Robert Leonard  01:33

Some of the listeners may be familiar with you from being on We Study Billionaires with Preston and Stig, but just for those who aren’t, walk us through your background and where you’re at today.

Ian Formigle  01:41

Sure, I’d be happy to.

I am the Chief Investment Officer at CrowdStreet, and CrowdStreet is a leading online commercial real estate investment platform. We’re based in Portland, Oregon, and I joined CrowdStreet in the summer of 2014 to oversee our marketplace. By volume, CrowdStreet is, to our knowledge, the largest online commercial real estate investment marketplace in the world. We’ve done over $13 billion worth of deals on our platform. But also, it’s fair to say that this is a nascent industry.

Prior to joining CrowdStreet, my background was in commercial real estate private equity and derivatives trading. I was previously a senior acquisitions officer for a group based here in Portland, Oregon. I would say that under the tutelage of my former mentors, this was really where I learned how to understand commercial real estate, how it functions, and how to identify opportunity and risk. 

Before that, I spent the first part of my career as an equity options market maker. I traded in an open outcry pit in San Francisco, so I was one of those old traders that used to wear a jacket and stand in a crowd. That’s where I first learned about capital markets and how to evaluate risk in a rapidly changing, fast-paced environment.

Robert Leonard  02:54

I’d say that the majority of the people listening to the show today are either new investors or at least individual personal investors as they invest in real estate directly themselves, maybe not so much through crowdfunding. So, for those who may not know, what exactly is CrowdStreet? And what is real estate crowdfunding?

Ian Formigle  03:11

Yeah, I’d be happy to discuss that. CrowdStreet is an award-winning online commercial real estate investment marketplace. When you show up to the website and you see us, that’s what we are. What that means is that we give accredited investors access to institutional-quality commercial real estate private equity offerings. What we’re doing is we’re building a community, where individuals and commercial real estate firms come together to invest in commercial real estate.

CrowdStreet, as a platform, was really born out of the Jumpstart Our Business Startups (JOBS) Act of 2012. Title II of this Act, which was passed in September 2013, and for any listeners, who’ve listened to one of my previous episodes have heard, this is what authorized general solicitation or advertising of Regulation D private offerings. Commercial real estate investment is largely comprised of these types of offerings.

So, now that we could put an advertisement or a general solicitation around a private deal, we could talk about it nationally. If we could talk about it nationally, we could put it on a website. This Act is what set the stage for our platform, and even at the macro level, what is now commonly referred to as real estate crowdfunding. But what I would say about real estate crowdfunding is that at its core, this is really just real estate syndication. We’re simply taking it, and we’re changing its modality.

So at CrowdStreet, when you invest in a single asset, you’re investing directly with that sponsor. This is what we call the direct-to-investor model, so you’re participating in a syndication. You’re just doing it online versus offline; how it’s been done for literally hundreds of years. By leveraging legislation, and then applying technology to it, we’ve taken this old offline syndication model, and we’ve brought scale and transparency to it.

I’d say that prior to the existence of a technology platform like CrowdStreet, there’s no real estate operator that I could imagine. I used to be one of those, and I would say that I would never even contemplate the possibility of 400 individual investors in a deal with an average investment amount of less than $50,000. It just was simply unheard of up until a few years ago. What’s changed is that now we have seen that exact kind of scale occur multiple times on our marketplace. Now that the scaling is happening, it’s truly beginning to disrupt how commercial real estate is capitalized. I think it’s just a fascinating time in our industry.

Robert Leonard  05:48

Why would somebody as a real estate investor decide to invest in real estate through a crowdfunding platform rather than just investing in the deals directly themselves?

Ian Formigle  05:58

It’s a good and totally fair question. I’d say that I think that there are a lot of benefits to utilizing crowdfunding platforms, in general, to invest in commercial real estate. I’ll go through what I think is the top five, and I think in the order of which I hear them from actual investors on our marketplace. 

The number one is access. This is the thing I hear every day. Investors come to our platform and tell us how amazing it is for them to see great deal flow from real estate operators all over the country. Most of whom they would never have been able to get to know or see their deal were it not for our marketplace. I hear this same phenomenon and perspective from operators as well.

