Investments

How Does Crowdstreet Work

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

CrowdStreet is an online marketplace where authorized investors may purchase real estate. Diversified funds and vehicles that hold multiple assets in a single package, individual deals that offer more granular exposure to specific geographic markets and properties, and tailored portfolios built and managed by seasoned real estate investment professionals are the three main ways investors can gain access to the commercial real estate market.

CrowdStreet’s returns are competitive with market benchmarks such as the S&P 500 stock index, but past performance is not indicative of future outcomes.

Since its start, CrowdStreet’s marketplace investments have generated an average annualized internal rate of return (IRR) of 18.5%, as reported by the site itself (as of early 2022). Since CrowdStreet’s inception in 2014, the S&P 500 has only twice (in 2017 and 2019) outperformed that rate of return, as reported by Macro Trends.

Using CrowdStreet, you may diversify your holdings and obtain access to a large and potentially lucrative asset class. If you’re interested in learning more about CrowdStreet and if it might be a good fit for you, keep reading to find out how the platform functions, how to build your CrowdStreet portfolio with investment opportunities available on the CrowdStreet Marketplace, and how to evaluate investment opportunities.

Deal Types and Investment Options on CrowdStreet

Debt, mezzanine debt, equity, preferred equity, and real estate investment trusts are just some of the commercial real estate deal types listed on the CrowdStreet Marketplace (REITs). Investing may be broken down into four distinct but interrelated risk levels: core, core-plus, value-add, and opportunistic.

CrowdStreet provides its customers with three separate investing options: diversified funds and vehicles, individual deals, and customized portfolios.

CrowdStreet Offers Various Deal Types

On the CrowdStreet Marketplace, investors may choose from five various types of real estate deals:

  • A real estate investment trust (REIT). REIT is a corporation that invests in real estate through direct purchases, the purchase of existing mortgages, and the provision of loans to real estate owners and developers.
  • Equity. Property developers and owners frequently incur debt to lower the amount of their own money (equity) required to participate in a transaction. In the case of bankruptcy or debt restructuring, issuers (lenders) of “senior debt,” such as a first mortgage, have precedence for repayment and are reimbursed before issuers of junior debt, such as mezzanine debt.
  • Mezzanine debt is subordinate to senior debt but subordinate to equity investments. Mezzanine lenders are reimbursed after senior loan issuers and before equity investors in the case of failure or bankruptcy.
  • Investors in common equity have ownership rights in provided assets or property portfolios. The value of their investment fluctuates in proportion to the value of the underlying asset or assets they possess.
  • Preferred Equity. When it comes to cash flow dividends, preferred shareholders are given precedence over regular shareholders.

Options for CrowdStreet Investment

Investors who want to take advantage of CrowdStreet’s extensive real estate investing knowledge while spending as little time as possible reviewing individual offers can do so using two of CrowdStreet’s three investment choices. The former is designed for those who want to learn as much as possible about a single investment opportunity on CrowdStreet.

Diversified Vehicles and Funds

The real estate funds (portfolios) in a blended portfolio are managed by experts and provide access to a variety of markets with a single investment. There are two types available:

  • Funds with a Single Donor. These are managed by a particular real estate company and provide access to the asset classes (such as multifamily or retail properties) or regions in which that company has expertise.
  • Funds Raised Through Crowdsourcing. Real estate experts at CrowdStreet create and oversee these multisponsor (multifirm) funds, which may provide greater diversification in terms of location or kind of property owned.

Individual Deals

Like do-it-yourself equities investors who select individual stocks and exchange-traded funds (ETFs) to build a fully customized, diversified investment portfolio, CrowdStreet investors who wish to communicate directly with sponsors and carefully choose the specific opportunities in which they invest will benefit from this type of investment.

On the CrowdStreet Marketplace, investors may find screened real estate transactions. Rather than going via CrowdStreet as a go-between, investors and deal sponsors can speak directly and, if the investor decides to invest, send money directly to the deal sponsor.
Minimum investments for individual agreements are considerably greater than those for investment funds, frequently reaching $25,000.

