Where Crowdfunding Real Estate Business Becomes Show Business

Crowdfunding Real Estate BusinesCrowdfunding Real Estate Business became Show Business during our recent interview at That Business Show.

Our Co-Founder and Chief Investment Officer, Alan Lewis, was recently interviewed by Jamie Meloni from That Business Show podcast to go over everything related to Crowdfunding and the Real Estate market in California.

Lewis goes from the very simple concept of crowdfunding to the latest data collected in the Real Estate market in the San Diego, California area. Meloni shares details about the current market in his area of expertise, Tampa, Florida. We get to learn important details that will help any investor in making a decision to start using Crowdfunding Real Estate investment on their investment portfolios.

Enjoy this interview and you can find all these details in the transcript below:

 

Interview:

Jamie Meloni (JM) Hey Welcome to the Real Estate edition of the That Business Show 2.0 I’m your host Jamie Meloni where real estate becomes Show Business. With new episodes each Thursday, 9:00 am. EST www.thatbuinessnetwork.com.

Today we are going to be talking about crowdfunding with Alan Lewis, who is my guest. He is the Chief Investment Officer and co-founder of DiversyFund and has worked in the Real Estate industry for 15 years. Including heading up a real estate private equity division where he oversaw Class A, multifamily, and working on Wall Street as both, an investment banker, and a corporate attorney serving real estate investment clients.

So, Alan, welcome to the program today.

Alan Lewis (AL) Hey, thanks, Jaime, I appreciate you having me on.
JM You know, crowdfunding is a term we are hearing more and more about in business, and I’ve talked about this on the program before. So, before we get into it, for people who aren’t familiar with what crowdfunding is, give us the overview. What Crowdfunding is?
AL Sure. The term gets toss around quite a bit. There are some technical terms for crowdfunding, but essentially, when we, in the industry, talk about crowdfunding, it means, having a crowd of investors. Think about a group of investors spread across the country. From California to New York, and all the states in between, who are basically coming together, pulling their money to fund a particular transaction. Be it real estate, or we’ve all seen the startup companies that have crowdfunding like a Kickstarter. So basically, a crowd of investors putting their capital together to make some sort of investment or transaction happen.
JM Now, why are we hearing about this more and more? Was there a recent change that allowed the average person to participate in crowdfunding? What’s the history on this?
AL Sure, yes. It all stands back to the JOBS Act, and there are some different parts of it. You know, there is Title II, which is where most of our deals fall under. Which allows people for the first time to advertise potential transactions. Before that, you know, you had to have a prior relationship with someone. You couldn’t just advertise, and say, “Hey, we are raising money for this project, or this transaction.”

So now we can do that as long as those investors, at the end of the day, are all accredited. It’s the new 506C exemption for securities laws.

The new thing that everyone is talking about is the new Title III, which is crowdfunding, where startup companies can raise up to 1 million dollars. It definitely has a big limit on it, and there are some limitations as to how much an investor can put in, based on their net worth and their income. So that’s the new thing that just came on online, and became active about a year ago. So that’s been the big buzz in the news. You know, the older 506C has been around for a couple of years.

JM Great. So, what is DiversyFund? What are you investing in?
AL We are an online crowdfunding platform, and what we’ve done is, we invest in Real Estate.

We looked at the market and what we saw was that as crowdfunding sites started popping up, there was this huge amount of real estate, right? Because if someone is going to invest, it is beneficial to have a hard asset, you know, backing your dollars. Instead of when you are investing in a startup company you are rolling the dice, at the end of the day. So, what we looked at was that all the competitors out there were functioning as a broker, right? They were matching investors to various 3rd party real estate developers and real estate sponsors, and we had some problems with that model because you have no quality control, right? I mean, you are going to have some great sponsors, some not so great sponsors, and you are not going to know the difference until it is too late, and the investor’s’ capital is at risk.

So, with my career and having come from a real estate development background, my partner having done real estate development for his 20-year career, we said hey, let’s just do something totally different. Let’s go vertically integrated where all the offerings that we put on our platform that our investors can look at, we are the developers on all of those.

