Detailed EquityMultiple Review 2020: crowdfunding real estate investment with EquityMultiple
Our EquityMultiple Review - Updated 30th June 2020
Equity Multiple specializes in commercial real estate debt and equity.
It's one of the few places to co-invest in a project in the form of crowdfunding. This offers them real "skin in the game" and one of the industry's leading opportunities to do the utmost due diligence. They were also one of the first places to announce their success on several (though not all) deals. Now they're going to get kudos for transparency.
On the other hand, they require a double layer of fees and profit shares compared with other platforms. This can make it tough for some investors to swallow their deals over rival options. Also, the volume is very small.
How Does Equity Multiple Work?
Equity Multiple outlets negotiate with third party partners, and then make them available on their web. Thus, it doesn't produce its own deals, but rather it operates like a crowdfunding version of Craigslist.
A lot of larger sites of this model charge the user nothing, but Equity Multiple charges extra fees and profit splits. To certain investors, that may be troublesome.
Pros and Cons of EquityMultiple
Access to commercial real estate investments.
Possible high rates of return.
Only open to accredited investors.
High investment minimum.
Complex fee structure that varies by investment.
Equity Multiple has a huge advantage over nearly any other rival. It's one of the few places that wants to co-invest in every venture. This offers them the real "skin in the game" and the ultimate opportunity to do the fullest due diligence. Note: The organization does not co-invest directly, but states that every transaction has been invested in by the principals of Mission Capital, which is seen as an extension of their senior leadership.
In addition, since 2017, they have received accolades from us as one of the first sites to publicly disclose their (partial) performance information in quarterly updates. In January 2019, this was modified to demonstrate the success of their concluded deals at the point of their completed deals.
A lot of their offers are in the pipeline and are not mentioned. So I'd love to see them build on this by releasing process deals as well (showing if they're doing proforma, etc.). Even the bad offers of the sponsor will be in this category. It would also be very useful to be able to see this with complete transparency in knowing the consistency of previous learning. They might consider this in the future.
On the other side, they charge a double layer of fees and profit splits compared with other sites. Many sites with a similar model have no charges for the buyer. It will significantly lessen the value the investors receives in the end relative to other alternative options. That alone can make it tough for some investors to embrace using the platform.
Their volume of investment is also very small. On the one hand, I want the platform I use to be pragmatic and not to underwrite poor offers. On the other hand, I can't really rate the site highly if it doesn't have a lot of volume for people to actually invest in. I assume that the business will find a way to boost this in the future.
Is Investing In Equity Multiple Legal?
Equity Multiple tends to be marketed to buyers under 506B, which may mean that it is not open to non-accredited investors. If so, prospective investors will need to go through a screening process before they can see the available investments.
Let's say it is 506b: it does not ask of investors to confirm (and periodically update) their accredited status as 506c deals do.
What does an Equity Multiple deal look like?
Here's my step-by-step due-diligence on a potential Equity Multiple investment. So this may or may not be a traditional investment. I'm a really cautious investor, so anything too dangerous for me might be the right match for someone else who's more risky in their approach. I'm not a financial advisor, a lawyer or an accountant. So this is just my own opinion, and please do check with your own financial advisors before making any financial decisions.
This is an investment in an apartment complex in Jacksonville. It is pitched as having already substantial place cash flow, strong occupancy (96 per cent) and past rental rises of 11 percent a year as a result of renovations and upgrades. This is expected to have 22.06 percent of IRR and 2.4x multiple over five years.
The first step is to make sure that the asset class and the strategy make sense for my portfolio. Let's say it makes sense to me, and dive in.
Sponsor: I think we're late in the process and I am worried about a potential slowdown. If we have a bad one, I don't want a newbie sponsor to learn costly lessons with my money. So in a traditional asset class like this, I need full estate cycle expertise in the same approach (in this case, value-added multi-family) with no investor money wasted.
To assess this, I'm looking at the full sponsor track record that shows both their performed and unrealized transactions. Often a sponsor is going to have a great-looking realized track record, and a lot of problems hidden in the unrealized (because they're unable to sell). So I want the sponsor to give me the whole gist.
Unlike several other platforms, Equity Multiple does not have enough detail from the sponsor to be able to recognize and gauge the risk. In the future, I would like to see them have this.
If I were interested in this deal, I'd ask them for a full track record. In case they have complete understanding of the real estate process and no money wasted, I will see it as a positive indication. If not, it would be a red flag and a dealbreaker for me. A more active investor, or someone who just loves this deal or sponsor might be fine with the track record.