Tailored Portfolio

All CrowdStreet participants with a minimum beginning balance of $250,000 are eligible to participate in this managed investment option. An investor’s goals and risk tolerance are discussed in depth during a first consultation with a specialized CrowdStreet adviser, whose role it is to create a diversified portfolio that fits the investor’s unique needs.

CrowdStreet Advisors, LLC, a wholly-owned company, is responsible for delivering CrowdStreet’s customized portfolio service (which it refers to as a Private Managed Account service).

CrowdStreet Deal Risk Profiles

The following are CrowdStreet’s four deal risk profiles, listed in escalating order of risk and potential reward. Keep in mind that there is always the potential for loss when investing in property.

Core Deals

These holdings provide regular and consistent income to investors. Full occupancy is the norm for these homes, which are often found in booming real estate areas and require no maintenance. For that reason, they have the safest profile out of the four possible options. CrowdStreet sees a minuscule percentage of the entire deal flow as core deals.

Core-Plus Transactions

Investment properties that are primarily occupied but may soon require repairs or renovations will have a portion of their monthly revenue set aside for these costs. Core-Plus is the most popular option in the CrowdStreet Marketplace and has an even lower risk profile than Core.

Value-Add Deals

Some major upkeep is necessary before these assets can provide their full potential income. As a result, there is a greater potential for loss, but also a greater potential for gain. Nearly half of the deal volume on the CrowdStreet Marketplace has been value-add transactions.

Deals that are opportunistic

These investments have the greatest potential for gain but also the greatest potential for loss on the CrowdStreet Marketplace. They are often brand-new constructions that have a difficult business plan and little to no cash flow in the beginning. They are responsible for around a third of all deals completed on CrowdStreet.

How to Begin Investing on CrowdStreet

The onboarding procedure for new investors on CrowdStreet consists of only three easy steps. Follow these instructions to activate your CrowdStreet account and start reviewing deals and making offers as soon as you’re able to.

  1. Accreditation Confirmation

Investment opportunities on CrowdStreet are restricted to “accredited investors,” as defined by the Securities and Exchange Commission (SEC):

  • Those who, individually or together, have a net worth of above $1 million
  • Those who have made over $200,000 (or $300,000 jointly) in two of the past three years and can reasonably anticipate continuing to continue making that much or more in the future are considered high earners.
  • Particularly private organizations with assets over $5 million
  • In certain cases, private companies will only accept investments from those whose owners or directors have reached the highest level of investor
  • The services of some licensed brokers and advisors

Investors who seek to employ certain accrediting criteria will be required to produce documentation of their income, assets, and obligations, or professional certification.

  1. Participate in a New Investor Orientation Session

After their identities have been confirmed, prospective investors might consider participating in an online orientation. On CrowdStreet, you may schedule one of these weekly 50-minute meetings.

  1. Form an Investing Entity

Every new investor on CrowdStreet is encouraged to form an investment entity before making their first offer. Aside from investing on a personal level (with one’s own money), investors can also do so via:

  • Self-directed IRAs
  • Trusts
  • LLCs

Bottom Line

If you’re an accredited investor looking to diversify your portfolio into commercial real estate, CrowdStreet is a great option. There is a wide variety of multifamily, hotel, retail, industrial, and office properties, as well as deal formats, available on the CrowdStreet Marketplace. 

CrowdStreet has completed over 520 commercial real estate transactions, with over 50 of those transactions being completely realized (sold). Although there is no guarantee of future returns, investments made through CrowdStreet have shown a healthy rate of return (around 18% IRR as of early 2022).

Of course, much like any other investment, commercial real estate carries inherent dangers that CrowdStreet’s due diligence can’t entirely fend against. It is recommended that you consult a trusted financial advisor before beginning to invest on CrowdStreet to ensure that the investment options accessible there are suitable for your goals, current financial situation, and comfort level with risk.

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