So, we have this quality control, we have a general contractor and a construction management team licensed that’s on board in-house, and it’s just been a huge switch in business models that make it better for our investors at the end of the day.

JM Okay, so you are developer behind all the projects that are in the fund. So, you are not buying 3rd party assets and putting them into the fund or becoming involved in those?
AL That’s right. Exactly. So, it is better for both sides, right?

We have… If I’m doing a project, you know, it is here in my backyard, in San Diego, we can visit them on a weekly or monthly basis, and the minute it’s off schedule or over budget we know, and we can jump in and fix it, rather than relying on someone else to hopefully tell you that something is not working out.

JM What type of assets are you developing right now? Commercial assets? Or are you doing residential? Single-family homes? What’s doing well in California where you are investing?
AL We have two main product lines that we like right now. We are always looking at market metrics to see where the trends are heading. You know, what’s happening with sale prices, rental rates, and vacancy.

So right now, we have single-family residential products that we are building. We are building these high-end homes in places like Coronado and La Jolla, and there is just such a healthy profit margin on those that’s worked out really well for our investors.

JM What keeps values so high in California? We know Silicon Valley and the tech industry are out there. Is that still what’s keeping value so high in California?
AL A lot of it is, you know if you come and visit you see that you can’t beat the weather, and many people just want to live here. So, we always have population growth and job growth. Down in San Diego, we are benefiting from a lot of venture capital, type of startups, who are always looking for a cheaper place to live, and it is still a desirable location for young professionals.
JM California is a very expensive market, but a very desirable one, no doubt. I was just in San Diego a couple of years ago, and I think the starting price for a home was like a half a million. I mean, I’m in Tampa, a major metro and you can still get a starting home for 100,000. It just amazes me the differences in prices across the metrics. I guess it comes down to the weather out there. I mean, we got heat, but we got that humidity. You don’t have that humidity out there.
AL Yeah, we don’t have the humidity, which is nice. It’s just an appealing place to live that people are steadily coming here.
JM Tell me how is this different from the electronic real estate investment trust? And REIT, for instance. Also, how would one who wants to invest be able to invest. Do they have to under an accredited investor, as we know the term?
AL Sure. For our platform, right now, all our investments are targeted for accredited investors. Our minimum investment is as low as $10,000 USD. We are trying to make it very easy for someone to get started.

The e-REITs, the electronic real estate investment trusts that we are seeing out there are similar to what we do with our passive income fund. What that means is that you are basically creating a fund, and that fund invests over a large number of real estate assets so you have the benefit of diversification. So, if one particular project doesn’t work out, instead of just being in dire straits with your capital, you have this pool of investments to kind of spread that risk out. So, it is a very easy way for, specially, new investors, into the real estate space to get started.

Our passive income fund, similar to a REIT, distributes out, each quarter, all of the income interest it earns. So, we’ve been basically hitting about 11.4% average return net to investors, since we started that fund about 4 years ago. So, there is a pretty established track record. People basically just put their money in, and each quarter they get a check, and after their initial 2 years they can pull their money out, whenever they want.

JM How has real estate been performing out in California?  In Florida, for instance, we had a great run right up until 2006, and we had that terrible crash. We lost about 50% value across the board between 2006 and 2008. And really, we didn’t start to recover until 2012. We’ve probably picked up about 30% of that loss value back, on average.

How has the California real estate market performed? And that’s the residential market.

AL We didn’t take quite as deep of a crash as you saw in Vegas, in Florida, Miami, where you had a lot of speculation.

Pricing is pretty much on par and it is fully recovered right now. Where we are seeing great year over year price increase. I think it went from 6 to 10% depending on the price point here. But even then, if you look at the sales volume, I was just pulling statistics, in fact, back in the peak in 2004, your monthly sales volume down in San Diego was 76,000 homes trading per month, and in the low point back in 2008, was 19,000.

It drops from 76,000 down to 19,000 per month, and right now, we are currently in about a 46,000. We are somewhere in the middle. We are still not even hitting the same volume, which is good, because we don’t have that much speculation going on, but pricing has pretty much recovered.

