David Manshoory is the Founder and CEO of Asset Avenue, a company connecting real estate professionals with investors online. Asset Avenue, created late in 2013, seeks to provide more investors with better access to high-quality real estate investment opportunities. They undertake a detailed vetting process on properties before listing using, among other things, proprietary screening mechanisms.
Prior to creating Asset Avenue, Mr. Manshoory founded Momentum Capital Partners, a California-based company focusing on distressed residential and multi-family properties. Mr. Manshoory spent some time with Bankless Times.
What are some of the typical profiles of people entering commercial real estate?
Most of our investors are business owners, C-level executives, or professionals such as dentists, doctors, and lawyers. They are actively looking for passive investments to grow their money. They understand the importance of investing to achieve their long-term financial goals.
What is drawing them in?
Investors are most concerned with three things: maintaining their current financial position; retirement; and the financial future of their children and grandchildren. Real estate has always been one of the most prized asset classes in the world, yet it’s also been one of the most difficult to access because it traditionally requires a lot of money to start investing. Real estate crowdfunding companies like ours change this by lowering the minimum investment to $10,000.
What criteria do you look for in those running projects that makes you more likely to support them?
Before we analyze any investment opportunities that are presented to us, we spend even more time pre-vetting the real estate companies that are presenting those opportunities to us. We want to understand everything about them, from their track record and current real estate portfolio to their team and internal infrastructure. We like to partner with companies that are actively buying in their marketplace, have a track record of picking winning investments, and specialize on a specific property type within real estate, such as apartment buildings, shopping centers or office buildings. They also tend to benefit from off-market deals given their reputation and industry presence.
AssetAvenue already has commitments from over 45 professional real estate companies in Southern California and across the country that are prepared to share their next commercial real estate investment opportunity to our investor community, and more companies contact us everyday to learn about our platform. We already have our first commercial real estate opportunities lined up and are getting prepared to offer them to our investors in the coming weeks.
How much money should an individual investor have to start out?
Investments begin at $10,000, and investors can choose to invest more if they particularly like an investment opportunity. Most of our investors are looking to invest from $10,000 to $100,000 per deal. This low capital barrier to entry makes it very easy for our investors to diversify their capital across different property types and multiple geographic locations.
What things should they know and what do you recommend they do to educate themselves?
Investors should not make their real estate investment decision purely based on the projected financial returns of the property. Savvy, experienced investors know that the local market conditions, the quality of the tenants, the population growth of the city and other non-financial metrics impact the quality of the investment.
For example, a property that offers a 6-9% annual cash-on-cash return during a five-year holding period may be a safer, risk-adjusted investment than another property that offers an 8-11% annual cash-on-cash return during the same period. Returns should not be the only factor in an investor’s decision-making process.
Due diligence with investor screening must be a key part of your business plan, for I can imagine agents worry about having to deal with dozens of investors on one project and the security of the capital. On the reverse, does your investor communications strategy have to be more complex given the number of investors you are dealing with?
AssetAvenue’s communications strategy with investors doesn’t have to be more complex, it simply has to be more robust. Not all investors have the same financial goals – some investors are looking for an attractive annual return, some are investing for real estate’s tax benefits, and others are investing long term for the appreciation potential when property values rise. Our communications strategy educates investors on all of the potential benefits of investing in real estate, and then identifies the benefits of each particular property on a case-by-case basis.
Do you need to be more detailed knowing that more investors are likely to be less experienced?
It’s important to make sure that the information we present to investors is clear and understandable. People don’t invest in things they don’t understand, so we present our investment opportunities in such a way that the average investor would understand what he is investing in, while also giving the more sophisticated investor the information he is looking for to scrutinize and approve of the investment.
During past comment periods, establishment members worried about the pain of having to communicate with small-fund investors wanting to be treated like large investors in terms of frequency of communication. Is this a fair assertion on their part or is that simply fear tactics?
The majority of investors who want to leverage the benefits of real estate crowdfunding want to be passive investors. They are not looking to supplement their existing full-time job with that of managing the real estate investments they are adding into their portfolio. Because of this, investors anticipate quarterly updates and income distributions, which has been the industry standard for decades and is completely acceptable. If investors were to ask for weekly or even monthly updates, there would be little to no additional value created by this increased communication frequency.
Does the use of many investors serve to thin out risk?
Having many investors participate in an investment reduces risk for all participating investors. If an investment required a $5 million capital raise, having 50 investors at $100,000 each is less risky for each investor than if 5 investors invested $1,000,000 each.
What lessons did you learn working in California real estate during the recession that you are putting to use today?
I learned that following the behavior of the crowd does not necessarily imply that sound investment decisions are being made. When the investment markets become overheated, it’s time to step back, pause and consider what the larger macroeconomic trends might be in the near and long term.
Furthermore, it is important to match the fixed-rate term of the debt to the investment strategy on the property. If an investment is going to be held for a 5- to 7-year period, the interest rate on the loan for the property should be fixed for that period, if not longer. If the investment is for a 2- to 3-year hold, then a shorter-term, fixed-rate loan could be pursued. Challenges can occur when an investment is meant to be held for a 5- to 7-year period, but the loan is fixed for only 2 to 3 years. If interest rates go up in the first three years, the terms of any refinancing might significantly reduce the returns of the property.
What is the spread between entirely new developments and re-purposing of existing properties? Can you talk about both?
The financial returns of any investment should reflect the risks inherent in that investment. Ground-up development projects typically yield a higher total return over the life of the investment, but there is also more risk in development than in purchasing an existing property. Development projects typically have no income for the first few years while the property is going through entitlements and getting built. The first payout to investors is typically after construction is complete and the property is either sold or refinanced.
Alternatively, when you are purchasing an existing property, whether it is being re-purposed or not, cash flows are typically available immediately or within the first year of ownership. Investors who are looking for immediate returns will typically invest in existing buildings, whereas investors who have money to stock away for many years without expecting or needing an annual cash-on-cash return may choose to invest in development projects.
You also have experience with the acquisition of neighborhood and community shopping centers. In the past most of the development has been in suburbs. What role can small and medium-scale retail development play in urban renewal and infill type projects?
Urban infill developers who specialize in small- and medium-scale retail projects play a significant role in shaping our communities and neighborhoods. They invest in properties that are not being used in their highest-and-best use, redesign the facades and structures with a newer, more modern look, and give specialty retailers, shops and restaurants an opportunity to establish their businesses and bring a desired amenity to the community.
As interest rates go back up and the banks find there’s more money to be made in real estate loans, how will that affect the RECF industry?
When interest rates for commercial real estate loans increase, there will be pricing fluctuations in the market as buyers adjust their offers on the higher cost of debt. When we are screening properties to consider for investment, we will be paying special attention to the loans underlying the property to ensure it matched the anticipated holding period of the investment.
Do you see RECF eventually including startup and younger manufacturers using it to secure their own real estate?
This could potentially occur, although I see some inherent challenges with it. Typically when you are investing in a single-tenant asset, a majority of the risk inherent in the investment is contingent on the tenant’s ability to meet their monthly rent payment. If the company is new or hasn’t really become a more established business yet, there is a risk that the company could fail and not meet its financial obligations. Investors need to take this into consideration before putting their money into an investment of this type.