There is a lot of excitement out there about real estate crowdfunding, but a clear understanding of how these platforms work is essential to protecting your investment. Crowdfunding essentially is a way for people to pool their money together to gain access to an investment they otherwise wouldn’t be able to participate in. We see crowdfunding in everything from GoFundMe campaigns to direct to consumer brands launching startups. Real estate crowdfunding is a highly regulated investment and understanding the ins and outs of this investment class is critical to protecting your capital.
In this interview, Deidre sits down with regular Motley Fool contributor Jason Hall for a no-nonsense deep dive into the best ways to evaluate and consider crowdfunding platforms and the deals they present.
JASON HALL: As I spent more time looking at these different platforms, it quickly became apparent that there is a lot of different ways to make money. Different platforms make money in different ways. The very first thing that I found that was the most important thing, was understanding how each platform does make money. It can cover a wide variety of things. Some of the platforms, especially in the regulation deals, standalone deals. They like to act as just standalone marketplaces, and they take a cut from transactions. When you invest your $25,000, they might take a quarter of a point and they'll charge the sponsor $10,000 to list that deal in their marketplace, and then they take a cut every year. But then, they might market it to you as being no fees. Well, you don't pay fees, but the sponsor does, so it affects your capital. It's really important to follow the money, and understand how the platform is making money and whether or not, and how it is aligned with you as an investor. [MUSIC]
DEIDRE WOOLLARD: You are listening to the Millionacres Podcast. Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and prospective for everyone, from those just starting out to season pros with decades of experience. At Millionacres, we work everyday to help you demystify real estate investing and build real wealth. [MUSIC].
DEIDRE WOOLLARD: Hello. I'm Deidre Woollard. I'm an editor at Millionacres, and thank you so much for tuning into The Millionacres Podcast. I'm really excited to have Jason Hall with me today to talk about real estate crowdfunding. We felt it was important to do a deep dive on this topic, because there's a lot of questions about how people can invest in crowdfunded deals. If you're like me, you've probably seen or heard ads for Fund-rise, RealtyMogul, Rich Uncles, just a bunch of them out there. There's so much excitement about real estate crowdfunding. I think it is exciting, but I also think it's important to cut through the hype a little bit, and that's what we're going to be doing today. You've probably seen crowdfunding out there. It's essentially a way for people to put their money together to do something bigger that they probably couldn't do on their own. We've seen it and everything from GoFundMe, direct-to-consumer brands, they are launching a cool startup like we saw with the Pebble Watch or things like that. In real estate, it usually is that you're contributing to purchasing a building or development, possibly something under construction. Now I'm going to turn it over to Jason. He's done many of our crowdfunding reviews on Millionacres. You can see those millionacres.com. He's very analytical. He's no holds barred, and he's really cut through some of what these platforms are saying and really got into the meat of it. Hey there, Jason. How are you?
JASON HALL: Hey. I'm really excited to have this conversation. One could say I might even be a bit of a fire brand on this topic. It's really interesting. I think one of the things is that there are a lot of times people hear the term crowdfunding. It's been a shift in the way people think about it. Crowdfunding for a lot of people now is like this is how you give money to causes. The reality is that it started out as a mechanism to allow people to invest in things they might not have had access to in the past. Commercial real estate is a prime example of that. This isn't giving money to good cause or just to develop a cool product and you might get neat freebies for helping fund that product. This is you investing in real estate, hard money loan to a developer, or you're going to own an equity stake in the property. There's lots of regulation that affects it. It's the Wild West right now. There's a ton of entrepreneurs that have jumped in on the developer side. Some have real estate background, some don't. It's really important for investors to understand what's going on before they risk any capital in this space.
DEIDRE WOOLLARD: Right. It's relatively new. It's still something that's definitely being worked out. But I know that one of the things in the legislation is that there are two main types of crowdfunding. There's Regulation A and Regulation D. Can you break down those for our listeners?