JM Hold that point there, I got to take a quick break. Currently talking with Alan Lewis, Chief Investment Officer, with DiversyFund, using crowdfunding to get you into the real estate business with a professional group that understands how to invest in the real estate market. For more, www.diversyfund.com. We got more when we come back from the break on That Business Show 2.0, the real estate edition. I’m Jamie Meloni where business becomes show business.
Break
JM And we are back to That Business Show 2.0, the real estate edition, where real estate becomes show business, with new episodes each Thursday morning, 9:00 am, EST, at www.thatbusinessnetwork.com.

Today my guest is Alan Lewis, Chief Investment Officer with DiversyFund, where they are using crowdfunding to invest in real estate assets. So, if you are an accredited investor and want to get into the real estate business, a nice tangible product that protects your investment, visit www.diversyfund.com for more information.

So, Alan, how are the residential market and the commercial market? Are they connected, when one goes up, one goes down, or do they both go up or down?

What I’m getting at here is, how is the exposure? Or, how is my money risk when I’m investing in, you know, just real estate assets that are in California?

AL In general, if you have an appreciation, or softening in the real estate market, it washes over most asset classes. However, different product types within real estate are affected differently. For example, when we had a big crash, in a way, with residential, multi-family actually wasn’t hit as hard because you have a lot of people getting foreclose, so now they become renters.

We are also seeing this perpetual renter mentality among the millennials who just reject the home buying story, and they don’t want to be tied down to a mortgage. They like to be able to pick up and leave if they want on a yearly basis.

So, multifamily surprisingly didn’t have as many foreclosures as the residential side. So, that’s why it is always good to try to diversify yourself in over a couple of different product types within the real estate asset classes.

JM How is the profit margin on rentals? In 2012, in Tampa Bay market, we were setting on, you know, a record-low value and a record-high rents, and we had this surge of investment groups that came into our market, the hedge funds, the Blackstone, progress residential, which was Free of Florida, which is a Goldman Sachs-based fund. They just centered up in our market and they gobbled up every short sale in sight. Really, that’s what led our market to today having a very low inventory supply because this stuff is tied up in rental housing, which normally becomes an on and off the market through normal life events, like divorce, and job change. We are having a hard time finding anything to sell to anybody right now because of this.

Did you have a similar experience in California? Or, what is the rental market like out there? In terms of profitability.

AL Because we had less, there surely was speculation here in southern California, but because it wasn’t as extreme as in your neck of the woods, we didn’t have quite that opportunity.

In 2010, 2011, there certainly were a lot of institutions sniffing around and pulling up assets for really attractive cap rates.

Now what we are seeing is, especially in San Diego, our backyard, where we also do multifamily investments in addition to our single-family product, so we have a couple of factors that we are really excited about.

First, the rent increase is right about 8% year over year. Which is very high, and we like that. Vacancies are down to 2-3% depending on who you are talking to. I think that what’s driving that, if you go around, and drive around some of the neighborhoods, you will see a ton of multi-family construction. So, your initial reaction is, okay, this is getting over-built and over-heated. But we are big data guys, and when you go to the data behind it, the economic forecasters are showing this huge 30,000 to 50,000 undersupply.

The deficit of multi-family apartment units that the city needs, based on populations and job growth, and we are only putting about 5,000 units online per year. So, a huge delta between, 30,000, and only supplying 5,000 units. So that is going to keep a rental increase and the vacancy rates where they are.

They may level off a little bit, but, I think, we’ll still have a very attractive outlook for multi-family here.

JM One of the things that I loved about San Diego was the Downtown. The Gaslamp district, the Petco Park that’s down there. So, to what degree does the Downtown-vibrant city life drive the surrounding communities?

I ask that because Downtown Tampa is dull, it’s doldrum of the development. We got some stuff on the horizon, with a new developer in Tampa that’s really supposed to bring back the nightlife, and the sass of the area. But, to what degree does a solid-fun Downtown help to prop up real estate values?

