From the desk:Crowdfunding (Platform Investor)

Fee stack on a crowdfunded equity deal nets me 9.6% against a duplex I could buy outright

Been building the first deal budget for months and I finally ran the crowdfunding version side by side against the small rental version, because at some point I have to pick a lane.

The crowdfunded deal: 90 unit value add multifamily, sponsor targeting 15.4% gross IRR over five years, 25k minimum. Fees as disclosed: 1.5% acquisition fee on purchase price, 1.5% annual asset management fee on invested equity, a 1% platform posting fee taken from my subscription, 8% preferred return, then 80/20 above the pref with a catch-up.

My pass at net: the acquisition fee comes out of my basis on day one, asset management drags roughly 150 bps a year, the platform fee is another 100 bps one time, and the promote takes about a fifth of everything over 8%. I get to somewhere around 9.6 to 10.2% net IRR if the sponsor hits the model exactly. If they miss by 200 bps at the property level, I'm at 7 and change, below the pref, so the promote pays nothing and I've earned bond-ish returns for a five year lockup with no control.

The duplex version: about 68k all in for down payment plus closing plus reserves on a 260k two unit, roughly 340 a month of cash flow after everything on my numbers, and I'd be the one taking the calls.

What I can't resolve is that the crowdfunded number depends entirely on the sponsor hitting a renovation and rent premium plan I can't verify, and the duplex number depends entirely on me not blowing the maintenance line. Both are single points of failure, just mine versus theirs.

Decision in front of me is 25k into the deal now versus keeping the whole 68k dry for the duplex through spring. Splitting means neither happens well.

Answer

-1angela_burkeServicePRO6

Your net IRR math looks about right in shape, though the catch-up provision is doing more damage than you've given it credit for. Read the exact language. With a full catch-up, once the pref is satisfied the sponsor takes 100% of the next dollars until they've caught up to their 20%, which pulls returns forward for them and pushes your effective split worse than 80/20 in any scenario where the deal performs decently but not spectacularly.

The part of your comparison I'd push back on is the 340 a month. I run a small team and I can tell you the calls have a price even when you take them yourself. Put a real number on your hours. If it's two hours a month at whatever your time is worth, the duplex margin thins fast, and if a tenant turns you're at negative for the year.

That doesn't make the crowdfunded deal better. It makes them closer than your spreadsheet says, and then the question is whether you want to learn the operating side at all. If you don't, the duplex is a job you're buying at a discount to its actual cost.

2 replies

1gregpowell66AG4BPRO8

The renovation plan is the whole deal and you can check more of it than you think. Ask the sponsor for the per unit renovation budget broken into line items, and the number of units they've already turned at this property if they own it, with actual achieved rents on those.

On a 90 unit value add, the models I've seen usually assume something like 8 to 12k a unit and a 180 to 250 dollar rent bump. If their budget is 8k a unit in a market where I know cabinets, counters, flooring and paint don't come in under 11, the gap shows up in month fourteen as a capital call or a slower turn schedule. Either one kills your 15.4%.

Also ask how many units they're turning per month and who's doing the work. In-house crew versus a general contractor changes the cost and the pace. If they say 12 units a month on a 90 unit property with one crew, that's optimistic in my experience.

@cobalt is right about your hours on the duplex. From my side of it, the difference is that on the duplex you find out you were wrong in week three and you can fix it. On the deal you find out in year two from a quarterly letter.