JASON HALL: Yes. The best way to think about it, is that these different categories are based on different classes of investors. You have accredited investors, which the SEC defines as someone who meets one of the following classifications, either one million dollars in net wealth that excludes their primary residence. In other words, it can be all of your retirement accounts, separate investments that you have, cash that you have, anything except for the home that you live in and the equity of that property, or if your earnings consistently as an individual are above $200,000 per year with the expectation that your earnings will continue to be above that. For married joints of tax filers, I think $300,000 is the bucket for that. That's how you can be considered an accredited investor. Those are the Regulation D deals. Regulation A is something that's a little more recent when it was introduced an opened up. This is something that opens up investing through this crowdfunded real estate investments to non-accredited investors. Basically, the rest of us. People like myself, I don't meet that million dollar or that earnings status just yet, so I still have access to invest through these. The main difference is that these Reg A deals, as they are commonly called Reg A or Reg A plus, is there's a higher regulatory requirements for the platforms, for the REIT, for the legal entity that's offering the investments. They have to file semi-annual filings and annual filings with the SEC. These Regulation D deals do not have to file disclosures with the SEC. That's a major difference. In turn, that passes along higher costs for those Reg A deals to meet those regulatory requirements. It costs money to do that. There's additional fees and structures that come into play. Those are the biggest difference between the Reg A stuff and the Reg D stuff.
DEIDRE WOOLLARD: For the Reg D stuff, I know that you generally have to commit a large amount of money. Usually, I believe it starts probably between $10,000 and $25,000. With the Reg A, it's a lot less. I believe it's as low as $500. Is that correct?
JASON HALL: Yes. That's correct. It's orders of magnitude difference. Most of what you see with the Regulation A, these are REITs. Real estate investment trust. It's a legal entity that owns multiple real estate investments. Typically, they're diversified across multiple properties or loans in a multiple properties. The lowest that I've seen continues to be fund-rise with a $500 minimum investments. A lot of the other REITs start at 1,000, some are $2,500 as a minimum. Even these can start pushing the smallest amount, for a lot of individual retail investors. But again, the reason why those limits are what they are typically is because the cost. It's expensive. The more individual investors these platforms have, the more Investor relations people. They need to have more customer service. They need to be able to provide and those add additional operating expenses too. That's why you tend to see the fees a little bit higher. Now, the Reg D side, typically what people are investing in is a standalone real estate development. Maybe a sponsor has identified and has a contract to acquire, let's say an apartment complex. That apartment complex is 30 or 40 years old, but it's in a great area. Nobody has invested any money in improving it in a very long time, and the sponsor sees an opportunity to do some renovations and improve it, and increase the rents. Increase the rents increases the cash flows. Then it could potentially create some opportunity a few years down the road to be able to sell that property, maybe to an institutional real estate owner who is looking for the cash flows from it at a profit. You might invest 10,000, is the very lowest that I ever see. Typically, you see 25,0000 is the typical low. A lot of the platforms like Cadre for example, or EAF is another one that also does a lot of developing, they typically start at around $50,000. Those numbers can get pretty big pretty quickly. But you're investing in a project. This is the project. This is what it's going to cost. This is the returns that we're looking to generate from these project. This is who's developing it. This is how they get paid. These are all the fees, and this is what our expected exit looks like. You have this laid-out path of how much you're going to invest, what you should be able to earn in terms of dividends or distributions from the cash flows of the project, and then what the exit date is when the capital will be returned to investors plus any additional profits that the deal makes when it closes and sells. That's the difference. You have a known targeted deal with a play-out timeline. These Reg A deals, you are investing at a rate that's an in perpetuity thing. You don't know when each individual property or deal is going to be exited. It's a little less clear exactly what the strategy is for those individual properties inside those Regulations A deals.
DEIDRE WOOLLARD: You mentioned that there are REITs. People who invest in REITs in the stock market. Is there a real difference between the two?
JASON HALL: Yes. REIT, Real Estate Investment Trust, this is something that anybody that invests in publicly shared a real estate companies should be familiar with. They get some tax advantages in terms of the cash flows where the REIT itself doesn't pay corporate income tax. That means more of the cash flows that are generates can be given to the owners, the investors, the shareholders of that REIT and these Regulation A REITs they work the same way. They get that same tax benefit. The dividends that you earn on a REIT versus compared to say like Coca-Cola as an example, Coca-Cola's dividends the taxes are paid as your capital gains rate. For most people, that's 15 percent. For the highest of earners, it's 20 percent. The difference with the dividends that REITs pay is it's paid at whatever your marginal tax rate is. If you earn $1,000 in dividends from the REITs that you own and you own them in a taxable account, and you're taxed at 25 percent marginal tax rate, then those dividends are taxed at that marginal tax rate. That's how it works. Now the difference though is that with REITs, you can easily own them inside a retirement account. Most of the platforms that offer REITs to Reg A investors, they accept funds from self-directed IRAs. You have the ability to own those into an IRA and get the tax advantage of not having to pay income tax on the dividends that you earn in that IRA. Most of the Reg D deals, they tend to be structured as limited partnerships or LLCs. Now those have different tax implications. A lot of those entities still allow you to use self-directed IRAs, but you run into more tax complexity because there's things like unrelated business taxable income, it's called UBTI. You can still end up owing even in IRA. You could still end up with a tax bill and plus with these self-directed IRAs that are out there, the fees are a lot higher than your fidelity rollover IRA or your ETrade Roth IRA that you might have on your online broker. There's additional fees that come in because it is more complex when you start owning these alternative assets in your retirement accounts.
