Crowdsourcing knowledge is a good idea if you want to invest in commercial real estate. Commercial real estate is one of my favorite asset classes to build wealth post the pandemic.
I particularly like residential and industrial properties in the Sunbelt, where Fundrise mainly invests. Office properties in coastal cities look like good value as well after huge price declines due to work-from-home.
I've got an idea that could be great for an ongoing series. Given Financial Samurai is an established site with a large community of investment savvy readers from all over the U.S. and the world, why not crowdsource our knowledge to see if we can make better investment decisions!
Real estate is my favorite asset class to build wealth long term because it is simple to understand, tangible, and rides the inflation wave. But buying physical real estate requires a large downpayment, ongoing property taxes, maintenance, tenant headaches, and often takes up a dangerously large percentage of one's overall net worth.
Crowdsourcing Knowledge To Invest In Real Estate
Given I already have four physical properties, I'd like to diversify and reduce risk by surgically investing smaller amounts of capital in properties with higher rental yields from different parts of the country.
San Francisco cap rates (net rental yields), for example, are only in the 2% – 4% range. This is where real estate crowdsourcing platforms come in. You can easily invest smaller amounts in different areas of the country with potentially much higher returns without betting the farm.
I have several hundred thousand dollars coming due from an expiring CD. Before then, I want to get comfortable with real estate crowdfunding in commercial real estate.
My goals are: 1) geographic diversification, 2) beating a 4% yield in a low risk way, and 3) investing in commercial real estate given all my properties are residential. Let's see what crowdsourcing knowledge can do.
Crowdsourcing Knowledge: Suburban Philadelphia Class-A Office Conshohocken, PA
Here's a current offering RealtyShares e-mailed to me. It's a Class-A office building with 30,000+ square feet about 14 miles away from Philadelphia. With a target 18% internal rate of return (annual return over 5-year life of investment), I'm salivating like Pavlov's Dog wanting to invest in this commercial real estate project. But I know nothing about Conshohocken, PA real estate and need help from those of you living in the region and from those who've invested in commercial real estate before.
Pros
* Commercial property built in 2000 with a ~30% vacant rate for upside rental income potential.
* $172/square foot potential purchase price.
* Stronger than average demographics (see below).
* RealtyShares investors are entitled to a 10.0% IRR (including return of capital) before the Sponsor (real estate developer) receives adjusted economics. Furthermore, the Sponsor's position is to be at 16.4% of the required equity for this project, which includes the conversion of its 2% acquisition fee into part of its equity interest. Proceeds above a 10% internal rate of return are to be split 75% to deal-level investors and 25% to the Sponsor, until such investors have earned a 16% annualized internal rate of return. Proceeds above a 16% internal rate of return are to be split 60% to deal-level investors and 40% to the Sponsor. In other words, there's incentive for the Sponsor to maximize returns.
* Quarterly dividend payment.
* Haverford Properties, the sponsor, has participated in several billion dollars in transactions and currently own five projects that collectively represent more than $300 million in assets under management since 2012.
Cons
* 5 year term. Might be difficult for some people to lock up cash for so long. I'm coming from a position where I locked up cash in a 7-year CD, so 5 years is in the ballpark.
* $10,000 minimum versus $5,000 minimum for other deals. I'd ideally like to invest in two $5,000 deals to test things out, although one good $10,000 deal would make things easier to track and write about.
* Nothing is a guarantee. The 18% IRR is just a target. The sponsor might not be able to fill the vacancies with high quality tenants. We could enter a recession post election. The sponsor might not be able to sell as planned in five years etc. I generally like to cut target IRRs in half, and treat anything higher as gravy. People tend to overpromise, underdeliver all the time when it comes to raising capital.
* Was targeting Midwest and Southern properties, but Conshohocken seems similarly cheap.
* Haverford Properties has only been investing since 2012, although the LinkedIn bio of the co-founder, Charles Houder says he's been at Haverford Properties since 2010. Perhaps there was no activity the first two years when he first started. At least Charles has been in the real estate investment arena since 2001, working for other firms.
Here is the official overview posted on RealtyShares that comes from Haverford Properties.
| Property Summary |
|---|
| 375 East Elm Street, (the “Property”) is a multi-tenanted Class-A office building on 2.7-acres in the Conshohocken submarket of Philadelphia, PA. The property was developed in 2000 and currently configured with six separate suites, five of which are expected be occupied at close. Of the approximately 9,000 square feet that will be vacant, it can be broken up into smaller suites or leased as a whole depending on tenant requirements. The tenants are generally characterized as professional type office users and include attorney’s and medical offices among others. Blended average in-place lease term and blended average in-place lease rate are 2.9 years and $23.80 PSF, respectively.
