The Best Real Estate Digital Syndication Platforms for 2022

In UNLEASHED, (2021) a book that analyzes the scale of the online private equity real estate industry since inception following the passing of the JOBS Act of 2012, we quantified the size of the industry for the first time.

 

In the following article, we update our analysis of this new industry, explain the difficulties in labelling it 'crowdfunding,' and comment on the track record and performance of five veteran marketplaces, each among the earliest adopters of digital syndication.

 

For those not familiar with the concept of real estate syndication - or the distinction between private equity real estate and 'crowdfunding,' we provide a detailed explanation. If you are already familiar with the industry and the related concepts, skip right to the section on the comparative performance of the major marketplaces by clicking here.

Contents:

What is Real Estate Syndication?

Real estate syndication is a process by which a real estate sponsor, sometimes referred to as the ‘developer’ or ‘operator’ or ‘general partner,’ raises money from numerous individuals that is then pooled and invested into a real estate deal. Real estate syndications can be very simple, with capital raised from just a few individuals, or much more complex with hundreds of passive investors having a stake in the deal.

 

How Does Real Estate Syndication Work?

Typically, a real estate sponsor will have already identified a property that they plan to acquire before forming a syndicate. The syndication is the vehicle by which they raise equity capital for that deal with debt coming from a financial institution, most commonly a bank. Depending on the nature of the deal, a sponsor may be looking to raise anywhere from 30-50% of the equity needed for a commercial real estate deal. The sponsor then oversees the investment on the limited partners’ behalf.

 

Syndication Process

 

Syndications are typically spearheaded by a sponsor (the “general partner” or “GP”). That sponsor can be either a person or, more likely, a team of people that has significant commercial real estate experience. They will act as the quarterback of the deal, overseeing everything from due diligence to raising capital, acquiring an asset, and then executing the intended business plan. For example, in a value-add real estate investment opportunity, the sponsor will line up the architects, engineers, general and/or sub-contractors, property managers and others needed to improve and then stabilize the asset.

 

Meanwhile, investors are considered “limited partners” or “LPs”. After investing in the deal, the LPs have very little to no control over how the property is managed. They are entrusting the sponsor to oversee these details on their behalf. In exchange for their equity investment, the LPs will earn a pro rata share of the cash flow distributions and/or sales proceeds and profits.

 

Deal Structure

Most syndications are structured to allow the sponsor to collect some combination of fees and distributions. For example, a sponsor might collect a 1-2% management fee for their efforts related to overseeing the construction, renovation and stabilization of an investment opportunity. This fee can be used to cover staff time, to pay attorneys and other consultant fees, and more.

 

However, to ensure proper alignment of interests (e.g., to ensure a sponsor is not solely motivated by fees), most sponsors also invest equity in the deal as well. Therefore, in many cases, the sponsor has both a GP and LP interest in the transaction. The sponsor may collect nominal fees throughout the deal but will then be motivated to earn the rest of their profits alongside the LP investors.

 

A deal can be structured with both preferred and/or common equity. As noted above, most syndications will leverage some form of traditional bank debt. Senior debt is the first to be repaid, followed by junior or “mezzanine” debt. After lenders have been repaid, the sponsor will then make payments to preferred equity investors (if any), followed by common equity investors as outlined in the deal’s original private placement memorandum. Those who invest in preferred or common equity get to reap the benefits in situations where a deal over-performs but have the most to lose if a deal does not perform as expected—as the senior debt holds the first position in the capital stack and has its loan secured by the property as collateral.

Related: Podcasts on learning about real estate investing

Real Estate Syndication Regulations

 

Real estate syndications are not new. The concept of individual investors participating in large-scale ventures as part of a limited partnership structure dates back as early as 1800 BCE when, as archeological records suggest, entrepreneurs secured private equity investments from other citizens to fund things like maritime expeditions. More recently, the industrial backbone of America in the post-civil war era was funded by banks and their industrial clients through unfettered access to individual investors in syndications that were, in essence, crowdfunded.

 

This  unrestricted access to the general public to syndicates of all kinds, including real estate, was curtailed by the Securities Act of 1933, which prohibited “public solicitation” of securities. Therefore, most real estate syndications were structured as joint ventures with very few individual equity investors. The sponsor had to show some sort of preexisting relationship with those equity investors, which is how so many deals got done using “country club” capital – e.g., a sponsor would have their wealthy friends and family invest large sums in individual deals. Unless someone was part of that circle, they would not have the same opportunity to invest. Effectively, this kept the barriers to entry high for anyone interested in investing in commercial real estate.

