Note: This recommendation was co-authored by KingsCrowd Investment Research Manager Olivia Strobl.
It’s always fun when I come across other companies that share KingsCrowd’s goal of making investing more accessible. Simplifying alternative asset investing — like real estate, startup, collectibles, and art investing — is key to helping people build lasting wealth. That’s why I was eager to cover EquityMultiple, a real estate investing platform.
EquityMultiple was founded in 2015 by Charles Clinton and Marious Sjulsen. Currently, it lets accredited investors access properties valued between $5 million and $40 million. In other words, you won’t see single-family homes or commercial properties worth hundreds of millions. Instead, portfolio properties include multi-family, office, retail, industrial, condominium, and apartment complexes.
In order to diversify real estate investing, EquityMultiple offers individual and pooled investment options as well as a range of different risk profiles for deals. Investors choose from three main kinds of real estate investments: a diversified portfolio of properties, single properties, or notes (more on this last one later). Like in online startup investing, investors can choose from a range of investment vehicles within these options, including equity, preferred equity, and debt. Investment minimums are typically $5,000 or $10,000 depending on the product (notes or direct investments), with fund investing minimums sitting at $20,000.
EquityMultiple generates revenue in a few ways: upfront fees for the use of tech and diligence which are paid upon close of investment, ongoing asset management fees from investors, and one-time incentive fees sourced from profits earned by a developer or investor. Fees vary by product, but for direct investments, annual fees are typically 1% or less. Most equity investments have either a 1% annual asset management fee or a flat annual service fee of $250.
Having multiple revenue streams, some transactional and others recurring, is an ideal business model for minimizing risk — cluing us in that EquityMultiple knows what it’s doing.
The Wide World of Online Investing
Our team is always rooting for the online private markets to grow. And investing platforms have certainly taken off. I’ve seen several new online startup investing platforms surface each year. The industry is gaining both legitimacy and popularity. What was a nascent market in 2020 is now relatively well established, though still pretty young. It has huge room for growth. Some of that growth will come from new platforms. And some will come from existing platforms expanding their customer bases and offerings. A few platforms, like Republic, are already adding real estate to their portfolios to grow their business.
And while there is no shortage of investing platforms that specialize in real estate, the market is still establishing itself. The global real estate crowdfunding market — valued at $10.8 billion in 2021 — is expected to grow at an astonishing annual rate of 45.6% from 2018 to 2030. And most of that growth will come from the North American market.
So much market potential means that EquityMultiple faces several capable competitors. CrowdStreet is one of them. It offers fund, industrial, multi-family, and hospitality deals across a range of geographies. CrowdStreet investors have deployed $4 billion in more than 732 projects as of December 2022. Currently, CrowdStreet is exclusive to accredited investors. CrowdStreet does not charge investors a fee on direct investment but instead has a 1% to 5% fee for sponsors and a 0.25% to 2.5% fee on tailored portfolios. Similar to EquityMultiple, the fee structure appears to largely depend on the product. In some cases of direct investments, CrowdStreet may be a cheaper option for investors. The range of properties, however, is relatively similar to EquityMultiple’s range.
Again, crowdfunding platforms like Republic also have real estate investing opportunities, though real estate is not their focus. Many Republic offerings are, however, open to non-accredited retail investors. Fundrise and Yieldstreet are two other big players in online real estate investing. Fundrise does not require accreditation, and investors pay a 0.15% annual investment advisory fee plus an annual management fee of 0.85% to 1.85%. At this time, EquityMultiple does not have options for non-accredited investors. So Fundrise wins out when it comes to accessibility — though likely not for long, as I’ll explain in a bit.
There are also publicly traded real estate investment trusts (REITs), but they don’t allow investors to pick and choose which properties and investment vehicles they invest in. They give investors far less optionality. What’s more, EquityMultiple is outperforming REITs by a mile. It’s giving investors a total net return of about 17% — much better than most public REITs.
Democratized Investing (Sounds Familiar)
Overall, portfolio offerings and fees aren’t going to distinguish EquityMultiple from its competitors. Each is a slightly different take on basically the same product.
