How crowdfunding for real estate really works Part 3: The mechanics
This is part 3 in a series. Follow these links for parts 1 and part 2.
Crowdfunding for real estate is a little bit of a different animal that other types of crowdfunding, like crowdfunding for startups or small business loans.
Where you could place an investment into a startup or a small business almost immediately, you are reliant on closing a contract on a property with crowdfunding for real estate.
Adding the crowd into an investment does add an additional layer of complexity.
At Realty Mogul, where we do crowdfunding for real estate, it all starts with a Letter of Intent, or LOI. Once we know we want to work with a specific operating partner who is strong in their respective property type in their respective market, we underwrite the operating partner and the property.
If we want to present the opportunity to our investors, we sign an LOI with the operating partner. This letter of intent outlines the plan for our relationship and includes things like confidentiality agreements and the amount of the investment we want to reserve for Realty Mogul investors.
For every investment, there is a funding deadline for Realty Mogul investors and a projected closing deadline for the property itself.
Our operating partners are reliant on Realty Mogul investors to close the project, so they cannot wait until the day before closing to line up the necessary capital.
The deadline for investors for the project is typically around 30 days before the actual close on the property. One reason for this is that the operating partner needs to go “hard” on a property. Going hard means putting down a deposit (also called “earnest money”) to show the seller of the property that you really intend to purchase the property.
An operator would tend not to want to go hard without knowing they can raise the needed funds to actually close on the property.
After lining up investment capital but before closing on the property, the operating partner is working diligently to get the project closed and typically finalizing conventional bank debt.
With interest rates still near historic lows, leverage is cheap and most operating partners use some degree of bank debt.
After the property is closed and the operating partner has legal possession and legal ownership, day-to-day operations begin including property management and any rehabilitation if the property needs it.
More often than not, there is some degree of renovation ranging from something as simple as a new coat of paint to rehabilitation for individual units.
Investors are kept up to date on a quarterly basis and receive both qualitative information and quantitative information on the progress for the investment.
At Realty Mogul specifically, we also look to provide our investors with quarterly distributions, derived from cash flow from rents, for our investments into commercial properties.