The physical condition of the building is reported to be good and the suites are in leasable condition per the third-party property inspection and the Sponsor’s feedback. The $25 PSF in tenant improvements budgeted for two new leases (6,042 sf assumed after 6 months and 3,021 sf after 15 months) is to most likely go to customizing the spaces and cosmetic upgrades. The $5 PSF budgeted for renewals (70% probability) is to either serve as incentive capital or for moderate upgrades. Please refer to the Photos tab for pictures of the crowdsourcing Property. |
| Property Details | |
|---|---|
| Year Built | 2000 |
| Building Square Footage | 30,266 Square Feet |
| Buildings/Floors | 1 Building/2 Stories |
| Parking | 128 Open Asphalt Spaces |
| Parking Ratio | 4.2 spaces per 1,000 square feet |
Investment Summary
RealtyShares invites its investors to participate in a common equity investment relating to the acquisition of a 30,266 square foot Class-A office building (the “Property”) located at 375 East Elm Street in downtown Conshohocken, a suburb in the Philadelphia-Camden-Wilmington Metropolitan Statistical Area (“MSA”). Developed in 2000, the Property is located approximately 14-miles northwest of Philadelphia’s Central Business District (“CBD”). Conshohocken is one of Philadephia's most vibrant and successful sub-markets for suburban office properties, and is supported by excellent residential demographics and strong demand for office inventory (see Investment Highlights below). The 2-story multi-tenanted building is expected to be approximately 30% vacant upon acquisition, presenting the Sponsor with the opportunity to substantially grow revenue by leasing space at market rates and to negotiate market rental rates with existing tenants as their leases come up for renewal; most these tenants are currently paying below market rates.
Haverford Properties (“Haverford” or the “Sponsor”) is acquiring the Property directly from seller at a potentially attractive basis of $172 per square foot. The Property was identified by the Sponsor on an off-market basis and is to relieve the Seller of a negative cash flow situation caused by the recent vacancy of a tenant. The expected new loan facility is to provide for 18-months of interest-only payments (no amortization), which is designed to reduce the initial debt service burden on the Sponsor so that it has sufficient time needed to stabilize the Property.
The Sponsor is a diversified real estate investment and development firm based outside of Philadelphia, Pennsylvania. The Sponsor is involved in all aspects of real estate development and investment, including, but not limited to, acquisition, entitlement and project construction, management, asset management, property management, accounting, and underwriting. As reported by the Sponsor, it has participated in several billion dollars in transactions and currently own five projects that collectively represent more than $300 million in assets under management.
Please note that this investment is scheduled to close in September and is to most likely be debited late August/ early September.
| Investment Highlights and Risk Mitigants |
|---|
|
| The following table compares the demographics in the area with state and country demographics: | ||||
| 3-Mile Radius | Pennsylvania | USA | ||
|---|---|---|---|---|
| 2016 Median Household Income (1) | $92,400 | $53,805 | $54,149 | |
| 2016 Education: Bachelor's Degree (1) | 31.7% | 17.9% | 18.8% | |
| 2016 Education: Graduate/Professional Degree (1) | 26.9% | 11.7% | 11.6% | |
| 2016 Unemployment Rate (1) | 4.5% | 5.9% | 5.9% | |
| White Collar Workforce (1) | 78.0% | 60.4% | 60.5% | |
(1) ESRI
|
Management Biographies
* Don't see world class institutions like The College of William & Mary and UC Berkeley, but at least both have graduate degrees and a decent amount of real estate investing experience. William & Mary and Cal are my alma maters, so I'm just having a little fun.
Investment Deal / Use Of Proceeds
* Nice to see $356,633 in reserves and $45,000 in working capital. It's interesting to see that despite a purchase price of $5,200,000, $700,000 more is set aside (13.5%) for various reasons.
Sources Of Funding For The Office Building
* It's always good to see a Sponsor have skin in the game. However, $267,433 is only 4.5% of the total sources of funding, despite being 16.4% of the equity. From a RealtyShares investor's point of view, you want the Sponsor to put up even more capital. My preference is for 10% of the capital or greater.
Blue Sky Exit Assumption
* I still can't believe it will cost a 5% commission in five years to sell a property ($365,339/$7,306,787). That seems outrageous given many of these deals are directly negotiated. Hopefully there is 1-2% upside in terms of commission savings here.
If You Invested $50,000 In This Deal
* If the deal pans out, an impressive 51% of your initial investment will be paid out in quarterly interest payments for the life of the deal. The chart also states that if you invest $50,000, you will end up with profits of $54,098 over a five year period ($104,098 total proceeds after initial capital is returned). That's a 108% total return if all works out, or 18% annual return. But again, things tend to never work out as planned, which is why I cut my return assumptions in half to be more conservative.
INVEST OR PASS?
Before I invested, I'd love to get your feedback, especially if you are a real estate crowdsourcing veteran or live in the PA area. Every potential investment always looks good when you read the marketing material. But as we all know, not every investment turns out great hence the desire to crowdsource knowledge.
There are a lot of deals on RealtyShares that already say “join the waitlist.” Further, as I'm focusing on commercial real estate instead of single or multi-family home properties, supply is even scarcer. Please feel free to be very critical of this potential investment. It's always good to know all the potential red flags before deploying any capital. If there are any other investments on the platform that look intriguing, let us know!
Crowdsourcing Updates
Update 9/28/2016 on crowdsourcing: The deal closed and I decided to invest $10,000 to see how things go and familiarize myself with the RealtyShares platform.
Update 9/20/2018 on crowdsourcing: After selling my SF rental house for $2,740,000 in 2017, I decided to reinvest $550,000 of the $1,800,000 in proceeds in RealtyShares' Domestic Equity Fund. So far, the fund is doing well and I'm targeting a 15% IRR.
Update 11/2018 on crowdsourcing: Unfortunately, RealtyShares is no longer accepting new investors. I'd look into Fundrise instead, as they are awesome and allow for non-accredited investors to invest in real estate crowdfunding.