DEIDRE WOOLLARD: That's a really good point. If you're owning Regulation A fund, do you have to do a self-directed IRA or could you deal with a traditional IRA or Roth IRA?
JASON HALL: It has to be done with the self-directed IRA, and there's a lot of trustees out there that do these self-directed IRAs. There are Roths and there are traditional for both, but again, the tax implications are tied to what you invest in. Whether it's LLC or limited partnership, doesn't matter if it's a Roth or traditional IRA, those tax implications could still be there. My suggestion is that anybody that's looking to use the self-directed IRA to invest in anything that's a non REITs, you need to talk to your tax professional before you buy that investment, before you invest in it. It's very clear you can see it in the documents that they provide, the legal documents that explain what it is you're investing and you can provide that to your tax expert, and they can explain the potential tax risks based on what you're investing in.
DEIDRE WOOLLARD: Excellent. Thank you. Just to explain to people, a self-directed IRA essentially lets you invest in a variety of other assets. There's some rules about what you can and can't invest with in self-directed IRAs, but it's essentially a way that you can use your retirement to invest in things outside of the traditional stock market.
JASON HALL: Exactly.
DEIDRE WOOLLARD: Let's talk a little bit about your views on Millionacres, and you've reviewed a bunch of these different platforms. What were the factors that you started to evaluate first?
JASON HALL: Yes, the first thing that I've learned about a year, almost at this point of reviewing these platforms is really understanding how the platforms themselves make money. How do they monetize the real estate investments? There's a lot of different ways that these platforms can make money, that can vary greatly depending on what their focus is. Some of the platforms essentially act as marketplaces and the deals that are offered. This is pretty common in the Reg D space where the platform does due diligence and some initial vetting of the real estate offering the sponsor, which is the developer that's going to be managing and developing the project. They go through that process of doing some initial due diligence, but the way that they make money can vary. Some make money, they collect a fee from the developer to list that deal and then they take a fee from the developer or the sponsor to manage the investor relation side of things. Then they will also take a cut of investments. Let's say you invest $25,000, they might take a quarter of a point as a transaction fee. A lot of these, they tend to do that, then they'll market themselves to investors as being no fees. What they're saying is that you're not paying the fees directly, but these things are still capital. They affect the capital for the deal because whether the sponsor is paying or you're paying, there's a cost for that is just knowing who is paying it. I think you also tend to see most of these platforms will also charge an asset management fees. It's an annualized fee. It can be anywhere from half percent a year to two percent a year. Again, depending on the platform and depending on how involved they are. You'll see that. You look at it like the transactional cash flows that they generate. Then you start thinking about other things too. You look at say Cadre, for example. I think is a great example of one that's also really involved in skin of the game in terms of having exposure to every deal. This is a platform that actually takes a stake in every deal that is offered on it's platform. It's executive stake of stake in every single deal that's floated on its platform. The reason this matters is because the platforms that only have exposure to transactional income of getting deals funded or getting deals on their platform don't have exposure to the downside risks. When you think about it, there's a tension between due diligence and vetting these deals and how the platform monetizes it. If you follow the money and their incentive is more tied to getting deals on their platform then when deal flow is at risk, the risk is that deals that might not have passed their scrutiny a year before or six months before when there was a lot of deals being marketed to them, the quality of the deals that are offered could potentially go down. But then you look at our platform that takes skin in the game and they invest in those deals, they have downside risk. They are much more aligned with investors in terms of losing money, and that can be a good thing to follow, to find the platforms where there's alignment between how the platform makes money and how investors make money, but also the risk of losing money when that is a little more shared across the different stakeholders. I think it informs about due diligence and where the safer investments can live.