Prior to online platforms, commercial real estate investing for individuals was largely a local game. If you think about it, you’re maybe living in your part in your city. If you’re lucky, you were introduced to somebody from a friend or a colleague. That group is probably based in your Metro, and they’re probably doing a deal somewhere in your state. That’s kind of how syndication used to occur. What our marketplace has done now is that we have investors from Orlando investing with groups based in Seattle, and vice versa. So, for investors, an online platform brings an entire nation of real estate operators and real estate investment opportunities, literally to your fingertips in your own home at your own time.

Number two, I think is vetting. Prior to launching on our marketplace, every deal that you see on our platform must pass a multi-step vetting process that includes us reviewing the sponsor, the deal, and the terms of that deal. CrowdStreet has a team of employees, for example. They are situated all around the country. They’re constantly hunting deal flow. 

Although, I can’t say that I recommend or give investment advice to anybody in general out there, what I can say is that we do have a thorough vetting process. And by that, what I mean is that roughly about 5% of everything that we see out in the field is what actually makes it onto the marketplace. I’ll be the first to admit that we’re far from perfect, but investors do gain the benefit of knowing that through our investments process, we pass on 95 deals to bring them five. Investors can read a full overview of our vetting process and watch videos that discuss it in more detail on our website. Feel free to check it out.

The third I would say is education. This is the fun part. I enjoy it. I hear it from investors every day. And I appreciate that when I’m at an investor event, people come up and talk to me about how we’re giving them great education and great tools that they utilize every day. It’s allowing them to jump up the learning curve and become better-informed investors. That’s part of why we set out to do this. Let’s increase the sophistication of everybody together. I would say that our catalog of written content is vast, but it’s really when you pair it with our webinars that we hold on a constant basis that really makes for a powerful combo.

The fourth I would say is consolidation. Currently, about 67% of active CrowdStreet investors have invested multiple times on our platform. And the number of repeat investments among those investors can actually reach over 80 deals for a couple of investors. Once we see that investors amass maybe at least five or more investments, then we definitely notice they gain a lot of value from consolidating the reporting and the analysis of their active investments through our platform; through what we call our “investor rooms.” I think this is what I’d probably call something kind of like the Amazon effect. Once you know where you want to shop for something online, being able to shop for it all in one place with an interface that allows you to easily track and manage it as you go forward is pretty powerful.

And I think the fifth and final thing is the ongoing involvement. What I mean by that is that as offerings appear in the marketplace, well, that’s not when we stop the involvement. CrowdStreet stays involved throughout the entire holding period of that investment. That might be for two years, or it might be 10 years.

In many instances through our investment vehicles, we are also co-investors right alongside the marketplace participants. We have a growing team of professionals at CrowdStreet that monitor investments and they communicate with investors. Sometimes, this might translate into us hosting webinars around special events like a voting decision. Maybe we have to decide if we’re going to sell a property or recapitalize it. It’s in instances like these where we provide the investors with valuable information in an easy-to-understand format. What I like to think of here is that we’re the professionals. We always get it, and we understand what the sponsor is trying to convey. And so, what we’ll do is we’ll break it down. It’s in those instances where I’ve seen that these investors not only find a lot of value in it, but they’ve come to rely on our perspective as these deals unfold.

Those are the top five benefits. I think it even goes from there, but we see those day in, day out.

Robert Leonard  11:11

I think you mentioned a few points there that could probably answer this next question as well, but what differentiates a platform like CrowdStreet from another platform like maybe Fundrise, RealtyShares, or something along those lines? What makes CrowdStreet different?

Ian Formigle  11:26

First of all, I agree with you, Robert, that there are different types of platforms. They have focused on different aspects within this industry. And in 2020, I would say that the leaders that are at the top, I think we’re now down to three or four. We have more or less started to specialize in various elements and aspects of this industry.

When I think about CrowdStreet, what we do, and how it’s different than some of the other platforms, what stands out to me and what I think is differentiated about us is two things. One: We have a true two-sided real estate marketplace. A lot of platforms are quality, but they really have what we’d say maybe like an investment vehicle type of marketplace, where you show up, and you invest in a certain product. That is what you have options to. You’re investing with the platform. The underlying real estate is something that the investment vehicles go to. CrowdStreet blends into that, but you have the option to invest directly into a deal with that operator, and be a limited partner directly in the deal. So, one: True two-sided marketplace is one thing that stands out.