AL The bay, which you are referring to, is becoming a big driver behind making rentals in the downtown area. What’s attractive, is what we call walkability, right?

People are increasingly active and they like the fact that they can go from the front door of their apartment building to their dry cleaner, their deli, a good grocery store like whole foods, and restaurants and trendy bars, and have all that just within a few blocks. So, where downtowns have been forward thinking, and have a zone and the time is correct to allow for that, they are really seeing that come to play.

San Diego has done a great job in being forward thinking in a lot of these areas. The Gaslamp is more catered towards convention visitors that come stay in hotels in the area, so local residents tend to avoid the guests. It’s kind of like Time Square in Manhattan, where I used to live.

It’s certainly that walkability. That is a huge factor.

JM It’s that live, work and play mentality. Like, Downtown Tampa shuts down at 5 or 6 o’clock in the evening. There is no night-life in downtown Tampa. But we got an investor names Jeff Vinik, is his name, and we got this district called the Channel Side District which is supposed to be a very vibrant area which has been done poorly over the last 10, 20 years or more, that it’s been in existence. He is wiping it all out, it’s a waterfront community.

He is building a brand-new development so that everybody is all about Downtown Tampa right now. So, we are very excited about what’s coming to the area. But one thing that we are also very excited about the potential to get the Tampa Bay Rays Stadium over to the Downtown, and you have Petco Park Downtown.

When that came to Downtown, was there a notable increase in activity in Downtown?

AL Yes, certainly. You got a lot of folks coming in from surrounding suburbs for those games, so you have an up taken in retail for the area surrounding the Park. We are seeing that local residents aren’t too happy with the parking and the crowding that comes in, but, you know, it is just a great luxury to have. You know, the ballpark is just a few blocks away, and you can go visit, especially if you are a baseball fan.
JM How do you see DiversyFund expanding? Do you plan to stay within the California market? Do you have plans to enter other real estate markets and develop this crowdfunding platform?
AL Since we are the developers in all of our projects, we prefer to do deals in markets where we understand the trends and what’s driving the growth and other factors. So, California is an easy one for us because it’s right here in our backyard. But, that said, we are certainly looking right now at other markets. I spent some time in Salt Lake City area where I headed up a private equity division, with a lot of similar markets. So, we are looking in other areas where we really like what the market is doing.
JM How are you attracting investors to your fund? How do you those people?
AL We do a lot of digital advertising, on Google, Bing, Facebook, social media, etc. A big thing for us is educating people. The average is doing what my parents and grandparents did, which is to put all their money in stock market, stock and bonds because that’s what they’ve been told to do.

So, they don’t even realize that their investment portfolio is missing real estate, private real estate. So, we have to educate people to help them understand that a good 20 to 30% of your portfolio should be in alternative assets. Which basically means that any asset class that is alternative to investing in stocks, of course, the biggest one, is real estate. So, as we go through that process, it takes a few touches, through advertising for people to finally get the message of, “I need to start moving some of my money out of stocks and into real estate.”

JM I was coached, as a young investor, buy a home as soon as you can, buy as much real estate as you can by my father. Because that’s the road to wealth. Then we had this financial crisis that hit through the mid-2000s, so the millennials have a different viewpoint, because of what they’ve seen happened to their parents and grandparents.

Do you find that it is a different discussion when you are talking to millennials about the value of investing in real estate vs. the baby boomers and people who have seen such good years in real estate?

AL Absolutely. Yes, the baby boomers, they understand. They had a nasty downturn, but they’ve also seen and gone through several cycles and have seen the wealth that is generated through real estate and seen that it is a great place to allocate some of your portfolios.

With millennials, in general, we are seeing two different groups. We are seeing those who have read “The Rich Dad”, one of Robert Kiyosaki’s books, and understand that real estate is a key driver for wealth generation. But we have a lot of millennials who saving for retirement is not on their radar. It’s the Instagram generation. They are just big on experiences, they are not buying assets, they don’t necessarily want the shiny car and the house. They just want these experiences.