 

That all changed with the passage by Congress of the JOBS Act in 2012. Under these new regulations, sponsors were allowed to engage in “general solicitation” for their real estate deals. This opened the floodgates for sponsors who could now raise capital by advertising or otherwise openly marketing their deals to the general public—near and far alike.

 

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Real Estate Digital Syndication vs. Real Estate Crowdfunding

 

There is an important distinction to be made between real estate syndication and real estate crowdfunding. The two terms are often used interchangeably, especially in the context of online funding platforms used for one vs. the other.

 

The JOBS Act of 2012 ushered in a wave of important regulations, which we will describe in more detail below. Notably, it allowed for general solicitation under Regulation D in newly introduced subsection 506(c). This is decidedly different than “crowdfunding,” which is allowed per Regulation CF. What most people think of as “real estate crowdfunding” actually occurs under Reg. D – not Reg. CF. In fact, there are very few real estate syndication platforms operating under Reg. CF, which requires registration and oversight by both the SEC and FINRA.

 

Therefore, while it is simple and catchy to refer to platforms like CrowdStreet, RealtyMogul, RealCrowd, EquityMultiple and others as real estate “crowdfunding” platforms, it is important to note that these are technically private equity real estate syndication platforms – not crowdfunding portals per Reg. CF – and calling them “crowdfunding” platforms can be problematic from a regulatory and/or lender’s perspective.

 

Read on to learn more about the regulations governing both online private equity real estate syndication platforms as well as “crowdfunding” platforms.

Regulation D Digital Syndication

 

The lion’s share of capital raised using online real estate syndication platforms like CrowdStreet do so by utilizing Regulation D - which is not, technically, 'crowdfunding.' There are two types of Regulation D capital formation, otherwise referred to as 506(b) and 506(c).

 

Regulation D, 506(b) offerings have been allowed for decades. Per Rule 506(b), sponsors can raise an unlimited amount of money for their real estate deals, as long as they have a pre-existing relationship with those investors. They are not allowed to utilize general solicitation or advertising to market their real estate securities. The upside is that under Reg. D, 506(b), sponsors can raise capital from an unlimited number of accredited investors and can also can raise capital from up to 35 non-accredited investors.

 

Regulation D, 506(c) is arguably what opened the door to today’s real estate private equity real estate marketplaces. Under Rule 506(c), created as part of the JOBS Act, anyone issuing securities may now utilize “general solicitation” or advertising to market their offerings to investors. Unlike Rule 506(b) offerings, these are only available to accredited investors.

 

It is a common misconception that 506(c) – which is what sponsors are increasingly utilizing  to raise money for their syndications because of the marketing options now available to them – is what sparked the advent of online real estate “crowdfunding.” In reality, all that 506(c) did was remove the requirement that sponsors have a pre-existing relationship with their investors. Now, sponsors can solicit investment from any accredited investor using an array of marketing and advertising techniques.

 

Therefore, it is more accurate to think of websites like CrowdStreet, RealtyMogul, RealCrowd and EquityMultiple as private equity real estate digital marketing and ecommerce platforms that help sponsors advertise their real estate syndications as they look to procure capital for their deals and gain committed funds from qualified investors. True “crowdfunding” platforms are subject to an entirely different set of SEC regulations (see Regulation CF Crowdfunding, below).

 

Regulation A+ Crowdfunding

 

Another way for real estate sponsors to raise capital is through Regulation A of the Securities Act. Any company selling securities under Reg. A is required to file their offering with the SEC for review, just as any major company would do when filing an IPO. Of course, this process is burdensome, especially for the size and scale of most real estate deals.

 

In 2015, changes to SEC regulations resulted in “Regulation A+” crowdfunding, often referred to as a “mini-IPO”. Under Reg A+, companies can raise up to $20 million in “Tier I” offerings and up to $75 million in “Tier II” offerings – each of which has its own requirements, including the level of SEC review needed prior to opening the offering.