The other thing that I feel is different today is when we think about the total volume of transactions, I don’t think there’s another platform in this country that can cite over $13 billion with a deal flow. We’ve had over 400 investments go live on the marketplace at this point. By getting to that high volume, what we’re talking about larger deals. We have focused, from the inception, on what we call institutional-quality commercial real estate. And that’s, I think, a little different than some of the other platforms we have done. The average deal size on CrowdStreet is about $40 million, and it’s usually backed by a group that has, today, on average, a portfolio of about $1 billion. And so, I think that’s just a differentiator. We’ve focused on different aspects of the commercial real estate crowdfunding space, and I think those two things are really what I think stands out and makes us different.

And then the third is a little bit of a sub-point: It’s through that velocity of that marketplace that has powered our ability to bring, I think, what are some interesting and unique index-style products. We have something called the CrowdStreet blended portfolio. The reason that we could actually bring the blended portfolio to market is that once we were doing over 100 deals a year that was translating into billions of dollars of real estate per year, we created an algorithm that then allocates money that will raise in a blind pool format, but then it seamlessly and rapidly deploys that money over a period of six to eight months into about 30 deals. 

You need billions of dollars with real estate to be able to make that kind of product work. So, it’s really going back to the core of when you have a large and viable two-sided marketplace that you are then able to actually build some vehicles that leverage that, and then create some interesting investment opportunities. 

Robert Leonard  14:20

Throughout this conversation so far, you’ve mentioned that CrowdStreet’s really focused on your commercial-type properties. Depending on who you’re speaking with, there tends to be a little bit of variation in the definitions of what an actual commercial property is. Some say anything over four units is a commercial property because that’s how banks generally look at them. While others only consider properties leased to businesses for business purposes as a commercial property, like strip malls or maybe office space. How do you and CrowdStreet define commercial real estate?

Ian Formigle  14:49

Yeah, sure. I do agree with you that this definition of commercial real estate really does vary wildly depending upon who you ask. That’s why, just a minute ago, I brought up the term, “institutional-quality commercial real estate,” since that’s what we do seek for our marketplace. Generally speaking, CrowdStreet defines institutional-quality as “well-maintained properties that are typically being sold by a company in the business of owning and operating commercial real estate to another company that is in the business of owning and operating commercial real estate.”

To put a number on this definition, we’re going to see the property values on our marketplace begin at about $10 million. That’s particularly on the small side. If you think about asset classes, such as industrial or storage, they tend to be a little bit cheaper than office or retail, and so forth. And they’ve gone as high as $250 million. And that same number that I mentioned a minute ago about an average of $40 million. Well, in a secondary market, a $40 million asset is typically going to be what we call institutional-quality.

Robert Leonard  15:52

Why did CrowdStreet decide to build a platform focused specifically on these properties? Was it to differentiate themselves from the other platforms, or is there a different reason?

Ian Formigle  16:00

It’s a great question. I would say that this takes me right back to the philosophical types of conversations that I had with the two co-founders of the company prior to my joining in the summer of 2014. I’d say even that this focus has a little bit to do with me personally because this was right along the lines of my own philosophy. And this is what I thought of when I talked about with the co-founders about the vision for what we should go do. There are a lot of reasons behind why we focused on them, but I’d say the following as in terms of what I see is the major ones.

By going after commercial real estate in an institutional-quality section of it, I think, first of all, you get more reliable and consistent information about those deals. So, when we think about making an informed investment decision to buy a property, it’s going to require the review and analysis of a tremendous amount of information.

I was bringing, I think, empathy for this because I was an acquisitions officer, and I was trying to go out and acquire commercial real estate for the years prior to joining CrowdStreet. I knew how much it takes and what you need to get to in terms of an informed opinion; knowing what you’re going to get before you should feel comfortable closing on an asset. To get to this information, some of it you can acquire independently of a seller through your own due diligence. You can walk properties, and you can ask people. You can meet with brokers, and so forth. You can also hire third-party groups to go in and analyze assets on your behalf. We call that third-party reports. They inspect the physical quality, maybe the environmental aspects of it. But for a lot of the information, for you to really get to it, you do need the seller to provide it.

By operating in the world of institutional-quality commercial real estate, there’s simply a lot more information that’s available on the property. And the key thing is that, for the most part, you can trust it. At the institutional level, commercial real estate is a pretty small world. Even today, the top brokerage firms, such as a CBRE or Cushman & Wakefield, are still the gatekeepers on a lot of these transactions. I would say that there’s really one degree of separation across this whole industry when we get to the upper tiers. 

