estate that’s opaque or semi-opaque to the investor, similar to the private REITs that have been around for decades
- Discrete Properties, In-House Diligence, allowing individual accredited investors to access distinct commercial properties, and providing some measure of underwriting and curation on the deals presented.
We’re closest to the last model, with a platform that allows individual investors to access institutional-quality commercial real estate investments starting with as little as $5k. That said, we like to think that there are several other unique qualities to our platform and focus:
- Full-cycle asset management: we report on the performance of closed investments frequently and transparently throughout the lifetime of each investment.
- Customer service: we think of ourselves as a real estate investment firm first, tech firm second. We’re not looking to ‘automate away’ the human aspects of investing, and we realize that investing is very much about trust, even if it’s transacted online. As such, we strive to be as available as we can to all investors and prospective investors.
- A range of risk/return profiles: while some platforms focus only on debt, or only on common equity, we present a curated set of senior debt, preferred equity, and equity investments, with a range of target return ranges and hold periods.
- Institutional CRE focus: we’re focused on institutional commercial real estate projects: partnering with experienced real estate firms in multi-tenant properties, and across property types. We feel that this provides our investors better diversification options and downside protection.
I understand EquityMultiple is backed by Mission Capital, a real estate company with more than 15 years of experience. Can you tell us a little more about Mission Capital and your relationship with them?
Absolutely, and this is related to the institutional focus I just spoke of. You can think about our partnership with Mission as another differentiator with respect to other real estate investing platforms.
Mission Capital – who provided our seed funding and with whom we still share an office – has provided CRE financing and other capital markets solutions to institutional real estate firms since before the last major economic downturn began. So not only does this provide our Investment Committee excellent perspective when it comes to vetting deals, but Mission’s nationwide network of sponsors and lenders also strengthens our pipeline of potential investments.
Approximately how many EquityMultiple investments have gone through the complete cycle with investors repaid? What sorts of returns have investors seen on realized deals?
As of June, 2020, we’ve closed on 96 investments across the country, and have had 22 go full cycle so far, and most have performed in-line with expectations. We built a Track Record utility that shows aggregate performance of the portfolio, which anyone can access upon creating an account (which is free).
The majority of those 22 realized investments are debt or preferred equity deals, meaning that our investors were entitled to a contractually established flat rate of return (and a target share of upside in the case of preferred equity investments). As such, our aggregate returns at this point reflect that low-to-mid-teens annualized return range that we offer through those types of investments.
We’re still early in the term of many of our equity investments; the range of possible returns for an equity investment is generally much larger. I would really encourage anyone who is curious to take a look at the Track Record tool; as our deal volume has ramped up over the past several years we will correspondingly expect to see an increased number of exits in the coming quarters, which will be incorporated into that reporting.
Crowdfunded real estate allows accredited investors to invest more passively in syndicated offerings. How much due diligence is done by EquityMultiple? What level of diligence do you expect from individual investors?
Great question. EquityMultiple has an in-house team that does extensive diligence on every potential investment – the firm that originated the deal, the market, and the particulars of the investment thesis and underlying pro forma assumptions. This means we spend weeks, if not months, evaluating and negotiating each potential investment, and ultimately we select fewer than 10% of the deals we see.
Hopefully, this gives investors some comfort, but we do feel it’s important that investors understand that all investments entail risk, including ours. Similarly, we recommend that investors take a close look at projected distribution schedules and risk factors for each investment, and consider whether it’s a good fit for their portfolio.
To this end, we do our best to structure information on each deal such that investors can understand the investment thesis at a high level and dig into particulars to whatever extent they need to in order to get comfortable.
We also encourage investors to freely ask questions – while we do our best to present investment details in a clear and succinct manner, we realize that clarification may be needed here and there, particularly for folks who are newer to commercial real estate investing.
How would you compare and contrast investing in crowdfunded real estate versus other passive real estate investments, like REITs or REIT index funds?
REITs are similar to real estate crowdfunding in that both vehicles allow individual investors to access commercial real estate at relatively low minimums, but there are some pretty substantial differences beyond that:
- REITs are generally opaque – management decisions, and even the set of individual properties within the fund, are usually obscured from the investor. With a platform like EquityMultiple, on the other hand, investors can understand exactly what they’re investing in at the asset level, have a more tangible sense of where there money is going, and more closely align their real estate portfolio with risk tolerance and return objectives.
- Because public REITs are traded, they tend to correlate heavily with the stock market. This means that there is inherently less downside protection than can be achieved with private real estate (the kinds of assets now available through real estate crowdfunding platforms). Similarly, public REITs have historically exhibited more volatility than private real estate.
