Real Estate Crowdfunding for Investors: Dan Miller of Fundrise
A few weeks ago I had the pleasure of interviewing Dan Miller, Co-founder of Fundrise.com and crowdfunding pioneer. His real estate crowdfunding platform is one of the first and certainly one of the most successful. They reported the average return across all their funded projects was 13.75%. That is pretty impressive.
Some highlights from our interview:
- Dan and his family have been involved with large-scale real estate development projects in the Washington DC area for many years.
- He created Fundrise as a way for anyone to invest in their highly profitable projects.
- Soon other developers wanted to raise money using their technology as well.
- They’ve partnered with some of the largest and most successful developers in the country, including Forest City, Silverstein Properties, and Blake Capital Management.
Here’s the complete transcript of the interview. Take a look and leave us a comment.[divider style="4"]
Kriss: Hello everyone. This is Kriss from the Franklin Society, and I’m here speaking with Dan Miller from Fundrise. Hi, there Dan.
Dan: Hey. Great to be speaking with you.
Kriss: Thank you so much for taking the time. I know you’re busy. So, give us a brief background on Fundrise, where you are and what your background is.
Dan: Sure. So, Fundrise is the first real estate crowdfunding platform in the United States. My brother, Ben, and I founded the company four years here in July 2010. Initially, it was a spinoff of our real estate development business. So, we were developers in D.C., buying and developing projects in a lot of the up and coming areas of the city. And as opposed to raising capital from private equity funds and investors, we wanted to allow anybody to invest alongside us. So, we built Fundrise. Spent about two years building the technology and the legal framework that would allow anybody to invest with us in a single deal for a little as $100. So, we successfully launched our first public fundraise in August 2012, raising $325,000 from 175 people. And at that point, we had real estate companies around the country starting to reach out to us asking to use the software and the technology. And that’s when we started scaling it as a platform for other real estate operators around the country and to invest in those projects.
Kriss: Great. So, you’re funding deals across the country now. And there’s quite a few crowdfunding real estate platforms now, what makes Fundrise different from the other ones?
Dan: So, we were the first by far. We were in July 2010 the next didn’t arrive until 2013. And now there’s probably over 100, at least, that claim to be crowdfunding platform. So, we are the first. We’re the only platform that’s done any offering to non-accredited investors.
Dan: Aside from high net worth accredited deals, we’ve done offerings that allows anybody to invest for as little as 100 bucks. And we’re the best capitalized, raised 38 million for our business a few months ago. And given our background in real estate, our family was large developer out of DC, built around 20 million square feet by my father’s history. So, we really have a deep real estate knowledge. A lot of the sponsors we work with are kind of top-tier sponsors, like Forest City, like Silverstein Properties, like Blake Capital Management. And so, it’s really about finding great sponsors who want to use the technology and raise capital on-line to expand their capital base as opposed to first-time developers. I think, you know, given our real estate network and our real estate background, I think that the quality of sponsorship on our site far surpasses any other site. And then the last thing that we now do recently which I think is a big differentiator, is we close on balance sheet with our own funds. So, if there’s a deal that we like, and it’s a $2 million position that we’re funding, we’ll close with a 2 million arm balance sheet, then put the deal up on Furndrise for investors to invest. So, there’s really due diligence, underwriting, and our own money behind it that gives the real estate company the certainty of funding but also give the investors the knowledge that the deal’s already been funded, that we believe in it, and that we’re only selling interest in real estate deals that we really stand behind.
Kriss: OK. So, you’ve vetting them as if you are the investor because you are the investor?
Dan: Yep. We are the investor and if we only sold 1.2 million of that $2 million position on Fundrise, we would retain the rest. So, it’s more like a merchant bank where we’re connected with a network of sponsors that are on our platform. It’s really more like a merchant bank where we have a network of sponsors that we curate, that we vet, that we’re willing to put our balance sheet behind, and grow with them. So, it’s just as much the capital markets investment business as it is the technology platform.
Kriss: Great. Great. Now, looking through your site, it looks like you do it a little bit differently. Some of the other platforms either offer debt or equity. It looks like you offer a hybrid. Can you talk about that?
Dan: Sure. So, the products we offer most, we do do senior debt preferred equity and equity. But what we really specialize in is preferred equity on construction and development deals. So, traditionally, if it’s a 10 million deal, you know, value-add rehab of an apartment building, there’d be a $6 million bank loan from a traditional commercial bank normally in the range of, you know, 3 to 5 percent depending on the market and the deal. And then, that’ll cover the first 60 percent as a senior loan. We’ll normally comes in as a second position, preferred equity from 60 to 80 percent, let’s say. And that $2 million position will get much higher interest, between 10 to 16 percent. Some current sum accrued and then there’ll be 20 percent junior put in by the real estate operator that’s in the first loss position. So, it’s effectively a high-yield position, junior to bank debt that goes with construction financing and then everybody gets paid out when the deal stabilizes, or if it’s condos, when all of the condos are sold.
Kriss: Understood. And so what kind of returns does this mean for the investors, net of all fees and everything?
Dan: Net returns are 10 to 16 percent. We just did a deal at 10 percent. It was a small value-added, of a multi-family project in Williamsburg, in Brooklyn. So, there it was only a few units, very well located, small rehab, and it was 30 percent equity junior. That was 10 percent all current. And we have another deal that’s coming up that’s a 15 percent and that’s some current some accrued. And that’s a 40-unit boutique condo development in Brooklyn on Greenpoint Park. So, between, you know, moderate value add, full, and it’s ground up, that’s the range and we price it based on the risk of the deal.
Kriss: Great. And what kind of time period were you looking at? In those two example deals, what was the hold period for them?
