Crowdfunding has become a popular way to fund various real estate projects; however, self-storage has been a bit late to the party compared to other asset classes. Here’s insight to how crowdfunding works, the various platforms available and its application to the storage industry. Can this type of financing work for your next investment?
An Alternative Source
Crowdfunding is a way of raising money online from multiple investors who typically invest smaller amounts and, therefore, have a smaller equity stake. It was made possible in April 2012 by the Jumpstart Our Business Startups Act, which removed the barriers to publicly marketing private securities. Title III, also known as the Crowdfund Act, has drawn the most public attention because it creates a way for companies to use crowdfunding to issue securities, something that wasn’t previously allowed.
This is of particular interest to self-storage investors and developers who face funding challenges as they look to grow their portfolios. Banks tend to vary in their appetite for self-storage loans, and many simply don’t make loans in the $1 million to $5 million range. Furthermore, many community banks, credit unions and even the Small Business Administration face regulations on the amount of loans they can make to any one borrower.
Crowdfunding attracts investors who can write a check for as little as $1,000 or $2,500 to participate in a project. The end result is a win-win: Developers and promoters enjoy a whole new source of funding, while invidividual investors who were sitting on the sidelines can contribute to commercial real estate investments.
How the Platforms Work
Crowdfunding has become popular as more people become disenchanted with the up-and-down nature of the stock market and investors who aren’t achieving their desired yields. It provides a way for investors to obtain a small piece of ownership in a hard asset such as a self-storage facility, which until recently, was only available to accredited investors or those who could afford the minimum outlay of $25,000 to $50,000.
Platforms like RealtyMogul, Crowdstreet, Fundrise and others fully vet the investment and the principals who are bringing it to market (the promoters) before making it available to their communities. They earn a fee for publishing the investment on their site and raising the capital, plus additional fees for underwriting, offering preparation and marketing services, investor portals and, in some cases, ongoing asset management.
The benefit to the promoter is not having to handle time-consuming investor questions and concerns. He only communicates with the crowdfunding platform, which in turn communicates with its investor community.
Most platforms like to see existing self-storage facilities that possess a value-add component. In other words, they prefer deals that cash-flow out of the gate, or those that are projected to cash-flow shortly thereafter, as that’s what most of their community is seeking. You’ll also see development and conversion projects being promoted, but it’s usually ones that are further along in the process, with a shorter waiting period to stabilization. Again, the platforms take great care to perform due diligence before introducing offerings to their community.
The biggest challenge to crowdfunding a storage project is finding one with enough yield to offset the equity splits and asset-management fees charged by the platform. A traditional broker-dealer relationship involves a one-time fee or percentage for raising the capital; but because the crowdfunding group is charging multiple fees, the yield to investors is usually lower. As a result, self-storage promoters prefer to use crowdfunding on projects with higher yields and the ability for to not only cash-flow but to earn significant income in year one.
Improved Access
Gaining access to real estate is becoming easier and requires smaller minimum investments. In fact, RealtyMogul recently launched its first real estate investment trust (REIT), open to nearly all investors with a $10,000 minimum investment. The REIT intends to invest in a variety of assets, including self storage.
For storage operators who’ve been raising money from friends and family, the traditional brokerage channels, or institutional investors, crowdfunding offers an alternative. It takes the traditional model of raising capital and removes the middleman, connecting borrowers directly to investors. The majority of these investors are tech entrepreneurs, doctors or lawyers. Could they get five friends together to purchase and operate a self-storage facility? Perhaps, but the risks are too high, as they don’t have the time to learn the industry, find a suitable facility, and then operate it once they acquire or develop it.
A Case Study
Inspired by the peer-to-peer lending and crowdfunding phenomenon, U-haul International Inc. started its own “Investors Club.” The online platform offers asset-background directly to accredited and non-accredited investors in all 50 states. Called “U-Notes,” the investments are backed by specific assets such as U-Haul self-storage locations, trucks, trailers and other moving equipment. Opportunities are posted weekly, allowing investors with as little as $100 to start earning interest within a week of subscribing.
U-Notes have become a complementary form of borrowing for U-Haul and work in conjunction with the company's traditional financing programs. Another benefit is the self-directed nature of the program eliminates the need for traditional lenders and other money brokers.
Investors receive a fair return without paying fees or commissions, and U-Haul enjoys favorable financing terms on the capital that’s raised through the program. So far, the Investors Club has raised and invested more than $121 million for its members of U-Notes.
The Future of Crowdfunding
Crowdfunding will continue to grow exponentially, but there’ll always be those who prefer a traditional approach to investing. In addition, the self-storage market has been on a tear in recent years, and there aren’t enough deals being offered to the pool of capital that's chasing the asset class. That will change as interest and capitalization rates increase. Furthermore, there are fewer sellers, and they know they have to sell for less money. That will cause some of the equity folks to drop out of the market, and crowdfunding will become more attractive to asset managers and promoters looking to grow their portfolio.
No matter where you are on the spectrum—passive investor with some money to put into hard assets or a self-storage professional looking to grow a portfolio—crowdfunding has proven to be a beneficial addition to our economy and is worth learning more about.
Scott Meyers, founder of Self Storage Profits Inc., has been involved in the self-storage industry as a developer, owner, syndicator and operator since 2005. He owns and operates 22 facilities in nine states. His community, www.thestoragemastermind.com, consists of equal parts owner/developers and private-equity investors who partner on select projects nationwide. To reach him, e-mail [email protected].