 

In practice, the still-cumbersome nature of offering securities via Reg. A+ means that few real estate sponsors pursue this avenue when raising capital. According to a March 2020 SEC report, approximately 183 issuers have raised a total of $2.4 billion since 2016 – not an insignificant amount, but worth noting that only a fraction of this dollar volume is attributed to real estate transactions. The primary benefit to utilizing Reg. A+ is that sponsors can raise capital from accredited and non-accredited investors alike.

 

Regulation CF Crowdfunding

 

The only “true” form of online real estate “crowdfunding” is done so per Regulation CF. Reg CF was also introduced as part of the 2012 JOBS Act, and initially allowed issuers to raise up to $1.07 million in equity for any business or entrepreneurial venture (including but not limited to real estate) within any 12-month period. That money could be raised from an unlimited number of investors, accredited and non-accredited alike.

 

Reg. CF crowdfunding portals must be authorized by FINRA and the SEC. SmallChange is one of the most notable Reg. CF real estate crowdfunding platforms operating today.

 

One of the reasons why so few real estate sponsors pursued using Reg CF to raise equity is because of that equity cap as well as the restrictions this sub-section of the JOBS Act imposes on issuers. Often, sponsors are looking to raise tens of millions of dollars in equity, so $1.07 million is a drop in the bucket. Perhaps in recognition of this reality, the SEC has since modified Reg CF to allow sponsors to raise up to $5 million per year – still a low threshold, but a five-fold increase from the previous Reg CF limit.

 

According to Crowdfund Capital Advisors, the amount invested in Reg. CF deals nearly doubled in 2020, from $134.8m in 2019 to $239.4m in 2020. To put that in context, there was an estimated $15 billion raised last year under Reg. 506(c).

 

There was a 75% increase in the number of investors who participated in Reg. CF offerings during this period, as well, with more than 358,000 recorded investments. However, the average investment was quite low at just $650 per investor. These investments primarily span non-real estate industries; with real estate investments make up only a small fraction of the total dollars raised using Reg. CF crowdfunding, and a tiny fraction of the total amount raised for real estate overall under 506 regulations.

 

Accredited Investor vs. Non-Accredited Investor

 

Commercial real estate, considered an “alternative” asset class, has historically been considered a “riskier” investment than more traditional stocks, bonds and equities. As such, the federal government has implemented certain rules around whom can invest in CRE and how. The primary distinction involves being an “accredited” vs. a “non-accredited” investor.

 

According to the SEC, an accredited investor is one that has:

 

      • At least $1 million in net worth, together with their spouse, and excluding the value of their primary residence;
      • Income of at least $200,000 per year (or $300,000 if combined with a spouse) for the past two years, with a reasonable expectation to earn the same or a higher income in the current year; or
      • Holds a Series 7, Series 65, or Series 82 license.

 

By some estimates, some 10.5% of the U.S. population meets the threshold to be an accredited investor, or a total of approximately 13 million households. Therefore, private equity real estate syndication platforms that raise money from non-accredited investors have access to the remaining 89.5% of the U.S. population who may otherwise be interested in investing, but who have been unable to do so until the recent SEC regulation changes.

Best Real Estate Syndication Platforms 2022

 

As noted above, real estate syndication is by no means a new process. Real estate syndication, often erroneously referred to as “crowdfunding” as discussed above, is the process by which a sponsor raises capital from a larger group of individuals (hence, the “crowd”). Historically, sponsors would raise large sums of money from a small pool of investors. Now that sponsors can engage in “general solicitation,” they can either raise capital directly from individuals or use various online platforms to advertise their deals to more investors who often contribute less capital apiece, but collectively, significant equity for individual commercial real estate deals.

 

Keep in mind that the private equity real estate digital syndication industry is still in its nascent stages of growth. The platforms we recognize below each report that they only accept 5% of the real estate sponsors who approach them – and that perhaps only 5% of sponsors even apply to list on any of these platforms. In short, only 5% of 5% of sponsors end up listing on a real estate private equity syndication platform which speaks to the potential for the industry's continued growth.

 

Below is a list of the top five real estate syndication platforms for 2022. It’s worth noting that while there are other entrants to the industry, these companies were among the visionary first movers after the 2012 JOBS Act was passed and are therefore the most proven and tenured.

 

Each learned early on that having robust investor education resources is vital to attracting new investors previously unfamiliar with private equity real estate. The credibility of the platforms we recognize below each is enhanced because they offer numerous educational resources available to investors; podcasts, articles, white papers, courses, and other numerous other resources.