Big Update 7/2019 on crowdsourcing:
IIRR Management Services, LLC (IRM) has taken over the Asset Management and Fund Admin functions of this investment.
The sponsor indicated that the building was 87.7% leased with 3,725 square feet available as of Q1 2019. This space is currently being marketed and they anticipate leasing the space in the first quarter of 2019. Beacon Commercial Real Estate, their leasing, and management company continue to market any spaces that come available.
The sponsor is making to Realty Shares 248, LLC for the Q12019 a distribution payment of 2.0%. To date, inclusive of the current distribution, Realty Shares 248, LLC has received a total return of 14.5% from the sponsor. Once the sponsor submits a payment to IRM, please allow 5-7 business days for ACH disbursements to be processed by us.
For the Period of January 1, 2019, through March 31, 2019, total rental income was $179,059 with total operating expenses of $62,478 resulting in a net income of $116,581 for this property.
According to our findings, this asset is currently performing according to the original business plan. This property has been identified as a Tier 1 asset. Distributions payments from this investment have been distributed in accordance with the original business plan. The sponsor in this property is responsive to our communications. IRM believes that the sponsor will continue to act in the best interests of our investors.
Please continue to monitor the Investor Dashboard for updates, and be sure to keep your bank account information up-to-date in order for our Fund Administrators to process payments accurately and avoid any delays or missed payments.
Check Out Fundrise
Invest In A Diversified Real Estate Crowdsourcing Fund
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing in commercial real estate enables you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.
Another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside.
If you want to get more surgical in your private real estate investments, Crowdstreet is a strong solution. I've met the people at Crowdstreet on two separate occasions and came away impressed with their risk-management and product offerings.
Crowdsourcing Knowledge For A Commercial Real Estate Investment is a Financial Samurai original post.
Related: Shh, Private Real Estate Crowdfunding Deals Are Not To Be Publicly Discussed
Sam,
Saw this article just today. Do you have any thoughts or concerns about it? https://therealdeal.com/2018/11/07/crowdfunding-startup-realtyshares-to-cease-investing-faces-mass-layoffs/
Yeah, really sad and surprised. Here are my thoughts in the FS Forums.
Okay — very intrigued by Todd’s posts and knowledge. Sam, can we get a Todd guest post going?!?! Todd, you in?
This is just a general comment, but it may be worth it. I don’t necessarily see the need for crowdsourcing knowledge about purchasing a very small amount of an institutional-quality real estate asset (other than helping the people reading the blog post and helping the egos of the people posting – possibly me?). That’s similar to engaging in a very long and detailed conversation about putting $10k into bonds. You’re probably not gonna make a ton of money or lose a ton of money. The ROI on your time to discuss the issue is nill. At best, maybe you increase your portfolio percentage by 1/8 of a percent? The worse part is the underwriting (essentially seeing if the Class A property is a good investment) is exponentially longer and more complex. Notice the “CFA” designation behind the co-founder’s name? They most certainly used Argus software and inserted their assumptions that take most people years of experience to truly understand. In addition, they probably have someone that knows the local market very well and has pulled all the demographics, construction starts, lease expirations of office tenants in competing buildings, and trends in the local office market (absorption, vacancy rates, etc). I think the crowdsourcing of knowledge would be better served for the company purchasing the asset as some kind of way to find out some inside knowledge about how to either add value to the project or notify them of a potential downfall. Crowdsourcing knowledge for the guy investing a small amount seems hard for me to see value.
However, the reason I read this blog post is because I work in commercial real estate and I thought you’d be crowdsourcing knowledge on smaller private placements or syndications from smaller investors. I think that’s a very interesting idea. I’ve seen limited partners in syndications make 25% – 30% on consecutive deals and the sponsor / general partner making over 100%. I was also in the industry during the downturn and had an incredibly wealthy client with three shopping centers anchored by Circuit City. First time I’ve seen a grown man weep after losing nearly everything. (FYI that’s also when I learned the importance of what’s called a co-tenancy clause held by nearly every co-anchor like Office Depot in Neighborhood and Regional Centers. Once the anchor goes dark, the co-anchor’s rent goes way down…bad news). So it’s not a boy’s game, but with the crowdsourcing of knowledge and finding an investor group with a relatively small minimum investment and good track record, the idea seems to make more sense. In my opinion, that’s a group that focuses on 20+ unit multifamily or 15,000sf+ retail / commercial. Groups that deal with smaller properties may have good track records but the lack of understanding macro-economic signs that the tide is turning (of course I’m speaking in generalities here). The guys that deal with Class A properties have mostly had a job their entire life. They’re probably the most intellectual guys in the room, but they’ll be the first to admit their primary goal is never to hit a home run, but to instead hit a single every time (which is great if that’s your goal!). This is a relatively small Class A asset, but judging by the amount owned by this group, they most certainly follow the same low-risk strategy of the big boys like Equity Office and Transwestern.
