How do you invest in residential real estate without dealing with the three Ts—tenants, toilets and trash?
Actually, it's always been possible to invest in trust deeds or loans secured by real estate—if you were willing to risk $50,000 to $100,000. But now Realty Mogul, a Web site that launched in March and is backed by Microsoft, is allowing accredited investors to pool their funds on vetted real estate properties such as multifamily homes and fix-and-flip rehabs for as little as $5,000.
"We are helping to democratize real estate investing," says Realty Mogul CEO Jilliene Helman, whose Beverly Hills-based firm recently raised $500,000 in angel financing led by Seattle serial entrepreneur Sky Kruse. The firm previously participated in Microsoft's Tech Stars Accelerator, a business incubator program that trades mentorship and technology for equity. The firm has raised just over $2 million for eight deals and expects to close 20 deals by the end of the month. Earlier in her career, Helman worked in private wealth as a vice president at Union Bank.
Realty Mogul is the "lendingclub.com of real estate," Helman says. Whereas the personal loans offered by peer-to-peer lending Web sites are uncollateralized, however, Realty Mogul's are secured by physical property. It offers short-term loans on first trust deeds or the most senior (first lien) debt in direct real estate deals at rates generally ranging from 8 percent to 10 percent, as well as equity on less liquid deals of three to five years in the form of preferred percentages. Like the Lending Club, the site restricts who can offer investments on the Web site.
"We are not investing in rookies," she says, pointing out that the firm focuses on "boring cash flow" rather than illiquid development deals or trophy deals that are sexy but don't always perform. "We are in the business of curating best-in-class operators."
The site's "value add" for investors is that it spends hundreds of hours per week scouring transactions for deals that are a good fit for its conservative cash flow orientation (deals that are hard to find) and then giving them access to these opportunities, which it vets beforehand, she says. Step one in that process, it turns out, is identifying best-in-class operating partners to work with. In general, that means experienced real estate companies with stellar track records that have a specific specialty and geography–multifamily in San Francisco, for example.
Critics have contended that best-in-class real estate operators don't need sites such as Realty Mogul because they already have access to all the funds they need. But Realty Mogul's experience suggests otherwise.
Case in point: The platform recently raised $600,000 in four hours for a 72-unit town home community on the edge of Fort Riley, an army base near Junction City, Kansas. Block Real Estate Fund, a subsidiary of Block Real Estate Services in Kansas City, sponsored the deal, which totaled $4 million in financing. The largest commercial real estate firm in Kansas, the firm's principals have engaged in $3 billion in transactions, according to Helman. But she says the firm approached Realty Mogul, not vice versa.
Her explanation? Firms like Block are always looking for additional sources of capital. But Realty Mogul is also in the business of making real estate transactions "incredibly simple" for sponsors as well as for investors, she says.
"We structure single-purpose vehicles where we pool all of our investors together," she says. "We gave them one check for $600,000. For them, it feels like one investor. And we do all the administrative work, including investor distributions, investor K-1s and all investor communications."
On its equity deals, Realty Mogul charges sponsors a flat fee ranging from $15,000 to $40,000 for all of its due diligence, depending on what is required, including background and criminal checks, market analyses and other itemized fees. It also charges an administration fee to cover investor reporting and technology fees. On its debt deals, its fees range from 1 percent to 2 percent of the transaction.
Helman is spending a lot of time on the road speaking at conferences and meeting potential partners and investors.
"In the end, although we are a technology company, we are also a relationship company," she says. " I want to meet our investors in person. I want them to know I am available to take questions."