And so, while things like a purchase and sale agreement will require a seller to represent that the information they provide is accurate. I think the biggest risk to an institutional seller of providing bad information is not really within the contract, but it’s within the damage that it causes to their reputation in the industry. I see this every day. These groups have trusted relationships amongst brokerage firms. Everybody knows who they are. You know who they are, and they know who you are. It’s just how it goes. I think it’s this need for institutional groups to maintain a good industry reputation that really makes the top players respect the rules.

When you go below the institutional-level in commercial real estate and get into the sub-levels of real estate, I think you run into a lot of issues. First, there’s simply a lot of information that’s missing. Non-pros just don’t know what they don’t know. They’re not necessarily deceitful operators. They just don’t know what they don’t know. Second, I’d say that even if a non-professional seller is not trying to defraud you, there’s still a real possibility they’re so bad at tracking the data that with the data they’re providing you with can be full of errors to the point that sometimes it’s worthless. 

So I think this is why most representation clauses within contracts are caveated with the statement “to the best of seller’s knowledge.” I think that really says it all. Because if the seller knows nothing, you can’t hold them accountable for being ignorant.

Moving on. Thinking about other things, I would say also, second, there’s more confidence in the operators, generally speaking. Due to our direct-to-investor model, CrowdStreet has to have confidence that the operators that we bring to our marketplace are and will continue to be good stewards of investor capital over the holding period. Institutional-quality commercial real estate is most frequently acquired by established companies with strong track records in teams of professionals that are in place to handle all the various required elements that are necessary to execute a business plan such as strong investor reporting, asset management, accounting, and investor relations. These are the things that we really think of. When I think about bringing a deal to the marketplace, I have to have confidence that the operator can execute at that level. By going to the institutional level, you know that 9/10 times you’re getting that level of execution in an operator.

I think the third, which almost piggybacks on the second, is that you get better repeatability of sponsors. So from a sponsor perspective, CrowdStreet, and I think every CrowdStreet investor, is ultimately seeking long-term sustainable relationships where we can count on the sponsor not only to deliver a high degree of professionalism to the investors, but also to continue to bring a series of viable investments to the marketplace over multiple years. This type of consistency is better for both investors and sponsors. It’s better for us as a platform too! And by sticking with institutional-quality commercial real estate, you’ve got a much better chance of working into this kind of a groove since it’s the largest groups that often have the best, largest and most sustainable pipelines of deal flow. You can always find a winner sometimes with a smaller group, but it’s just a lot harder to find a series of winners.

I think the fourth reason to think about is that we look for better consistency of returns. I think we can find them more likely by focusing on this type of real estate. It’s kind of going back to the notion of professionals, right? Professionals no matter what the industry, they’re typically pretty good at what they do. By investing in institutional-quality commercial real estate, well, you’re playing in the majors, so to speak, which as an investor means that you’re gaining access to the highest caliber of operators. This can translate into a higher probability of quality execution, as well as more sophisticated underwriting assumptions. Better underwriting assumptions are going to lead to a higher probability of meeting or exceeding pro forma returns. Groups are always going to get some of them wrong, but you’re looking for the batting average over the long term.

A case in point, this is why for pensions and endowments, they place so much emphasis on the operator. They place a lot less emphasis on the deal. Literally, they’re going to allocate money to the operator and then let the operator go to work oftentimes in a fully-discretionary format. And that’s why when you know that you can trust the operator, over the long run, the deals are going to be better.

I see the fifth and final reason here is scale. So, when we first entered the commercial real estate crowdfunding space, so to speak, in 2014. One of the reasons I would say why CrowdStreet went straight to institutional-quality commercial real estate, in addition to all the reasons I cited, is also because we intended to become a major player in the commercial real estate capital markets. The only way to achieve that level of success was to compete at the institutional level, given how much of this total market is comprised of this kind of real estate.

Some other platforms took an approach of starting small, thinking they could work their way up once they gain some traction. We saw some platforms have trouble transitioning that. The transition proved harder than they thought. When I look back on our history, I think one of the things that maybe now I would say that we got right was by focusing on this level of institutional-quality commercial real estate since day one, it is one of our key differentiators even today. There are a lot of things, but I think those are the main ones.