DEIDRE WOOLLARD: I feel that's important right now, especially due to COVID-19. We've seen all deals fall apart. I feel that that's one of the things that may be more important than ever.
JASON HALL: Absolutely. I think when we saw this in March, most of the platforms and this is something we'll talk about too a little more with Regulation A. Investment offerings is how do you get your capital back, that sort of thing. We saw very quickly the Regulation A funds circle the wagons really quick and stopped any share repurchase plans they had or liquidity plans. These are the ones that you are not investing at a deal. You're investing at a REIT that buys property with your capital and manages it, and flips it, and generates cash flow. Those funds, every single one of them has the right to refuse to return capital. You can send in a request for redemption or share repurchases, however, they tend to describe it and they can say no. They have autonomy to do that. That's a risk that Reg A investors need to consider. The point is that, back in March, just about across-the-board, all of those Reg A funds except for one, Streetwise is the only one that I personally saw, that I reach out to and the ones that were filing releases. The only one that continued to offer redemptions. Every single other one said, "We're temporarily halting redemptions." Now the good news is we've seen it's been a weird recession, money has quickly flowed into the space while like fund rises talked a lot about how they're really trying to target. You'd be opportunistic right now. You never want to be a seller in a buyer's market, and this is certainly a buyer's market. A lot of capital has flowed back in and it's created opportunity that they're taking advantage of. The risk, I guess, is that when we see the economic cycles and when we see real estate cycles, is you never want to be in a situation where you have a targeted data to take your capital out and it just happens to correspond with an unpredictable change in the cycle that causes the REIT that you invest in to say, "Well, we're not going to do any redemptions right now."
DEIDRE WOOLLARD: Yes, that is something that I think is important for people to understand is that when you invest in one of these, it's not like the stock market. You can't essentially panic-sell. Not that anyone should ever panic-sell, but you can't necessarily just pull out because you feel like it. The times when you can take your money out and the amount of money you can take out and what you might receive back can definitely vary. I know that's one of the things that you evaluated in your reviews.
JASON HALL: Yes. These are very illiquid investments. I think even with the REITs, they do have those clear redemption plans laid out, and typically, the way they structure them is pretty interesting and I tend to think it's smart. They build it so that they want investors not even attempt to ask for redemption for at least five years, because they build them so that there's a scale, it's like a waterfall. A lot of them, like you invest, they say no redemptions for the first year. Then between year 1 and 2, they're going to charge you five percent. I've seen some even say we are going to charge you 10 percent of NAV, which is net asset value, which is the per share value of the assets in the REIT. They're going to hit you with a 10 percent fee. Then between years 2 and 3, they're going to charge you seven-and-half and five. By the time you get to year five, there's no more fees. They try to create financial incentive to prevent people from thinking about this as a way to tap liquidity, because here's the bottom line. If you are a real estate developer, you have a project laid out and it's going to take five years to develop it, you need the capital. You can't deal with sending people back money every few months and then scrambling to try and find more capital to complete the deal. That's why these businesses exist and that's why there's opportunity because they need predictable access to capital and investors that have capital they can ignore for an extended period of time can profit from having that capital tied up in a great investment.
DEIDRE WOOLLARD: Well, that brings up another point is that, when you've got your money in these funds, tracking it is a little bit different than the way you would track your publicly-traded REITs, or any other stock investments because it all takes place inside the platform. I know that's one of the things that you've looked at inside the reviews, is reviewed some like if they have a mobile app or how they report and when they report, because it can vary a lot depending on the platform that you choose.