On a totally unrelated note, if you’re just looking for consistent returns and not so much worried about asset appreciation or tax-shielding the income, I think the best investments that provide excellent returns commensurate with the risk are notes secured by real estate. I happen to solely invest in these inside my IRA (two notes) and Roth IRA (one note) so the tax issue is still avoided/delayed for me, but it’s amazingly simple to find notes that pay 10%-12% with strong borrowers at ridiculously low LTV’s like 50%-60% and some even lower. Think about the last downturn and how much property values went down. Maybe some areas depreciated more than 40%, but not many, and if they did, most have recovered fairly quickly. So if the borrower doesn’t pay you, you take the property, and if it happens to be in the next worse downturn, maybe you have a property at exactly the current market value? Well, at least you can say you bought it at the bottom of the market ;-) I just think that’s the best risk/return for someone looking for consistent income. The biggest risk in notes (and only way I could see losing money on my investment other than outright fraud) is being sued by the borrower so I stay away from owner-occupied properties and hire a professional loan servicer. My opinion is younger investors should buy real estate for the capital appreciation & tax benefits and slowly build up a portfolio of notes (possibly inside tax protected vehicles) as they’re older so their cash flow is great for retirement. But hey, I’m an RE guy. I own no stocks or bonds.
The Financial Samurai is the annointed one with a more diverse and well-rounded (and many times extremely creative) understanding of how to compare two different asset classes. So take my comment with a grain of salt.
Sorry in advance if I was off topic or offended anyone here. Much longer response than I intended…
Hi Todd,
Thanks for sharing some ideas. I just love to learn, and get as thorough as possible before investing larger sums of money. I’ve started with $10,000, and plan to invest another $250,000 over the next 12 months. I like this space, like how they are forced to offer higher returns as rates have gone higher, and am a big fan of real estate in general. I just don’t want to buy another physical property anymore at my age and current portfolio.
I’m tired and want to simplify life!
Happy Holidays!
Sam
Todd,
What sources do you use to find notes paying 10-12% w/ LTV’s of 50%? All the crowdfunding notes don’t come close to that, unless you look at LTV for the value of a “to be finished” flip which is not really the same thing.
Hey Dave, with all due respect to Sam, I’d rather not change the direction of his posting, but I see them almost every day. I live in CA and I never calculate LTV as ARV…always current value. Not sure about other states. The best notes I find are phone calls from relationships with hard money lenders and a few guys who run funds that find something outside their scope, but there’s a very large lender out here that sends nearly a deal every day. If Sam’s OK with it, I’m happy to share the URL or maybe he can relay it to you.
One comment on the subject. I think crowdfunding for commercial real estate deals is a great idea. Those deals need enough money where the crowdfunding is solving a true problem so RE professionals see the value in it and enter that market…win-win. Even with P2P, I see the value of crowdfunding simply based on pure volume of people that want consumer debt (unfortunately). But with notes, I live in SoCal and constantly see notes as low as $100k – $200k. (BTW I think $100k is the minimum total note size to invest into considering the fixed costs of a trustee sale. Anything less and the fixed costs eat up the protected equity too quickly if it goes badly…in CA at least). If you don’t have or want to invest that much, it’s much better to find someone to split it with and know what you’re getting into, with the property, borrower and servicer. Look at this just from the worst-case risk standpoint: With CRE, the sponsor will own/control it unless the lender takes it and you lose everything. With P2P, you’ll get paid until you don’t…no collateral. But with notes, I think about downside as upside in many cases. I don’t loan to own, but I certainly don’t mind that scenario and I always underwrite that case before investing. So if it’s crowdfunding for notes, I’m assuming you’d be trusting the operation of a distressed asset (people don’t lose well-run properties to the lender) in the hands of a lender or a receiver, either of which will likely eat up that last little bit of upside through inefficiencies (lender) or exorbitant fees (receiver). You can do better yourself and if you have another beneficiary (partner) with you in the note, make sure you have an operating agreement outlining who’s in charge of making the decisions during servicing, default and after taking the asset back.
It all circles back to my belief that younger investors should focus on RE for appreciation and tax benefits, which will give them the experience to handle the notes if they go bad when they’re investing for cash flow later in life. And if they’re reading Financial Samurai the entire time, they’ll be ninjas with swords of cash.
Sam if you are ok giving Todd my email that would be great.
are you able to receive some of the tax benefits from the depreciation of the property?
Long time reader here who also loves real estate as an asset class. The amount of feedback and local knowledge your post has generated is very impressive and really speaks to the value of your reader base. I work in commercial real estate for a living and would vote no on this opportunity for the following reasons…
I think the target IRR is over inflated and the lack of sponsor equity in the deal scares me off. When you don’t know the market and are not able to complete the DD yourself my two requirements on a crowd funded real estate deal would be proven track record and market knowledge from the sponsor (seems to be true) and significant co-investment from sponsor which is not the case here.
Below are my Pros and Cons on the deal.
Pros
1) Below Replacement Cost – at $172 PSF this property would be purchased below replacement cost which somewhat shelters this investment from new development. Any new development would likely have a much higher cost basis and therefore would require higher rents for the deal to make sense and would maintain a higher yield if market rental rates were to drop.
2) Below Market Rent – Possible for cash flow growth by rolling expiries to market. The question here is what is market rent? I would want to see what recent new deals were done at and what inducements were made. $5 PSF might be a low assumption for renewals.
3) Opportunity for increased occupancy – buying this property with 30% vacancy allows for additional upside through lease up
Cons
1) Lack of Sponsor Investment – Very little equity from the GP with 39% of their equity coming from the Acquisition Fee. Even with the favourable hurdle rate the sponsor has very little to lose if this deal doesn’t work out.
2) Short Average Lease Term – with only 2.9 years of average term there is lots of lease turn over within the hold period which could lead to additional vacancy. Without being able to walk the building, talk to tenants, and understand the competitive properties this seems like a major risk to the cash flow due to the potential for increased vacancy and/or leasing costs.