CrowdStreet

 

CrowdStreet is by far the largest online private equity real estate investing platform. It was founded in 2014 and last year alone, helped sponsors raise more than $1.3 billion in equity from individual investors.

 

Since its inception, CrowdStreet investors have successfully funded 615 deals, of which, 98 have been realized as of March 4, 2022 (i.e., gone full cycle and have been sold). Among these deals, an estimated 193 were considered “opportunistic” investments; another 273  were “value-add” investments; 98 were “core-plus” deals; and 11 have been “core” deals.

 

The average hold period for those realized deals was 2.7 years and on average, these deals generated a 18.5% IRR and 1.49x equity multiple on behalf of investors.

 

Typically, there are anywhere between 5-15 individual deals featured on the CrowdStreet marketplace at any given time. These deals are only available to accredited investors and typically, require individuals to invest at least $25,000 in each deal – one of the highest minimum investment thresholds of the platforms featured here today.

 

At time of writing, CrowdStreet had raised just over $3 billion in capital on $22 billion of total capitalized deals making CrowdStreet the largest, most successful private equity platform, and at this scale in so short a time period, a platform that has almost become an industry unto themselves.

RealtyMogul

 

Founded in 2012, RealtyMogul is one of the most established online real estate syndication platforms out there today. RealtyMogul has helped sponsors raise more than $700 million in equity that has gone on to finance more than 400 properties.

 

One of the primary draws of RealtyMogul is that it allows both accredited and non-accredited investors to invest with as little as $5,000.

 

Non-accredited investors may only invest in the platform’s two public, non-traded real estate investment trusts (REITs): the RealtyMogul Income REIT and RealtyMogul Apartment Growth REIT. The RM Income REIT invets in commercial real estate debt and equity assets across product types, including multifamily, office, industrial, self-storage and retail. The RM Apartment Growth REIT invests in preferred and common equity in multifamily apartments. Both REITs pay dividends on either a monthly or quarterly basis.

 

Accredited investors can invest in these REITs, too, but they also have access to several private placement investments featured on RealtyMogul as well. Individual deals may have higher investment minimums and will often range from $25,000 to $50,000. RealtyMogul’s private placement investments generally have a 3-7 year investment time horizon. They are offered to investors as unregistered securities offerings, making them exempt from registration with the SEC.

EquityMultiple

 


EquityMultiple is another of the more established private equity real estate platforms for those considering investing via online in a real estate syndication. Although deals are only available to accredited investors, those who qualify as such will have access to an array of equity, preferred equity, and syndicated debt offerings. Therefore, EquityMultiple is a good option for those looking to invest in different positions across the real estate capital stack, which helps to vary someone’s risk and order of repayment. As is common across the main platforms we are covering in this article, EquityMultiple also offers specialized deals, such as opportunity zone investments and, in some cases, deals eligible for those conducting 1031 exchanges.

 

The platform has a relatively low investment minimum of just $5,000 for some deals, though many offerings require an initial investment of at least $10,000 or more. Also as is common among the main syndication platforms, EquityMultiple accepts sponsors to their platform who allow investments to be made via a self-directed IRA.

 

Since its founding, EquityMultiple has helped sponsors raise $318 million across all investment types. Debt investments represented $49 million of that total (14 exited investments); Preferred Equity totaled $115 million (35 exited investments); and JV Equity represented $138 million (15 exited investments). Across all investment types, roughly $145.4 million has been returned to EquityMultiple investors in terms of gross distributions.

RealCrowd

 

RealCrowd is another of the top veterans of the real estate syndication industry that helps sponsors raise capital (debt, equity and preferred equity) for individual assets and funds. These deals are only available to accredited investors who must invest at least $25,000 per deal.

 

Similar to the other seasoned platforms, RealCrowd engages in a Sponsor vetting process before allowing a deal to be listed on its platform. Sponsors must have at least 10 years of operating experience and $50 million of verified transaction experience in order for their deals to be featured on RealCrowd’s platform. RealCrowd also requires lender references from each of its prospective sponsors.