At the end of the day, we are trying to help them see how, if you like being able to travel and having this freedom, starting to invest in early age certainly will help you maintain that ability and increase your ability to do what you want and have that financial freedom.

JM But, on the flip side, you are reaching the millennials because you are the developer, you are building these multi-family rentals and this housing to attract the millennials who are all about the experience, so now on the flip side, you are catering to them as a product provider.

How are you developing your product, or, are you developing your products to reach the millennials?

AL I think a big part of that is that our real estate assets are the same regardless of who our investors are, but a big part of that goes back to educating through our marketing process. So, when we have people who come to our website to set up for free an account, and then they can start talking to us on the phone, to go through questions they have, just about an asset in particular. Our folks start with basic questions such as “tell me how real estate investing works.”

So, we spend a lot of time with basic concepts that you are familiar with, like passive income, what does that mean. Some people just have to figure out for the first time that investing in real estate is sort of a cash flow and then they collect quarterly payments. That’s new to a lot of people.

JM You’ve been involved in investing, in real estate business for some time now. Crowdfunding a fairly new concept in business. How has it enabled you to grow as a business? What has crowdfunding done for you as a fund?
AL Crowdfunding has been a complete game changer. We are a forefront of this industry that is innovating two things.

  1. The way capital is raised in the financial industry. And,
  2. The way that real estate development is getting done.

In the past, unless you knew some guy, some broker in wall street, and had enough money to get his attention, and write a couple million dollars, or be best friends with the real estate developer, people just didn’t have access to this kind of vetted, institutional quality, private real estate deals.

With crowdfunding, what we’ve done is, we’ve changed the whole spacing, give, someone in Ohio, who would never have an opportunity otherwise, we give them access. So, we talk about democratizing access to these wealth-generating opportunities, so that’s really what we are doing. As a company, we are very proud to be changing and growing an entire industry and system, and doing it in a way that spreads the way people can generate wealth and who can generate wealth.

Now it’s open to everyone.

JM I’m thinking of the analogy, that crowdfunding is to the average investor, kind of what podcasting is vs. the media. Podcasting is giving a voice to so many average people who’ve built up tremendous audiences and is kind of the thorn on this side of traditional media out there; which doesn’t give a voice to a lot of the average ordinary people.

Crowdfunding in your business is giving a chance for the average person with average money to get involved in investments that otherwise would be held off for the multi-millionaires up on wall street.

Is that a good association?

AL Yes, to the same point, you talk about being a thorn in the side of an established industry, and with our income fund, that’s been around for a while, we’ve put it on the website for the first time for new investors to come in. And, what we did is, in our marketing we talk about declaring the war on fees, declaring a war on the asset management fee, the performance fee, that these wall street funds typically charge. We can do that because we make our money on the development side, so it’s very easy for us to completely eliminate fees so the investor if the fund is making 11%, the investor keeps 11%.

That, certainly, has people in the established financial industry not happy that fees are going away. They like their fee checks, but that’s what happens with industry innovation, and when you vertically integrate, you have that savings, so you can pass it along to the consumer, which in our case is our investors.

JM Is there a minimum investment to get involved with DiversyFund?
AL Yes, we’ll go as low as $5,000 USD, but it depends on the particular project. The ones on our website right now are all $10,000 USD, so the big one, that people start with is our Income Fund. It’s the easiest one. It has a 4-year-track record, and you just part the money and collect your quarterly checks. We are averaging 10.1% based on our last quarter payments. So, it is a great place to start.
JM So, if someone wants to put their money in DiversyFund, how would they get started? What would you advise them to do?
AL You just go to the website, www.diversyfund.com, go to the sign up for a free account, look at what we have there, If you want to talk to one of us, we’ll answer any questions, and then the process is completely online, it’s fully automated, you sign your docs online, and ACH your capital and then just collect the checks.
JM Alright sounds good.

It’s been a great discussion. Alan Lewis, co-founder and Chief Investment Officer of the DiversyFund.

Thank you so much for being with me on this edition of The Real Estate Show.

AL My pleasure Jamie.
Visit www.diversyfund.com for more information. Stay tuned. We’ll be back.