3) Inflated Exit – Exit at $241 PSF seems somewhat high. Even if the property is 100% occupied the next investor would likely include a general vacancy allowance. Also when the property is sold in 5 years it will be 20 Years old and likely reaching an age that requires significant re-investment that the next buyer will likely include in their valuation.
This is a great article/thread. Not just informative, but insightful as well. I’m a novice (OK, wannabe) in commercial real estate so I can’t contribute anything there and aside from a couple of weekends and watching Trading Places about 50 times, know nothing about Philly. So if you think this comment is all take & no give, feel free to dump it and I won’t be upset. But you’ve been very generous in the spirit of gaining knowledge, so if I may, I’d like to piggy-back on this post.
We have a real estate investors meet-up group in St. Louis, mostly 2-4 unit up to maybe 24-unit residential apartments. We would LOVE to have someone with expertise about the ins & outs of investing (better yet, sponsoring) on these platforms come speak to us, preferably unaffiliated with the management of any specific platform. We could not fly you out, so if someone from the St. Louis area is out there reading, please come share what you’ve learned. Thanks.
One more thing. The good equity deals on RS are filled in no more than a few days. This one is taking longer, so one has to assume it is not as good as many of their other deals
I am active with RS and a few of the other portals. I saw this one and passed. Biggest reason is i am not too high on office buildings in general because of long term demographic trends of much less actual space per employee due to telecommuting etc.
i am familiar with philly and suburbs and I do agree with the poster who wondered how strong the office building market really is in the speciifc locale that this building is in. Its not KoP nor is it center city which are reakky the more eatablished markets
Long-time lurker posting for the first time. I live in Philadelphia, but commute to the suburbs for work. I think it’s important to consider a few items, and I’ll try to point a case towards the actual city, or a different part of the suburbs.
1. In terms of location, there are often geographic demarcations to be aware of. On a micro level, these could be train tracks or the highway. In some Philadelphia neighborhoods, you don’t want to live on “that side” of the tracks, for instance. On a broader level for metro Philadelphia, the demarcation is slightly less pronounced, but I believe it to be the Schuylkill River. North of the river can range from working class (Norristown) to upper middle class (Plymouth Meeting, Conshohocken) and recent college grads (Manayunk). Fine neighborhoods, no doubt, but there’s a stark contrast between those neighborhoods and the ones south of the river. Here we’re talking about old money, the 1% and the 0.1% of the population. This is also where many of PA’s top schools are. One only needs to drive by Harriton, Radnor, Lower Merion, etc, to see the wealth of the area. I recommend reading https://en.wikipedia.org/wiki/Philadelphia_Main_Line.
There are suburban office parks sprawled along the Main Line, which I could consider true Class A properties. Many locations with density along Route 30 are ideal. If you want to move further along to the west, there’s a bunch of office parks just off of 202 (Vanguard).
I have a few comments about transportation. Distance-wise, it’s not too far from the city, but as several folks have mentioned, I-76 is always a nightmare. I can’t overstate this enough. You’d think it’d only take 20 minutes from Conshohocken to the city, but that time can easily be doubled on a routine basis. So, sure, it has easy entry to the highway, but I wouldn’t count on it actually functioning as a “highway” outside of 6-11 AM, and 3-7 PM. This problem arises for all suburbs, though. For public transit, SEPTA regional rail, which is the most commonly used form of public transportation to get into/out of the city, commute times are similar. However, the Main Line has a crucial difference Conshohocken doesn’t: Amtrak, which will get you into the city almost twice as fast, at maybe $2 more in fare.
So, in terms of location, I believe the Main Line/KOP area to be superior to Conshohocken.
2. Geopolitical events: I foresee the KOP area developing more rapidly than Conshohocken. Aside from the massive KOP expansion, there’s a potential rail project in the works, which would seem to drive more foot traffic to the KOP area, through increased accessibility. Google KOP rail for some insight there. I don’t believe there will be an oversupply, either.
I haven’t mentioned Center City much yet, but a huge incentive for new development is present in the form of the 10-year tax abatement (suburbs don’t have this). The most famous beneficiary of this benefit is Comcast. Did you know that according to my rough calculations, for the duration of time (about 7 years) that skyscraper has been built, they’ve only paid approximately 700K in property taxes (or on average, 100K a year)? Now ask yourself – if you’re a business, why would you locate in the suburbs (at all), if you can enjoy this massive tax benefit in the city? While there’s no way to empirically prove it, anecdotally this has contributed to a boom in both residential and commercial construction. The most recent commercial corridor to take off has been the University City district, spurred by Penn Medicine’s expansions. When you’re in that area, you literally feel like you’re a different city, that’s 20 years more modern.
Excellent points. Seems like traffic is becoming a nightmare EVERYWHERE in the country. This demonstrates robust demographic growth outpacing public transportation growth. Traffic also shows a backstop for demand for housing and office space overall theoretically. Every time I sit in SF Bay Area traffic, to make myself feel better, I tell myself this must be good for company profits, which is good for company stock prices, which is good for landlords to raise rents, which is good for assets owners who will see their assets inflate.
If I didn’t focus on the positives of traffic, I might very well move to Montana, a beautiful place. I did the next logical thing was to move several miles west of city center to enjoy more peace and quiet since I no longer have a commute.