JASON HALL: Yes, it can. Here's the other thing too, is it also depends on what exactly are you owning, because a lot of these deals, you might not have an equity stake. It might be a hard money loan. You might be lending money to a developer. So that's closer to a bond. It's a loan. The value is the value plus whatever interest in yield it's expected to generate. Again, with real estate, what's the market value of the asset? There is that and you minus all the obligations and expenses and that sort of thing. You have a publicly-traded REIT, the true value should be underpinned by the value of those assets. But often, the market value that day depends on what other people happen to be thinking it's worth, so it can fluctuate greatly. The NAV, the net asset value, you tend to see reported for these assets is a lot more tied to properties that's been evaluated. They know what it's worth because you know what it was paid for and you know how much cash flows it generated the year before. You know what your operating expenses are. That NAV doesn't fluctuate day-to-day because it's not traded on a secondary market where there's this liquidity that changes the value on a day-to-day basis. They tend to update that NAV at least once a year. If there has been a material change, they will update the NAV based on that material change. There's all of these things that come into play, they can affect the value. But again, the biggest thing is because it's not liquid. The value tends to be borrowing some material change far more consistent and stable. For the most part, these platforms are really good about filing quarterly reports to investors. Again, these aren't things that necessarily you're going to go to the SEC. These are things that they're going to send to investors. If you want a property that's being developed, you need to know what's happened. Are they hitting the timelines? Are they running into problems? Are they having to change the plan based on maybe a global pandemic that might've thrown things off. They need to keep investors informed of those things along the way. Typically, what happens is, one of these platforms, they might have funded three dozen real estate deals over the past year, and through the platform you have a dashboard where they manage the communications from the sponsor so that when you log into your dashboard, you'll get the information about the deal or deals that you have participated in. They come right there, and you can keep up with what's going on, and they manage that flow. For the REITs, the Reg A stuff tends to be a little more like what you see from publicly-traded companies because again they have to file with the SEC. Typically, with our stuff, if they file with the SEC, pretty often is there's going to be a press release, and they love to send those press releases out to investors. Unless it's bad news, they might not send a press release and they are only going to do an SEC filing. You need to get comfortable with how to find the SEC filings for those Regulation A products that you might be invested in so you can stay up-to-date with what's going on.
DEIDRE WOOLLARD: That's a good point. One of the things I've noticed from Fundrise, I have invested a little bit with them just to test up the platform, is that they may exit a deal faster than they originally planned to. I've noticed that during the pandemic especially. It's interesting with these Regulation A funds is they may say, we're going to hold this property for five years, but they may end up exiting sooner. They may end up exiting later. I think it's important for people to understand is that you don't really have control over that, and that's really true with both the Regulation A and the Regulation D funds, is that the sponsor, or the developer is really in control of that timeline and will adjust it depending on economic factors or anything else that could happen.
JASON HALL: Absolutely. I think one thing that's with the Reg D deals, it's a little easier to know exactly what you own because, again, you're typically investing in a project. Some of them like Cadre, they do offer these that are more managed investment things. Like Cadre, you can give them $100,000 and they will invest $10,000 of that into the next 10 deals that they fund through their platform. But again, you know those 10 deals when they hit. This is the deal. When you invest in these Regulation A funds, Fundrise is a good example. Fundrise is gigantic. They're the dominant participant in this space with more individual investors than in probably the next two or three platforms combined. They're really substantial in their scale. You have the least amount of control of any of these platforms because you can't even pick an individual REIT to invest in. You describe who you are as an investor. If you're looking just primarily for income, if you're targeting capital gains, growth, or if you're looking more of a balanced mix, they're going to allocate the funds that you invest with them across multiple different REITs that are targeted to focus on whatever your specific goals that you outlined are. That makes it even more complex because you could end up owning over five years of investing with Fundrise. You may end up owning a stake in five or six different REITs, and each of those REITs might own a dozen or more properties. In terms of doing due diligence, it's much more challenging if you're really trying to have more control over your individual investments. These REITs, especially like a Fundrise can be far more complicated to do. The point is that you have to trust management. I think that's what it comes back to. You have to trust the people that are allocating the capital to act in your best interest. A big part of that, again, is figuring out how they make money. That's something we've really focused on heavily, especially on our Reg A platform reviews is looking at how the platforms monetize. One of the things that I've seen in a lot of these Regulation A REITs is you start getting into the filings and you find out that a platform, for example, they might be able to take a two percent transaction fee when a property is sold, or two percent when a property is acquired and that's not something they really talk about in their marketing at all. What this does, this creates incentive for them to flip properties because they can take a cut. Even if that property is sold at a loss, they can still take that fee. Well, a construction might be managed, development might be managed by a closely-held company that has its related party to the sponsor and they might charge above market fees for construction. These are things that you have to understand because sometimes, I've seen some of these platforms, they've gained it. Even though they are disclosing it, they put it in those regulatory filings, and it's there, 99 percent of investors don't crack those filings open and never know that even though they might say we only charge a one percent annualized asset management fee, sure, that's all they charge you directly within the capital that's in the REIT. The fees that they are paying for the services that are provided can be egregious in construction so that the sponsor can make money even if you as an investor don't necessarily profit.