Dan: The first deal that was 10 percent all current, was two years. And the 15 percent ground-up condo development, that was three years. So, normally, you know, between one to three years on the deals.
Kriss: One to three years. Now when you say the 10 and 15 percent, it that an annualized, or is that…
Dan: Yeah. That’s all annualized. It’s all annualized.
Dan: And as an example, if it’s a ground-up development because there’s not any current cash flow, we may have eight percent of that return be current and seven percent accrued and do it the term of the investment.
Dan: So, we’ll structure the deal based on current interest and accrued interest. So, we’ll structure the deal that kind of fit with the profile. If there’s existing cash flow, we’ll have a higher amounts of current pay where if it’s more ground-up development, we’ll have more of the return accrued.
Kriss: OK. Outstanding. OK. So, you said that investors can get started for as little as $100 in each deal. Do you suggest that investors invest in a lot of different deals and sort of spread out their risks? Or what are some best practices for the investors?
Dan: That’s what we’re starting to do. Initially, it began deal by deal. Which people were very excited about the idea that they can invest in that single building, that they can underwrite it, they can understanding it. There’s also a big pool of investors that wanted a more diverse type product. One individual investors who wants to diversify their portfolio. So, we recently formed an investment advisor. So, we can now create pools of securities and they’ll be spread among the 10 deals that we would have . Almost like a basket of standardized deal. We just formed an investment advisor, so we can now create pools of securities and recommend a diversified portfolio. So instead of buying one deal, you could buy New York, and it will split among 10 deals in New York, and that way you can very cheaply for a couple basis points have a diversified portfolio. So, it’s really kind of expanding the initial offering from single deals to also portfolios of deals.
Kriss: Great. Great. And what do typical investors get started with? I mean, do they tend to start with $5,000?
Dan: Yeah. Most investors start at $5,000. On the public offerings where we allow people in at 100, we do that just to really let anybody invest. And in that case, a lot of times, it’s people’s first experience with commercial real estate. But the typical average investment is about 5,000 and that’s a lot of times professional investors, people in the real estate industry, people invest larger amounts I would say between $5,000 and $15,000. So, the average investment is about 5,000. We let people in with as low as 100. And then we have a good amount of investors between 5 and 50 is the common range. And then we also have family offices, high net worth investors, investment funds that will put a 100,000 plus. So, our largest investor today puts 3 million into a deal.
Kriss: Wow. OK. That’s remarkable. OK, so, on your website, you talk about how really only five percent of the deals that you evaluate make it through to your investors. Do you find that your investors do another layer, of their own due diligence?
Dan: Yeah. We’ve actually been surprised at the depth of analysis from the investors on the site. And we allow people to comment on each deal. And oftentimes they’re very intelligent comments. It may be a broker who sold a property nearby who says, you know, this comps out, or these rents are below market. There’s really a lot of analysis on the site that we end up stressing and having comment and that way, people can start to get comfortable and do their own due diligence. So, the five percent is us, in winnowing out and structuring deals that we think makes sense. And then there’s also another layer of people on the site doing their own due diligence.
Kriss: Got you. That seems to be a commonality with a lot of this crowdfunding, not just real estate but some of the angel investing that you can actually follow along with some of the, kind of, superstar investors and see what they’re investing in. And if you sort of like their methodology, you can follow along with
Dan: You can go with them. And I think that’s a real trend. I mean, I think what people are seeing is that people invest for, you know, social reasons as well. People are connected to people they trust, and I think you’re going to see more and more of that happen where you have expert investors whether they’re in the real estate field or social network of that investor. And they will rely on them for due diligence and follow them into deals.
Kriss: That’s really cool. Very cool. Well, I really appreciate your time, Dan. I know you’re a busy guy. And Fundrise looks like a fantastic option. I’m going to be opening an account here in the next couple of weeks and start investing myself.
Kriss: Do you have any case studies, or any investor stories? We don’t have to relate them here necessarily. But do you have some case studies that we could look at and share with our readers?
Dan: Yeah. That would be helpful. We have a few that, Jordan, if you reach out after the call, she can connect you with. We have a few deals that are fully return capital and we have a breakdown of those deals. We have a few other deals where we had investors add value to the deal such as helping people permit and helping to lease the properties. So, there’s both examples of completed returns and then also leveraging the crowd for more value which we see as, you know, a huge trend if the value of the proposition isn’t just that you’re investing in deals, you’re also influencing out-coming increased returns. I think it’s particularly powerful.
Kriss: One quick question, because this is true crowdfunding, do you see people who are local to the project getting involved with it?
Dan: That’s what we’ve been most excited about. So, that’s kind of within the initial narrative, that people locally understand the neighborhood, they understand the property, they know what’s happening, they kind of have a lot of other data points to make an investment in local real estate. And one of our recent public offerings, 1539 7th Street, Jordan can give you the exact info. I think about a quarter of the investors were living within a mile.
Dan: So, you really had real local proximity and that’s something that we think is particularly of value of those local investors because they can help spend money at the restaurant when the restaurant opens. They can buy condos in that building. They can actually be a part of that deal and influence the outcome. And then that brings much more value than just their capital.
Kriss: Well, this is great. I mean this is what the Franklin Society is really all about. We’re off Wall Street, alternative investment. And this is the essence of crowdfunding and you guys seem to be doing a great job with it. So, we’re going to post links to your website. As I said, I will start doing some investments with you and share my success stories, and we’ll share some other success stories that we get from your assistant Jordan. Thank you, Dan, so much for your time.
Dan: Thank you so much. And looking forward to it.
Dan: And let us know if you have any questions once you’re on the site.
Kriss: We sure will. Thank you.