I do wonder about the structural demand for office space w/ more co-working space and more telecommuting. But it seems like the economy is so strong right now that the leakage is not enough to counteract the wave of new workers.
I almost laugh out loud when I read that commutes of 40 minutes are considered a nightmare in some communities. Having worked in Washington, DC, San Francisco, and L.A. I have heard of 3 hour commutes (each way) every day. People don’t realize how good they have it.
Hi Sam,
Why don’t you make a business trip there and follow up with it via a post – to invest or not invest? That way it’s business related and you can see firsthand, interview people, use other criteria. Seeing is believing!
But it’s in Philadelphia. If it was in Hawaii or in Vail during the winter that would be another story. :)
The whole point about the Internet and crowdsourcing is to lower the cost of knowledge and the cost of due diligence so one can make smaller investments more efficiently instead of going all in. Google Street view and Financial Samurai it is!
Sam, this may not be the direction you’d like to see this conversation head, but I’m curious about your alternatives to the above investment. Even with the fine collection of information, it is hard to evaluate this prospect in isolation.
On its own, I don’t think I would have much hesitation on this one if I were in your position.
I live in Philadelphia and think that Conshy is one of the better burbs for a city dweller. Pretty easy to get the train there. I have a friend who works at 101 Elm Street and it takes him about 20 minutes to get there from the north side of Center City. Some businesses move there to avoid Philadelphia Wage, BIRT & NPT taxes. The 5% transaction costs / commission probably includes transfer taxes which is why it’s higher than usual.
Thanks for posting this. I’m learning a lot from this post and comment. You are getting great feedback from local readers. 18% return sounds unreal in this environment.
Great insight and dialogue provoking questions. As I said before I’m not much for real estate investments so I can’t give much insight. I’m also not in the Philly area. However, wouldn’t such a large investment warrant a trip yourself to scope out the area and office building?
$10,000 is a pretty small investment for me actually. I was looking at buying a dream home with my parents for 300X that amount. https://www.financialsamurai.com/a-race-against-time-buying-a-dream-home-with-my-parents/
But yes, if the amount you plan on investing takes up a significant amount of your net worth, absolutely go out there and check the place out and do as much due diligence as possible.
If you end up investing in this equity deal, shouldn’t you be filing state taxes in Philly? Just to avoid the hassle of filing another state tax, I’d pass on it unless I am investing 100k+.
Pretty easy to do online. Just several clicks of a button w/ H&R Block and TurboTax. I’ll double check for you if you’d like.
You are buying shares in a company, not the real estate itself. The shares are classified as securities. I don’t think you would need to file a Pennsylvania return.
Look at Hailey Friedman’s comments. I am incorrect – even though these are securities, you or the company will pay income tax in Pennsylvania.
Sam,
Thanks for posting on this topic. The idea of crowdsourcing due diligence is brilliant!
A few comments on the property starting with my background. 1) I have been an active Realtyshares investor for the past couple of years primarily using a solo 401k account, 2) I look at public REITs as part of my day job, 3) I have been trying to invest in CRE for the past year or so with primary focus on shopping centers in the midwest area.
Regarding this property, I would not be in a rush to invest given that it has been sitting on Realtyshares website for more than a month – the amount they are trying to raise is not particularly high relative to previous commercial real estate deals – implies investors not particularly keen on this. I think the main reasons are a) long hold time of 5 years, b) office properties typically do poorly in a recession both from a lease as well as sale perspective vs multi family etc c) optimistic assumptions on their ability to lease existing vacancy, rent growth/year in their proforma, as well as the lease rate assumption for a vacancy which seems to be on the market for a while (see loopnet) – lease rate assumption is $25/sqft vs current market seems to be around $20, which is their most recent lease signed for similar sized space, d) relatively short duration lease with low credit quality tenants, e) you could easily end up with a flat to low single digit IRR for equity depending on the vacancy, rental growth (and not just half the IRR you are assuming in your conservative case) and even a negative IRR in a recession case.
I do like the economics in the deal which is more investor friendly – more typical for an experienced commercial team is to take 50% after the hurdle rate.
If you want to do more due diligence, best to talk to commercial leasing agents in the area – easy to sign up for a free account and get a list from loopnet. These agents usually have the best intel on the location, the specific class of real estate as well as realistic rental and vacancy assumptions. One such example is Joe on loopnet – . Disclaimer – I do not have any relation with loopnet or with Joe. The other issue we found while looking at CRE is how the tax basis and the real estate taxes change when you buy (a lot of times this can be passed on to the tenants depending on the lease, but need info on the leases to make sure). In this case, looks the property sold for $4.7mm in 2012 and about $4mm in 2011. So the bump up in taxes is 10% from prev purchase price which is manageable. We ran into situations where the property tax would double and was not fully reimbursable and was a deal killer for us.
There is plenty of question marks on this deal for me and not a fan of suburban office space, hence my decision to move on and spend time on other deals. I do think there is a high chance of recession in the next couple of years, definitely in the next 5 years, so I am more focused on single family debt for the solo 401k (less attractive for after tax dollars as interest is taxed at marginal rate) and multi family and neighborhood shopping centers which are more service oriented – for after tax investments.
Please keep up the good work.
