- May 18, 2017 at 12:53 pm #3910
I’m digging into your platform database to figure out my real estate investment options. When I look at the equity opportunities, I feel like I’m seeing a higher degree of risk given the projected returns. So debt opportunities seem more appealing to me. But I’m NOT an accredited investor. And it looks like there are far fewer platforms offering real estate debt investments for non-accredited investors. Here’s what my search returned for Real Estate:
Open to anyone
Debt:2 Equity: 6
Only accredited investors
Debt: 19 Equity: 18
Any thoughts about the imbalance?May 18, 2017 at 4:06 pm #3917
@violet That’s a great question, and understandable it’s a bit confusing to see that mismatch. A lot of it comes down (I think) to the SEC’s efforts to protect non-accredited investors from themselves. There’s quite a bit of variety out there, but in general among the real estate debt investments offered on the Reg D platforms, you’re investing through some form of “special purpose vehicle” (SPV) like an LLC. While as an investor you will generally receive a promissory note, it’s between the investor and the platform (or an SPV created by the platform) and not directly with the borrower. For example, Sally goes to Patch of Land to borrow money for a fix-and-flip, and applies for a loan. She’s approved, and receives a loan from Patch of Land, which holds a mortgage on the property. Bob then logs in to Patch of Land as an investor and decides to invest in the loan given to Sally. What Bob ends up actually getting is a promissory note from an LLC created by Patch of Land, pledged by a promise to pay via the underlying loan Sally got (but explicitly excluding any other of Patch of Land’s assets). So while it’s technically true that the the loan to Sally is secured by the property, Bob has no ability to pursue a claim on the property in the event of a default because his promissory note is with Patch of Land, not with Sally.
Confused yet? It gets even more abstruse with investments through funds or other aggregation platforms like AlphaFlow, where you as an investor are investing in an LLC that is itself investing in multiple other LLCs like the one from Patch of Land.
While convoluted business entities are quite common for alternative investing, they’re understandably a bit daunting for many newcomers (a note I have with Patch of Land runs 165 pages for a $5,000 investment!) And so with very few exceptions, non-accredited investors cannot invest in these kinds of special-purpose entities.
Most of the real estate crowdfunding platforms open to non-accredited investors are utilizing Reg A+, which does not permit SPVs, and are explicitly equity investments. However, the company you’re getting equity in may itself turn around and invest in debt investments! (That is the case with the Income eReit from Fundrise for example).
So on the one hand, if you invest in that kind of Reg A+ REIT, you’d ultimately be investing in loans. On the other, what you’re actually receiving isn’t a promissory note but an equity interest in a company.
(If you have any suggestions for how to categorize or label these things differently in the database, I’m very open to suggestions, it’s something I’ve struggled with quite a bit.)May 19, 2017 at 10:17 pm #3924
OK, I’ll save my rant about the “accredited investor” designation for another thread. But I appreciate you walking me through the use of SPVs. And it’s helpful to consider the notion that my equity investment could be an investment in…debt investments, though I don’t know if that feels more or less secure!
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