DEIDRE WOOLLARD: If you are an investor and you're starting out and you're interested in these, do you recommend going to the SEC filings? Do you recommend going to the platform itself? Where do you start?
JASON HALL: I think it's a little bit of both, because I think it's really good to hear what the platform say, and that's what you see in their marketing and on their platforms. But then, when you compare that to what they actually do, which is what they disclose in the regulatory filings, I think it can really be eye-opening. One of the platforms that I really like a lot for regulation investors is called Streetwise because what they say, and what they do are incredibly aligned and the fees structures and their process and their strategy, I think is really aligned with creating the best value for all stakeholders. Then you start looking at some of the other platforms and their engagement with closely-held parties. They're not having hands length or arm's length negotiations, as they call it, for things like, they're not bidding out for construction. The sponsor that owns the platform owns the construction company. You have these conflicts of interest with some of the other platforms Frankly, I haven't seen that with Streetwise and I think it's one of the things that's made me very impressed with their alignment, with how they make money and how investors profit.
DEIDRE WOOLLARD: I think there's also a question of risks with these investments. They are, I would say, higher risk than traditional stock market investments in some cases. I know that we've had a few of them that have run into trouble. RealtyShares a few years ago, ran into trouble and then were purchased by another company. I think some of the other crowd funded Regulation A funds have run into trouble especially recently.
JASON HALL: Yes. RealtyShares is a good example. Actually, two of the existing large Reg D platforms into IINTOO and RREAF Holdings formed a joint venture to manage the RealtyShares assets through liquidation and project completion to try to return as much capital as they could to investors. We've actually reviewed both of those platforms and there are quite interesting platforms, especially I think for conservative investors. They both have something interesting to offer. More recently, we've seen BrickStreet which is part of the Rich Uncle collection of REITs. I think it's maybe a week or so ago, they just filed with the SEC that the board has approved liquidating the assets. This is one that's just some quick background, if you had asked me a year ago what I thought about this portfolio, real estate assets. We own an apartment complex. It's a university housing. Then we have a minority stake in another apartment complex that's university housing. We own a Starbucks that's on a university campus. We've got a Gold's Gym too. Our debt-to-assets ratio is 55 percent, which for the uninitiated, that's actually quite conservative. When you get above 60 percent, 70 percent, that's when it's viewed as a little more high-risk, but 55 percent is a pretty good REIT. If you asked me a year ago what I thought about that, I would've been like, yes, that's conservative. That looks like a pretty good investment. That's BrickStreet. COVID-19 happened, and Gold's Gym went bankrupt. Universities said, "Well, we're just mostly going to be shifting to remote learning." Just like that, all of a sudden, the vast majority of your properties are generating a rounding error from zero revenue. Then Starbucks tells all of its landlords, "Well, we want a year's forbearance of our rent." You're talking about a black swan, and it's really sad. I was holding out hope they might be able to figure something out, but just completely caught. You went from a super dependable, great, low-risk asset base to liquidated. If investors come out of this with pennies on the dollar, they're going to make out pretty good. This thing started out at seven dollars a share. Either five or seven dollars a share was the initial net asset value. They reduced that to like 27 cents a share a few months ago when all this happened, and said, "We're trying. We're doing everything we can, but it doesn't look good." Then they just announced about a week ago that they're going to liquidate. It's sad, but investors just aren't going to get much of anything out of this.
DEIDRE WOOLLARD: Yes, that definitely is stark example of how risky things can be. This year is an unusual year as as you said, a black swan event and hard to predict. I don't think that this year is necessarily a year through which you can evaluate how these funds may do in the future, but it's certainly something to keep in mind, is that there is that extra level of risk with these investments.
JASON HALL: The big takeaway too is concentration risk, because again, this is a REIT that owned less than a half a dozen properties. There's several publicly traded REITs that have a commercial real estate and multi-family real estate property mix, but they have dozens or hundreds of properties that have university apartments and maybe own a Gold's Gym or two that are fine, because they're not so concentrated on those assets that just immediately lost all of their cash flows. That is another real risk to consider because part of the Reg A plus standard is they can only raise up to $50 million per REIT, per investment. That by itself means that the assets are going to be more concentrated. That can create more upside, if they execute well. But it also creates higher risk from these just unforeseen events like we just experienced.
DEIDRE WOOLLARD: Well, you mentioned the upside, so that's a good question. Who do you think these investments are really best suited for?