Hi Ravi,
Thanks for all the feedback! I can see how investing in one’s portfolio can turn into a full-time job! For example, let’s say I have $500,000 to invest, and I plan to invest in 20, $25,000 projects. To do all that due diligence would take forever. No wonder why so many people are happily willing to pay 2% management fee and invest a fund with a team of people who look at deals full time w/ hopefully more expertise.
I think their 18% IRR target is simply just a target, and probably a marketing target. 8%-9% is what I’d realistically shoot for and expect.
Nice find on this property being bought for $4.7M in 2012. $5.2M, four years later doesn’t seem like a huge premium. If this was SF, the $4.7M would be worth $7M now.
I do agree the in a recession, suburbs get hit hardest. Maybe we can collectively ask for MORE concessions before coming in. For example, I create a Financial Samurai Syndicate in the amount of $500,000 that gets better terms. This happens all the time in private equity deals.
Any favorite public REITs you’d buy now given that’s your expertise?
thx,
Sam
Sam,
Agreed on the time consuming and often times frustrating nature of evaluating deals – I have spent probably 10 hrs/week for most of this year working with couple of other partners (all of us have full time jobs and one is based in midwest who does all our local diligence) looking at hundreds of operating memos and making offers on 10 and investing in 1 deal so far. Given the time we are spending, we are making bigger commitments and looking to have 5-10 properties rather than 20 that you are looking to do.
Regarding the price appreciation, 10% change in 4 years seems like a bargain, but as you well know, bay area laps Philly suburbs in job growth and rental growth of 10%/year vs flat to 1% growth/year in this philly sub market – I saw rents in the same $20-25/sqft for office space 4 years ago as well. Based on the other comments in this thread though, feels like this region is starting to revitalize, which would mean this opportunity might turn out better than expected.
The syndicate concept makes a lot of sense once you get some critical mass, as you do get much better terms (particularly get rid of the fees on fees as you well know).
On public REIT recommendations, I am not allowed to peddle investment advise. I do however broadly like the Tower and Self Storage REITs.
I am not sure if you have looked at RealtyMogul, given your commercial real estate focus. I have 1 investment with them and they have more CRE deals vs residential focus at RS. Unfortunately the minimums are also higher for the commercial deals, but both RS and RM have some flexibility on the minimums, particularly if you have invested in a lot of their deals (shhh.. you did not hear that from me). I have lot more exposure with RS having done 22 deals (mostly residential debt) with them so far with 10%+/year returns – which is my risk adjusted hurdle rate. It also helped that RS was local, and I met the CEO, who is a fellow Haas alum, a couple of times – having a personal relationship goes a long way to create trust in this nascent asset class. I believe you chose RS for a similar reason. I also saw that you went to Haas. Go Bears!
Cheers,
Ravi
My focus has been the property. Ravi nailed the problems with the market, the product type and the specific financial projections. A recession at the five year point is a good possibility. This property could easily drop to 50 percent occupancy or less at $20.00 FSG or less (not including concessions), and sell for $3MM in five years in a recessionary environment.
Did not see the for lease info on LoopNet. There was space available in 2014 when Google drove by. The deal is probably more investor friendly to make up for some of the property’s shortcomings.
I voted no after reading the post and all the comments. I think the projections are overly optimisitic especially considering the tenant vacancy is at a 3 year low. I think the markets are going to be unstable for at least the next two years and businesses are going to suffer as usual. This leaves only 3 years for this to make you money.
I think you should stick to your rule, sponsor should have at least 10% invested. I also think they should at minimum guarantee your capital if they’re locking you in for 5 years and if possible guarantee a minimum return. That’s what a bank does and the return is guaranteed there.
50K is a lot of money (imho) to have sitting doing nothing for 5 years (or worse to lose that capital). If you invested it in a CD at 4% interest, you’d get 10K after 5 years which is 20% of the original investment amount.
*Disclaimer: But that’s just me with my very, very, very (did I mention very?) limited knowledge of finance and investments. I don’t like investments that take my money, choose how to spend it, don’t guarantee returns and not allow me any flexibility to move it when I see fit.
Ah, I do love a guaranteed return over time. A guaranteed return or a hedged return is why I’ve invested heavily in structured notes since leaving my day job in 2012. Here are some posts about structured notes:
https://www.financialsamurai.com/understanding-structured-derivative-products-cdsnote-as-an-investment/
https://www.financialsamurai.com/example-of-how-a-structured-note-works/
I’d love a minimum guarantee e.g. 2% a year + upside. What I’ve also learned from private deals is that a lot of things are negotiable.
How does realtyshares work with 1031 exchanges. Can a person 1031 into and out of the property.
Cheers,
Scott
This is fascinating to see everyone’s nuanced thoughts on this matter. Thank you for letting us learn with you.
I work in commercial real estate private equity. Waterfall and fee structure are favorable to investors. I think the fact that the sponsors are willing to take on recourse is a very good sign. My concern would be on the exit and on re-leasing the space. Not sure how many questions you can ask on RealtyShares, but I would want to know the sponsor has a competitive advantage over current ownership to lease the space and that there are several tenants interested in the area. I would also be concerned about an exit in 5 years, especially with office product, when we could be in the midst of an economic recession. I think crowdsourcing is hard because you don’t know these guys at Haverford, and you don’t know their relationships in the market. Cash on cash is strong but that’s all contingent upon a quick lease-up with solid rents.
If you can find out answers to these questions, and they check out, I’d say this is a go for your higher-risk bucket.