Fundrise

 

Although large and successful, unlike the other platforms featured here today, Fundrise is is actually a sponsor that raises capital for their own deals using Reg. A+ (i.e., by issuing securities to non-accredited investors using a “mini-IPO”). When someone invests with Fundrise, they are investing in a portfolio of real estate assets that Fundrise has already identified, acquired and will now manage on investors’ behalf.

 

Individuals can invest with as little as $1,000 on Fundrise. In turn, they can choose from an assortment of Fundrise eREITs and eFunds. Those willing to invest more (e.g., $10,000 for an “Advanced” account or $100,000 for a “Premium” account) will have access to more real estate deals than those investing the bare minimum.

 

Fundrise is also unique in that it offers a redemption program that allows investors to sell their shares back to Fundrise for a 1% fee if doing so within the typical 5-year hold period. This appeals to investors looking for flexibility or as a means of otherwise preserving liquidity.

 

This model has proven very successful for Fundrise and its investors. Since its inception in 2017, the annual returns of Fundrise client accounts was 5.42% - a marked increase from Public REITs (4.34%) and the S&P 500 (2.17%) during the same period.

Why Private Equity Real Estate Syndication Platforms?

 

Online real estate syndication platforms appeal to both sponsors and investors alike for several reasons:

 


Ability to raise capital from a wider, more diverse audience.

 

Until the advent of the 2012 JOBS Act, real estate sponsors looking to raise debt or equity for their commercial real estate projects would have to pound the pavement looking for prospective investors. They would have to take meeting after meeting, spending countless hours in board rooms and wining and dining investors as part of the sales process.

 

That process has now been streamlined and can be done entirely online, saving sponsors significant time and money. By raising capital using an online real estate syndication platform, sponsors can use various marketing and advertising techniques to get in front of hundreds of thousands of investors from all over the world.

 

Access to institutional-quality real estate.

 

Real estate syndication platforms have opened the door to institutional-quality real estate deals that individual investors would not otherwise be able to access. This is largely due to low investment minimums. Whereas sponsors raising capital through traditional means may require a minimum investment of $100,000 or even $250,000 per deal, most platforms feature investment opportunities for those willing to invest as little as $5,000 or $10,000 apiece.

 

By lowering the minimum investment threshold, sponsors have the ability to raise the same amount of money—but from more individuals, with those individuals having access to institutional-quality deals for the first time.

 

Ability to “shop” around for commercial real estate deals.


Those who have invested in private equity real estate have historically done so on an ad-hoc basis. A friend or family member might introduce them to a real estate sponsor who is actively raising capital for a syndication or fund. These opportunities are generally few and far between, and do not allow investors to compare one opportunity to the next.

 

Real estate syndication platforms bring a new transparency to the commercial real estate industry. Individual investors can peruse each platform, evaluating deals put forth by numerous sponsors and across geographies and product types. This allows investors to be more informed and take greater control over their real estate investment decisions.

 

Strong investment returns.


Another reason investors are drawn to real estate syndication platforms is that these deals, on average, have returns ranging between 11% to 15% per year. Of course, there is risk associated with any real estate syndication.

 

The success of any deal will depend on the sponsor’s ability to execute their intended business plan, and accordingly, investors will want to do their due diligence on each sponsor prior to investing. That said, the deals that have closed on these major syndication platforms to date have generally been able to distribute double-digit returns to their investors.

Is Real Estate Investing a Good Option for You?

 

Investing in commercial real estate is a great way for an individual to diversify their portfolios. Too often, investors become overly concentrated in a mix of traditional stocks, bonds and equities. The ability to invest in real estate securities—online or otherwise—is an excellent way for investors to add commercial real estate to their portfolios. Those looking to preserve liquidity may opt to invest in an eREIT whereas those with a longer-term mindset may want to consider investing with a sponsor directly through a syndication or fund.

 

In either case, online real estate syndication platforms have made investing in commercial real estate easier and more transparent than ever.

 

Conclusion

 

The commercial real estate “crowdfunding” marketplace is growing with remarkable speed. There are new platforms emerging each year in an effort to take away market share from those who are more established. As lenders become more comfortable with these platforms, it is expected that more sponsors will utilize them as a way of raising both debt and equity for their syndications.

 

That said, determining which platform is “best” is no easy task. Each offers something slightly different. The five platforms featured here today are among the best real estate syndication platforms in 2022 and are among those any prospective sponsor or investor will want to consider.

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