- Private REITs don’t have that issue, but have historically been characterized by extremely high management fees (often high single-digits or even above 10%, as compared to the 0.5%-1.5% annual fees on EquityMultiple investments).
- The flip side of this: REITs are liquid, whereas investments made through EquityMultiple and other platforms are generally illiquid
For many investors, it may make sense to hold both REITs and private commercial real estate within their portfolio. As a Blackstone study from a few years ago noted, portfolios that allocate 20% or more to private-market alternative assets – like real estate crowdfunding – tend to outperform those that do not.
Real Estate has generally performed well since we emerged from the Great Recession. How would you expect crowdfunded real estate investments to perform in a cooling real estate market or the next recession?
The short answer is that no one knows for certain, and you shouldn’t trust anyone who purports to have a crystal ball.
It would be folly to assume the current bull market will last forever without any substantial correction. It would also be overly pessimistic to assume that real estate markets will be as devastated by the next downturn as they were during the last recession, and that opportunities for yield will dry up entirely.
There aren’t the same levels of extreme leverage and overbuilding in real estate markets that there was preceding the Great Recession, and we’re continuing to see opportunities for yield in alternative CRE asset classes (like data centers or self storage) and emerging secondary and tertiary markets where underlying demographic trends remain strong.
As always, diversification is key – some markets, property types, and real estate crowdfunding investments will be adversely impacted during the next downturn. Others less so, or not at all.
Certain alternative real estate asset classes – like self-storage, manufactured housing communities, and student housing – may prove to be countercyclical, and show strong returns during the next downturn. Likewise, some markets will fare better than others due to specific local demand drivers and net migration factors.
Again, no one can predict 100% the specific contours of the next downturn, and how specific local real estate markets will be impacted. But those investors who diversify across markets, property types and hold periods will be in better position to weather the storm, whenever and however it hits.
Platforms can do right by investors by offering a diversity and breadth of commercial real estate investments across the country. At EquityMultiple, we also seek to negotiate built-in investor protections, such as payment priority and interest reserves for payment of cash distributions.
What was your background prior to EquityMultiple, and what inspired you to co-found this company?
We started the company with a shared vision of making commercial real estate investing more accessible and transparent for individual investors. Private real estate transactions have historically provided great returns in aggregate and great downside protection alongside stocks and bonds, but have been largely inaccessible for individual investors up until very recently.
Our goal in starting the company was to harness technology and allow individuals all over the country to co-invest passively alongside experienced real estate firms, provide a layer of underwriting on investments, and provide a single-point-of-access platform for individual investors to create a diversified commercial real estate portfolio.
Incidentally, we’ve realized that the product is a natural fit for many doctors – smart, detail-oriented, super-busy professionals who don’t have the time to acquire and manage commercial property on their own and really benefit from streamlined access to private-market CRE investments.
My background is in real estate law. Prior to founding EquityMultiple in 2015, I worked for Simpson Thacher, a big law firm here in New York, on some very large, complex CRE transactions – including Blackstone’s $1.9 billion purchase of Motel 6 and Hilton’s real estate asset restructuring and refinancing in advance of its $2.5 billion IPO. My law background definitely helps me navigate the fine print of real estate transactions, structure deals, and sniff out risk.
I’d always wanted to pursue something more entrepreneurial, but the lightbulb really lit up when I received a Christmas bonus and, despite being immersed in lucrative commercial real estate in my day-to-day job, I really had no access to it as an individual investor.
Start receiving paid survey opportunities in your area of expertise to your email inbox by joining the Curizon community of Physicians and Healthcare Professionals.
Use our link to Join and you'll also be entered into a drawing for an additional $250 to be awarded to one new registrant referred by Physician on FIRE this month.
Where can potential investors see current offerings?
Due to SEC and FINRA regulations, we require all investors to answer some initial suitability questions – including self-certifying as an accredited investor – prior to entering our platform and reviewing current and past offerings.
We welcome anyone who is interested to create an account, go through a brief suitability questionnaire, and have a look at our current and past offerings, as well as the aforementioned Track Record page. Creating an account won’t obligate you to any further action.
Is there anything else you’d like to share with my readers?
I’d like to mention as well that we’re planning on offer ‘Opportunity Funds; – new tax-advantaged real estate investments per the Investing in Opportunity Act, an under-the-radar component of the late-2017 tax reform. I won’t go into the program at length here (perhaps the subject of a future interview!) but interested investors can learn more at our Opportunity Funds resource page.
[PoF: Thank you so much, Charles, for taking the time to answer my questions in detail. I appreciate your candor in detailing both the potential risks and benefits of these hands-off (for us, not you) commercial real estate investment opportunities.
I also appreciate the offer of a 1% yield bump for my readers on their first debt or preferred equity investments with EquityMultiple. The readers thank you, as well.]