Hi Justin,
Thanks for your insights. I can ask RealtyShares an endless amount of questions with answers, but perhaps not so much the sponsor, Haverford Properties. But maybe. I don’t see why I can’t just e-mail them this post and have them answer questions, unless there is some SEC rule against that during a private placement offering.
I worry with you regarding exits as well. Who knows the future in 5 years. It would be interesting if in 5 years, Conshy becomes a BOOM TOWN and rents rocket and there is max occupancy. Why sell then? Just collect outsized returns every year for a s long as possible.
Based on the feedback on FS from locals, Haverford has a good track record. I’d like to reach out to them.
S
“I would think a realistic worst case scenario oh is that a recession hits in the area, there is only a 50% occupancy, and investors just collect half or less than half of the Projected rents and hold until there is a recovery to be able to sell.”
If it worked at 70 percent occupancy, the current owner would likely not be forced to sell. There’s a reason the sponsor is coming to the table with less than 5 percent equity and crowdfunding the rest of the 20 percent and it is they can afford to take risk with this capital structure. It’s easy for them to walk away.
I would love to know who is lending on this deal. Guess I will have to sign up for an account to get the full story.
Lots of these deals start with the founders only putting in 5%. That’s part of the reason I look at them. I want to see how to get a 5% down project with 20+% IRR. Not sure it’s worth the effort but interesting to look at.
Conshohocken has an “awkward” location? It has exits to 476 and 76 and close to the turnpike and close enough to 202. It also has two train stations.
As Brian shared above, MoreThanTheCurve.com provides vacancy rates every quarter. It has been sliding down and is now at a three year record low.
The one issue is that there is a million plus square feet approved, but not yet built. That could alter the market if they get built.
If you are bearish over the next few years on RE, why are you investing in these deals especially since it would be tricky to get out. When I read the documents this seems like a note and there are a few firms with longer track record of buying notes for pennies on the dollar and also servicing it so you don’t have to deal with the headache of default. I dont believe RealtyShares services and would help convert the notes from non-performing to performing.
Haven’t bought yet John, but will highlight when I do. Plenty of people also make money in bear markets. It’s not a 100% one way loss for all investors. You just have to go look and do your due diligence on various investment opportunities, which is what I’m doing now.
I like to lock my money up for 5 – 10 years w/ a strong IRR so I don’t have to deal w/ it. B/c I live below my means, I have an excess of capital coming in every month that I’ve got to figure out what to do with it. The big one is coming in 1Q2017 when a CD comes due.
What are you doing with your money? And how are you exposed to real estate if any? Thx
Question….what is the worst case scenario for this kind of investment? Losing interest only? Losing everything?
Thanks
I would think a realistic worst case scenario oh is that a recession hits in the area, there is only a 50% occupancy, and investors just collect half or less than half of the Projected rents and hold until there is a recovery to be able to sell.
At 50% vacancy, would they be able to cover the cost of the debt? Would they be able to hold until there is a recovery, especially if that recovery happens after the “interest only” part of the loan expires? It seems there is a reasonable chance that the bank forecloses on this loan and equity owners get nothing.
Sam do you have an opinion regarding concentration risk for this relatively new product? Meaning, in terms of your overall investment portfolio (or net worth for that matter)… I’m curious to know your appetite for risk-taking. 0.5% concentration / property is kind of where my head’s at. That would limit me to the $5k investments at this point… So unfortunately this one is out. As far as advice, this is a bit anecdotal but I’ve heard from a colleague that is moving to that area that it’s the place to be right now (from a residential standpoint). I suspect that doesn’t help you from the commercial side of things. However the greater population density can never hurt.
Concentration risk is exactly why I’m hesitant to buy another physical property. I recommend/like keeping real estate as less than 50% of total net worth. The more diversified that 50% or less is, the better at this stage. I basically went “all-in” with properties in SF that have done well, but the market seems to be fading now.
0.5% concentration is pretty small. My investments with high conviction go to 5% – 10% of my entire portfolio. I do like to make more concentrated bets.
I’m thinking of carving $100,000 of my $340,000 expiring CD in real estate crowdsourcing. Hence, a $10,000 investment in this commercial property would be 10%.
Fair. I guess I’m still recovering emotionally from ’07-’12 as far as real estate goes…
Stock markets bounced back in ~5 yrs. Real estate still isn’t there…
I understand past performance does not guarantee future results. I guess even though I’m a regular reader I still question your confidence in real estate. Are you not seeing some of the irresponsibly free-flowing capital that we saw in the lead up to the last crash? Some would argue products such as this one we are discussing now are evidence of overconfidence in the sector… aren’t you better off investing in your own business?
Did you have a bad experience between 2007 and 2012? A lot of areas have recovered to reach their previous Heights, and some places like New York and San Francisco are way beyond their previous peaks.
Lending and refinancing has been incredibly tight and difficult over the past six or seven years since the financial crisis. The irony is that only the people who don’t need the money seem to be getting money to invest. Down payment levels are much much greater than in the past and if there is a downturn I suspect they much shallower one e.g. 20% versus 50%.
It took me almost 4 months to refinance my mortgage, with the bank where I have more than 1 million in assets and a 15 year relationship with. I’ve never missed a payment and I have an 800 credit score. When people have a lot more skin in the game it is much more difficult to walk away from an underperforming property.
But due to the potential for a downturn, I’m investing much less money in different locations.