Robert Leonard  23:57

I want to talk about how someone goes about deciding which deal to invest in on a platform like CrowdStreet, whether it’s CrowdStreet or a different platform, or any type of crowdfunding really, when it comes to real estate. I get asked this question a lot: “When someone’s browsing through the various offerings, should they just always pick the one with the highest targeted IRR? Why or why not?”

Ian Formigle  24:19

I’m glad you asked this question because I think this touches on a particular hotspot from my personal perspective. The answer is absolutely not. I think, for listeners, if there’s one takeaway from today’s podcast, it should be that selecting commercial real estate investments solely on the basis of targeted IRR is a recipe for disaster. With that said, let’s kind of peel that back. To begin to understand why, I think it’s valuable to start by thinking about the concept of the risk-reward spectrum.

Imagine a graph. We’ve got an X-axis and a Y-axis. Let’s go ahead and plot returns along the X-axis and risk along the Y-axis. Go all the way down to no risk. Start with a risk-free return. Say that’s about 2% today, and then we’re going to have an upward sloping curve. It could be 40 degrees or 38 degrees; whatever it is. It’s going to trend upwards to the right, and it’s going to continue on to add more risk for every level of return that you expect. Right? And that’s exactly what that curve is intended to convey.

For commercial real estate, we live within this paradigm. This is a curve that applies to us, and I’d say it’s possible to shift this curve up or down maybe, depending on what you might know, what level of information, or if you have imperfect information that you’re leveraging to your advantage. Now, you’re maybe getting a little bit better return for every level of risk. But at the end of the day, you cannot escape the idea that when you expect greater returns, you are accepting greater risk. Simply, that’s how it works.

When we apply this graph to actual real deals, and we think about them on a leveraged basis, well, I would say that when we think about the least risky deals, say the deals are what we call “core,” and they’re going to show up in our marketplace. The targeted returns on those types of properties are going to range somewhere between 7% and 9% on an annualized basis. That’s the basic. That’s a core deal. You can feel pretty good. That’s a deal you sleep at night.

From there, we’re going to start stepping out in terms of risk. Now, if we go all the way out to the end of the curve, way out there on the spectrum, we’re going to have what we call the riskiest opportunistic deals. Those can reach over 30% targeted on an annualized basis, but then what you are accepting is, if you go for that deal, it has so many moving parts. It could be distressed. It could be vacant. It could be that you have to tear down half of it and rebuild it. There’s so much that takes on risk to get to that return, that investors are accepting a very real possibility of principal loss.

I think the unfortunate thing is that some investors who are new on the marketplace or just newer in general, they tend to view risk as relatively constant, and they’re thinking that higher returns on a targeted basis translate into higher actual returns. And that’s where I go back to it. It doesn’t work that way. It could work that way, but it might not. And you might end up with a deal that turns into a loss because, well, you’re swinging for the fence. If you swing for the fence every time, you have to expect to strikeout.

When I think about assembling a portfolio of different commercial real estate investments, I’ve always advocated for a blended approach, when it comes to risk and returns. It’s definitely fine for investors to go for the allure of that +20% IRR deal, particularly, when the deal is compelling, and you’re ready to take risk. But if you do, possibly on the next deal, consider something a little less risky; allocating to a deal, for example, that might be a stabilized multifamily asset. It has conservative leverage on it. It has cheap long-term fixed-rate debt on it. That’s the kind of deal that’s going to target a return of roughly 12-13% annualized range, but I can tell you that it has a much stronger probability of delivering those targeted returns than the deal that you just invested in at 22%. This is the kind of deal that you can sleep at night. So think about risk and return as a spectrum, and just know where you’re plotting yourself, and what you’re expecting in exchange to get that level of return.

Robert Leonard  28:34

So we’re talking about these returns using the IRR. For those who haven’t heard that before, what is an IRR?

Ian Formigle  28:42

Very good question. It’s something we put on our website years ago to educate investors. IRR stands for Internal Rate of Return. In layman’s terms, that translates to a series of cash flows that are translated into an annualized rate of return, but one that factors in the time value of money. You can calculate it in Excel. 