Skin in the Game: As a cautious investor, I want the sponsor to co-invest 5-10 percent to account for the fact that the promoter system allows the sponsor to push the risk envelope. (I would consider less if they are a new sponsor: as long as they have a lot of money).
It is critical that the co-investment is in cash and on the same terms as the investor. If not, the dissuasive effect is not as strong. Also, sometimes the deal is shown to have high skin of the game, but when you find out that some or all of it is provided by partners who do not have general partner control of the partnership. Non-controlling partners have little impact on the deal, and that part of the so-called "coinvestment" will be overlooked for the purposes of this study.
The sponsor's equity is 23 percent. This is really high, and in many cases this is so because some of that money is brought in by a non-controlling partner or is not completely in cash or on the same terms as the investor. And if someone's involved in this deal, I'd suggest finding out about it. If thereafter, the coinvestment is at least 5%, I will find it to be a good indicator.
A more proactive investor would choose lower skin in the game, to allow the sponsor to drive the expected returns as high as possible.
Debt: To reduce the risk of default and to lose 100% of the investment, I like to see prudent debt consumption at 65 percent or less of LTV. I would want to see them reduce the risk of refinancing by acquiring long-term loans for 7 to 10 years. And eventually, I want them to reduce interest rate pressure by locking in a low fixed interest rate.
This is at 65 percent of the loan rate, which is a positive indication to me. Someone who is more competitive may like to have a greater advantage so that there is a better anticipated gain.
The interest rate is set at 4.6 percent, which is another outstanding indicator for me. Someone who believes interest rates are going to decline over the period can see that as negative.
It's not transparent to me how long the loan is going to last. If the loan lasts at least seven years, that's perfect time, too. Anything less would have been a yellow or a red flag for me. Someone who is more risk-prone or feels the refinancing risk is small would be okay with a shorter-term loan.
The property management fee is 3%. The sale fee is 2% of the asset management charge. Each of these are in average terms, so to me they're okay.
On top of this there is an equity multiple origination fee, which is a 4 percent one-time charge. This is particularly unusual with other approved services that typically do not charge such a fee. The investor who goes ahead with it starts off in the 4 percent hole.
There is a 1 percent extra equity multiple recurring operating fee, too. Another way to look at this is that the asset management fees are together 3 percent, while the average is 1.5-2 percent. This is highly noncompetitive.
For me, these two things combined are deal breakers, because there are practically hundreds of sponsors a month with offers that are much better options. Someone who truly likes the sponsor and the deal would feel differently.
The waterfall is a double cascade.
The sponsor has a 7 percent preferred return, which is on average between 5 and 8 percent and it is absolutely fine to me. There seems to be no return on investments after that. This isn't super impressive compared to some of the other sponsors. Then they take their share with 70 percent the investor and 30 percent the sponsor. This is not quite competitive, as the usual split gives the investor 75 percent to 85 percent. Personally, I would have to really love this offer and the sponsor to embrace these noncompetitive terms.
Then there's another catch. It's really rare for another hand to snatch money from a pot like this before the investor gets it. There seems to be no preferred return in this waterfall (very noncompetitive, as there is usually a 5 to 8 percent preferred return). Then there's a return of capital tier that's pretty normal and nice to see. The next tier is 90 percent investor/10 percent EM up to 70 percent IRR. And then the next point is 85 percent the investor/15 percent the EM.
With the two waterfalls together, it's hard for me to think of another offer I've seen lately that is so noncompetitive. The investor will browse through hundreds of offers on other sites, such as CrowdStreet and Real Crowd, and never see a double charging situation like this.
For me personally: I don't see any need to invest in a offer like this because there are too many others to pick from (but don't put investors through this double wringer). Someone who truly likes this contract and the sponsor may be all right with this.
If the investment passed all of my initial tests, I would have went deeper to test the sponsor, the property itself, the estimates, etc.
EquityMultiple is a place to learn if you want to invest in commercial real estate, but you don't have the resources – or money – to do so on your own.
The company provides developers with ventures that have been thoroughly audited by their industry-professional team. Their fees are fair, they are open about costs, and you can be assured that the business is fully funded and stable. Besides, it offers day-to-day buyers, including you and me, a chance to tap into the commercial real estate business that we otherwise wouldn't be able to do individually.
Equity Multiple main features and highlights
- Commercial Real Estate
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