JASON HALL: I think if you look at the Regulation D investments, again, these are the individual deals. I think these are a great opportunity for accredited investors and hopefully we start seeing they're becoming more will to start opening these up to non-accredited investors. I think these are great investors for anybody that is targeting a good mix of capital growth and some income along the way that can invest and are looking to invest for five years or less, because most of these deals take 3-5 years from start to finish. They generate cash flows along the way so you can earn some income. Then a lot of times, those properties, once they're developed, there's a large investor that's willing to buy, that wants to buy because they want to own it for 20 years to participate in those cash flows, to get those earnings, the cash flow kickoff from it. For individual investors, it's a great way to participate in these multi-million-dollar developments without having to come up with multi-billions of dollars and become an expert in developing real estate. It's a great way to invest 25, 50, $100,000 in one of these great projects and generate consistent market beating returns, because over the long term, real estate development has been a great business, and you can predictably generate great, strong capital gains and earn income along the way. For the REITs, for us Regulation A folks, I'm a little less sold on it right now because you have the risk of concentration. It's still really early. We're barely five years into these entities even being able to exist. There's a ton of people with tech backgrounds that have jumped in, that don't have experience in real estate. There's a lot of people in real estate finance that have jumped in that don't have experience as real estate developers, and there's a few developers that have developed real estate through multiple market cycles. There's only a few that have done that and some of those, unfortunately, have built the REITs with those fees that are buried in there that they can make money, whether investors do or not, that make them less attractive investments. But the biggest risk to me is limited access to being able to get your capital back. For example, Cardone Capital, the deals that they offer, these are 10-year deals, 10 years.
DEIDRE WOOLLARD: That's a long time.
JASON HALL: It's a long time. By the way, do you know where they are sourcing the deals? They're buying minority stakes in Grant Cardone's personal real estate investments. Again, these are not negotiated deals. Again, you don't have that hands length or that arm's length negotiation. Ten years can cover a lot of mistakes. You really have to understand what you're investing in and how at risk and how hard your access to your capital could be. That is my biggest concern, is because we're still so early. We don't have anybody that really shown that for five, 10 years, they can consistently generate capital, and then investors will have access to getting that capital back in a reasonable period of time. That's the one thing that has kept me, at this point, from investing in any of the REITs. But I will say that I've been very impressed with the folks at Streetwise. That's the one that I've targeted and I will almost certainly be invested in Streetwise before, if not by the end of the year, I'd say within 12 months out. I will have invested in Streetwise. They have impressed me.
DEIDRE WOOLLARD: Nice. You would say for people who are in Regulation A bucket, if you're interested, maybe you could try it out, but be experimental and also, it sounds like you really have to do your homework.
JASON HALL: You do. For example, the biggest player in the space right now, Fundrise, the majority of their revenues come from originations, not from investor or not from asset management fees. Again, they make most of their money from transactions, from bringing new deals in. Even their largest player, and they have a great reputation, and I think they've done a good job, and I think they are well-run, and they have very experienced people that have developed real estate that are involved. But again, you have to understand, follow the money and where they make money isn't completely aligned with where you would make money. You have to explicitly trust management is going to continue to act in your best interest, even when it's not always aligned with what's in the best interest of that organization. There's tension there that you really, really have to focus. I think we just need more time for this to play out, to know where the best players are and where the best opportunities to make money. But it has to be capital that you just have to go ahead and assume you're not going to able to touch for a decade. Whatever they say, whatever the redemption policy is, you just have to go ahead and assume that you're not going to able to touch it for 10 years.
DEIDRE WOOLLARD: Really good point. Well, this was fantastic. Thank you very much. Just a reminder to everyone, you can find all of Jason's crowdfunding reviews on millionacres.com. They're in our crowdfunding hub. He is a very strict grader and the reviews are very detailed and they go into a lot of the questions that we've gone over today. You could really take a look there. Then also, of course, as Jason said, do your own due diligence. Go to the platforms themselves, look at what they're saying. Go to the SEC and look at the filings for each one before you make a decision. This was great. Thank you, and thank you for tuning into the Millionacres Podcast.
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DEIDRE WOOLLARD: [MUSIC] People on this program may have an interest in the deals, offerings, or services they discuss and Millionacres or the Motley Fool may have a formal recommendation for or against. Always consult a certified tax professional before acting on tax advice and do not buy or sell assets based solely on what you hear. [MUSIC]