A simple example that I think best illustrates the difference between IRR and just a simple annualized rate of return, which we call Average Annualized Return (AAR); let’s say, for example, we’re going to do a deal. Now, we’ll invest $1, and in this scenario, you earn a 10% annual yield on your investment every year for five years. At the end of that fifth year, you’ll receive your money back. So in this scenario, you would have a 10% IRR, and that would translate to a 1.5 multiple in your money. You invest $1, you get a total of $1.50 back over five years, and $0.10 of return every year on your money to get there.

Now, let’s modify that scenario. Say, for example, you’re still going to earn a total of $1.50 over five years, but then now, let’s accelerate your annual yields into the first two years. So, now, you’re going to earn a 25% yield in year 1 and year 2; $0.25 in year 1, and $0.25 in year 2. You’re going to receive no money back on an annualized basis. You get your principal back in year 5.

So, we’ve earned the same amount of total money over the same amount of time, but we’ve accelerated when we get that annual yield. If you take that and dump that into Excel, you’re going to see that the IRR on that investment is now 11.7%. So we jumped from 10% to 11.7%, despite the fact that you reserved the same total amount of money for five years. This just exemplifies how the IRR takes into account the time value of money. And by accelerating the cash yield, you’re going to bump the IRR.

I think the takeaway for investors in this example is that anytime you are considering a targeted IRR of an investment, you must also consider the equity multiple or the total return of that investment, and then look at that combination holistically. This is definitely how sophisticated institutional investors look at it. I know because I’ve negotiated with them over the years. They tend to value the total return, or what we call the equity multiple, over the IRR because they know that the IRR can be easily manipulated simply by altering the holding period. And groups that have money and are looking to grow wealth are looking for total return.

And so, I think what that translates to when you’re looking at deals is you might look at a deal with a longer-term hold. It might have a lower targeted IRR, but it might have a total higher return or equity multiple. If you don’t necessarily have a pressing need for the money to come back to you faster, you might be better off opting for the greater total return and letting that money stay out there a little bit longer. So those are the two things; consider IRR and equity multiple, and how they match together.

There was an article I wrote a few years ago called, The Yin and Yang of Equity Multiples and IRR. This is really important, I think, as investors start to kind of get to the next level of understanding.

Robert Leonard  32:07

For someone that’s investing in commercial real estate, maybe not at the institutional level, but maybe a level down, and maybe they’re just doing it themselves personally; maybe buying small strip malls or buying larger multifamily, but not institutional, how important is that dynamic between the IRR and the equity multiple? Or is it mainly important, when you start to get to the institutional scale?

Ian Formigle  32:28

I think it’s important at both levels, Robert. Again, I go back to beginning with the thought process of “Why am I investing?” Am I investing to try to accelerate and earn a quick hit, expose my money short term, take chips off the table, and then reassess? Am I investing as an individual? For example, I have a 12-year old daughter. Am I trying to put her through college? Okay, the answer is yes. Do I need the money? If I’m going to invest today to put my daughter through college, knowing that she’s going to show up in college, hopefully, six years from now, then that’s my starting point. I probably don’t need to really harvest that investment to pay for college for at least another year or two, knowing that we have some money already set aside to do that. I’m thinking, through that scenario, that’s a six-to-nine-year type of hold. Knowing that that’s where you begin the analysis, then the execution of that analysis is finding the deal or combination of deals or investments. It doesn’t have to be just deals that are going to get you to the goal, so I begin there.

At the end of the day, an IRR is a valuable metric because it’s going to break down that series of cash flows into that time-weighted annualized rate of return. So, I do know that all things being equal, if I can make a 20% IRR versus a 10% IRR. Well, I know that in three, five, or seven years, I’m probably going to make a lot more money during the 20%s than the 10%s. But again, it’s about the manipulation of the time period because I could make more money in a 15% versus a 10%. I can make more money with a 10% versus a 15% if I’m thinking about how long I’m holding the investment. Or maybe the goal is I need a certain dollar amount for the nest egg I’m trying to build. They go hand-in-hand. You have to look at them both. There’s no one right way or wrong way to look at it. I just think that it’s really important to think about total return, while you’re thinking about an annualized return.

Robert Leonard  34:27

Someone who’s listening to the show that might be interested in investing in some commercial real estate through a crowdfunding platform like CrowdStreet, or whether they are just interested in investing in crowdfunded real estate deals through another platform. Maybe they want to do smaller residential stuff. Do you always have to be an accredited investor?

Ian Formigle  34:46

For the CrowdStreet marketplace, the answer is yes.

