When you’re a technology innovator shaking up Wall Street’s traditions when it comes to real estate financing, your business philosophy changes almost as fast as the technology. That was the upshot from Doug Miller, cofounder and CEO of Fundrise, during a recent NMHC Emerging Leaders Speakers Series program in Washington, D.C.
“I've moved a long way from focusing on urban authenticity to focusing on where are the best returns,” said Miller, whose online platform allows everyday people to directly invest in properties across the country for as little as $100, effectively cutting out many of financing’s middlemen. “Because that's what our investor wants.”
But what the online investor wants hasn’t been exactly what Miller originally anticipated.
“We definitely are surprised by what the crowd wants,” he said. “We started with [conservative] deals where investors weren’t going to lose money. But the investors often want high risk-and I’m more middle of the road.”
As a higher tolerance for risk has emerged so has the expectation on the timing of returns. “They also want short term,” Miller said. “They'd rather take a nine-month deal rather than a nine-year year deal. The online investor has an Internet mentality. If they could give you the money and get it back next week, they would.”
And while all real estate is local, its online investors aren’t necessarily. “We have money coming in from almost every zip code,” Miller said. This has been unexpected, Miller said, because the initial thought was that the platform would create a highly localized avenue for people to invest in projects in their neighborhoods.
Martin Ditto, president and CEO of Ditto Residential, a Washington, D.C., residential developer, gave attendees more insight into how crowdfunding really works as he showcased several projects to which Fundrise provided the debt financing. (Click here for the presentations.)
For Ditto, crowdfunding was a perfect fit because many of his projects are on a scale where there are few sources. Institutional money doesn’t write small checks (>$10 million), so many projects end up being too small for private equity and too big for friends-and-family money. So, like Goldilocks, crowdsourcing companies end up being just the right size to take advantage of that sweet spot in the market.
Miller also said that companies like his provide much more flexibility than institutional money. “The reason institutional money is so rigid is that their investors are rigid. Their investors are pension funds, which are really government agencies,” he said. “Our investors are individuals, so the developer gets more flexibility.”
For as much as Fundrise has evolved since its launch, more changes and growth are still to come, Miller said. He said his team is working overtime to source more deals and growing its warehouse line of credit to be able to target larger deals. “We’re doing $5 million checks now,” Miller said. “But with our growth rate, we’ll be doing $25 million checks.”
As funding capacity expands, Miller said he expects to take a bigger bite out of institutional player’s market share. “As we scale, our cost of money is going to be less. It’s a fact,” he said. “We’re not big enough now, so they don’t care yet, but we’re 12 months away from that.”
Private equity is likely to feel the squeeze first because it historically has operated with a higher fee structure. “The retail investor today is paying 20 percent to 30 percent all-in fees,” Miller explained. “Under our mantra, it’s no fees and 0.5 percent a year.”
While domestic demand is growing, the real boost to crowdfunding platforms is likely to come from overseas, where China has been a leader in online finance. “The only reason you don’t see $50 billion of online Chinese funding in the market today is because the Chinese government has been slow to allow it to scale,” said Miller. “This is global, not domestic.”