First crowdfunding deal I ever did: $2,500 in, $3,275 out at month 33

Still figuring out which strategy fits me, so I put a small amount into a portal equity deal instead of reading about them for another year. Small retail strip, six bays, one vacant, in a suburb of a midsize southern city. Sponsor's plan was releasing the empty bay, redoing the parking lot and signage, then selling. Target was 12% IRR over three years, $2,500 minimum, and the deal page said 8% pref with a 20% promote above that.

What happened: the vacant bay leased at month 9 to a physical therapy tenant, slower than the 4 months the plan said. Distributions started at month 12 and came quarterly after that, small, around $50 a quarter. They sold at month 33. I got $3,275 total, so about 1.31x on my money.

The part that made me nervous was month 6 through month 9, when the bay was still empty and the update letter said negotiations were ongoing with no cash to distribute yet. I had no way to check anything they told me. I could not drive by, could not call the broker, could not do anything but read the letter and wait. That's the actual feature of this whole thing that I didn't understand before I wired.

What I'd keep: starting at $2,500 rather than $25,000, because the fee stack and the reporting rhythm are things you can only learn by being in one.

Answer

2devon_pierce Get yoursPRO5

quarry's point about one lease carrying the whole plan is the thing to take out of this. I've got 40 deals in a spreadsheet I haven't bought any of, and the test I use is: how many separate things have to go right for the base case to happen? Your answer was one, which is why 4 months of slippage cost you time and not money. A ground-up deal or a heavy repositioning has eight or ten of those and they compound.

The other thing I'd take from your post, kestrel, is the month 6 to 9 stretch. You describe having no way to verify anything, and that's permanent in this format, not a first-deal problem. So the diligence has to happen before the wire, because afterward your only tool is reading the letters. That means the sponsor's history of reporting through bad quarters matters as much as the projected IRR.

And the small size was right. The fee stack on a $2,500 check teaches you the same lesson it does on a $25,000 check, at a tenth the tuition.

2 replies

3carlos_nunezActive

1.31x in 33 months is a fine result on a first try and the reason it worked is that one lease signed. Six bays, one vacant, so roughly 17% of the rent roll was the entire business plan. If that tenant walks at month 8 instead of signing, the sponsor is selling a strip with a hole in it and the buyer prices the vacancy plus the leasing cost. That's your $2,500 turning into maybe $1,900, and it wouldn't have been anyone's fault.

Also worth knowing for next time: did the sponsor pay a leasing commission out of the deal for that bay, and was it disclosed? On small strips that fee can be a real percentage of the year's cash flow.