While our minimum investment amount is $25,000, either for a single asset or one of our vehicles, you must meet the SEC’s definition of an accredited investor. It’s important to point out that this is the SEC’s definition. It’s not mine. It’s not anything with the industry. We’re living within this world. We just have to play by the rules. What the definition of an accredited investor really means is that you have to satisfy one of two tests. There’s either the income test or the net worth test. Under the income test, the investor either earns at least $200,000 annually as an individual or $300,000 jointly. And the expectation is you’re going to do that going forward. 

Under the net worth test, the investor has a total net worth of at least $1 million, and that is exclusive of the investor’s personal residence. Now, there’s a third test, too. There’s a standalone entity test. If you have a trust, for example. A trust can also be an accredited investor. But in order for that trust or any standalone entity to qualify as an accredited investor, it must have at least $5 million worth of assets.

So yes, at CrowdStreet, we are an accredited investor platform. There are other options out there. There are definitely a few reputable platforms that we know that offer investments for non-accredited investors. The offerings that you’ll find on these platforms are typically offered pursuant to Regulation A. That’s another change in legislation that came about in recent years. You’re going to find that, on average, those offerings are structured either as a fund or as a real estate investment trust. It’s certainly a viable option. I would say that the one-off single asset deals are always typically going to be accredited, but there are other options out there for investors as well, if you’re not quite in that criteria.

Robert Leonard  36:41

Some people might be thinking that listing their potential deals on crowdfunding platforms would be a great way to raise capital. Can anyone list deals on crowdfunding sites? Or do they have to be an accredited investor, or do they have to go through some sort of process to get a deal listed there?

Ian Formigle  36:57

Without being able to speak for other platforms, I’ll walk you through what it takes to come to the CrowdStreet marketplace. CrowdStreet as a company is highly selective when we consider offerings for our marketplace. As we discussed earlier, roughly five out of every 100 potential deals is what actually makes it to the marketplace. Generally speaking, eligibility for sponsors to come to the marketplace kind of begins at a minimum of about $100 million of total transaction experience under their belt. They typically possess a strong track record of performance, and they have strong references.

However, with that said, these days, it is increasingly common for CrowdStreet marketplace sponsors to have over $1 billion of total transaction experience, as well as to have a large team of dedicated professionals on staff to handle those items that I talked about earlier, such as investor reporting, asset management, and accounting. So, it’s a pretty exhaustive process. Because we’re a direct-to-investor platform, we are looking for that kind of best-in-breed sponsor with outstanding deal flow for our platform. There are different ways to fit within the ecosystem. This is just how it works at CrowdStreet.

Robert Leonard  38:07

I think we’ve had a really good conversation about CrowdStreet and commercial real estate investing in general. Now, I’m curious to get some more insight as to what your personal real estate investing looks like. What does your current portfolio look like? Are you investing in real estate individually yourself? Are you putting all your money into crowdfunded deals? What does that look like?

Ian Formigle  38:26

Before I joined CrowdStreet, I was a private real estate investor. I invested in deals through my previous private equity firm. I used to be a multifamily syndicator, so I own and still own multifamily property. But since I’ve joined CrowdStreet, I’ve been eating my dog food, so to speak. I invest in deals on the marketplace. So far, I’ve invested in 12 deals. Of those 12, I have seen 3 of them realized. Fortunately for me, all 3 were about pro forma. I do continue to invest regularly in the marketplace, and my cadence of investing depends greatly on my personal liquidity. I’m just an individual investor like everybody else out there. 

What do I think about the asset types of those 12 deals? I get asked that a lot. They consist of office, multifamily, medical office, and hospitality. I would really say that right now, it should include retail as well. I’m a huge believer in the countercyclical play that is within the retail industry, particularly when it’s associated with grocery-anchored retail. For example, I just missed out, I think, on a great opportunity to invest in a shopping center that was recently on our marketplace that was located in the Greater Boston Metro. I think if I was more focused on investing last month than enjoying some time off at the end of the year, I think I would have probably jumped on that one.

I would say that part of my personal investment criteria centers on what I perceive to be oftentimes a relatively attractive going-in basis. I oftentimes look at things at the end of the day and buy a property at a certain price per square foot. We’re oftentimes adding money to it, and then we’re exiting it. We’re hopefully exiting that at a greater price per square foot.

So, to me, both numbers: the entry number, the exit number; and then, I think, third, the amount of money going into the deal needs to make sense for me to get on board with a deal. I’d say that in my three realized deals, in particular, two of the realized transactions, this philosophy has served me well. Also, I strongly believe that great deals have great stories. Anytime I’m looking to invest in a deal, I’m analyzing the story behind the deal. If that story is compelling, makes sense, and it stands up to scrutiny — very important part — then, I want to dig in and understand that deal in much more detail.

Finally, other than CrowdStreet, like I said, I have an ownership stake in a 150-unit multifamily property that’s located in Moore, Oklahoma. That goes back to my multifamily syndication days. I’ve owned that firm for a long time. This is a direct holding that predates my 10 years in CrowdStreet. It’ll probably sell at one point in the future. I don’t know. But that’s my personal real estate investing experience.

Robert Leonard  41:13

Like you mentioned, you’re just an individual investor like everyone else that’s listening to the show. So, when you have liquid capital that you’re ready to invest, what is the thought process you go through to determine whether you want it to go into an offering on CrowdStreet’s platform? Or if you want to maybe deploy this as an individual, active investor yourself? Or are you just not interested in that anymore because you would prefer the returns on a passive investment, where you don’t need to do anything through CrowdStreet?

Ian Formigle  41:40

Today, I am a passive investor. But every marketplace investor is really a passive investor, right? I’m investing directly alongside other investors in the marketplace. My name is showing up in the ledger right next to another marketplace participant’s name. I don’t get special treatment. If anything, I’d say that sometimes I get less than special treatment because if there’s an over-subscribed scenario, I’m going to probably bounce myself out to give investors a chance, just so that I know that I’m sticking honest to the whole thing, and I’m not trying to cherry-pick my own opportunities. But what I’m looking for is the same types of things that other investors are out there looking for. We’re looking for opportunity.

Given where I am in my life cycle of investing, like I said, I have some young kids I want to put through college one day. I have money to put to work that I don’t necessarily need to have back for income. I’m in the very core, middle part of my career, right? I still have 20+ years ago, but I’ve been in business for 20-25 years. And so, that means that I’m not afraid to take some risks; calculated risks, right? But like I talked about earlier in terms of risk and reward, I might go for a value-add strategy more often than not. I know that I’m taking a serious risk when I do it, but I also know that if I make five good decisions and one bad one that I can bounce back from that. Some of the wins are going to moderate out some of the losses. 

And I’m looking to build wealth. As I get older, as I go more towards retirement, then yes, of course, my investment philosophy is going to change. I’m going to be starting to think more about current income, and how to go through more wealth preservation. My thought process is no different than other investors’ thought processes out there, in terms of what are we really trying to achieve at the end of the day.

Robert Leonard  43:22

Ian, as always, thanks so much for your time, and for joining me here on The Investor’s Podcast. Where can the audience go to connect with you?

Ian Formigle  43:31

Yeah. As I always kind of mention in any interview, I love to connect with investors. I love to talk about deals. I am certainly a deal junkie. To find me, it’s pretty easy. I am the only Ian Formigle on LinkedIn. So simply pull that up, and you’ll find me right away.

Investors are also welcome to find me through CrowdStreet. You can hit up info@crowdstreet.com. We have a large team that can pick it up. They’re going to take that inquiry, and they’re going to forward it to me. I can get back to investors. Please come check out our website: www.crowdstreet.com. As you do connect with me, ping me on LinkedIn, or find me through info@crowdstreet.com. Provide feedback. We constantly strive to improve the investor’s experience on the platform. We want to know what investors think, what works on a platform, and what doesn’t work.

I can say confidently that our platform is better today than it was a year ago. I know that it’s going to be better a year from now than it is today. And the only way it gets better is through your feedback, so please let me know.

Robert Leonard  44:27

Be sure to let Ian know what you think about this episode, as well. Let him know your feedback on everything we talked about. If you have any questions, feel free to shoot those over his way as well.

I’ll be sure to put links to everything you just mentioned in the show notes, so everyone listening can go connect with you. Thanks so much! I really appreciate it.

Ian Formigle  44:43

Thank you, Robert! It’s a pleasure! I always enjoy these kinds of conversations, and I look forward to future conversations.

Robert Leonard  44:50

All right, guys! That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week!

Outro  44:56

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