But on closer inspection, EquityMultiple is finding ways to stand out from the crowd. For one, Charles and his team have introduced the Alpine Note. It’s a short-term (three- or six-month) debt instrument that is similar to a certificate of deposit. (For those unfamiliar, certificates of deposit pay a fixed interest rate for a set time period.) The note works to prefund investments within the EquityMultiple portfolio. There are no fees for investing with Alpine Notes. And the minimum investment is just $5,000, the lowest the company offers. It’s much more accessible than investing directly in the portfolio with required $10,000 minimums. The shorter terms also allow for faster liquidity.
Additionally, EquityMultiple offers access to real estate debt, which most competitors do not. This may be particularly attractive for investors in a higher interest rate environment. In the next few months, EquityMultiple plans to offer a diversified real estate debt product focused on paying a high coupon (aka a high annual interest rate) while providing liquidity options.
EquityMultiple also plans to move into the non-accredited investor space. As someone who is 1) a non-accredited investor and 2) a champion of democratizing online investing, I applaud the move. A non-accredited product in the form of a Regulation A fund is in the works. And those frustrated with the lack of liquidity in the online private markets have something to be excited about: Investors will have the option for a redemption request after one year.
The move is really a long-term marketing play — and takes a page out of Apple’s marketing playbook. Apple put a lot of emphasis on selling its products to students who would (hopefully) become lifelong customers, buying more expensive products as they moved up the wealth ladder. Charles hopes EquityMultiple’s non-accredited customers will eventually amass enough wealth to become accredited and continue using the platform. Non-accredited real estate investing is in no way exclusive to EquityMultiple, but it’s necessary if EquityMultiple wants to provide a comprehensive solution and become one of the leaders in online real estate investing.
EquityMultiple’s value proposition can be summarized in two words: accessibility and simplicity. Again, it’s hard to stand out in this market. But the Alpine Note is unique and creative, and it expands the product suite into real estate debt. It will fuel EquityMultiple’s stellar track record of 81 assets exited with a gross internal rate of return (aggregate return on investment before management fees and taxes) of 18.7%. At the same time, it will promote simplicity and accessibility with lower minimums and liquidity options. The non-accredited product is less of a differentiator and more of a long-term marketing play. But should it gain traction, EquityMultiple could become one of the most comprehensive real estate investing platforms out there.
Making It Stick
My excitement around the product offering and future rollouts was tempered by a few reservations about the company as an investment opportunity.
EquityMultiple has 40,000 registered investors. Of those users, 3,600 have made an investment with an average check size between $25,000 and $30,000. The number of registered users on the platform is quite impressive, but only around 9% are making investments. I don’t love those stats.
In response, the team’s plan is to take a more data-driven approach to engagement while growing the investor relations team. Charles told me that he is in the process of transitioning EquityMultiple from a 506(b) to 506(c) platform. Without getting too technical, this regulatory shift will enable EquityMultiple to collect a lot of personal information that users aren’t always willing to give with 506(b). That and getting more data from data providers should improve customer targeting, eliminate some of the dropoff, and expand the company’s ability to attract new users.
The non-accredited product may also make for better conversion in the long term. Again, if users grow their wealth and trust the platform, they may continue to invest once their accreditation status changes. As more users join the platform and more capital is deployed, there will also be a greater sense of legitimacy. Similar to startup investing platforms, early adopters will pave the way for curious investors to feel safe deploying capital. And given that users average five investments, it is clear that those who use the platform love it.
The Road Ahead
But before taking on the future, EquityMultiple has to navigate through a difficult and challenging present. Real estate prices are dropping across the board. And while there are exceptions, it’s difficult to identify opportunities that are resistant to current market trends.
The company has options, though. It can finance properties that represent outstanding bargains and then simply wait for the market to rebound. Or it can turn to refinancing loans backed by properties with solid fundamentals.
Charles says he’s looking at both options. And that’s smart. Picking and choosing from each option is the right approach. But right now, the real estate market represents as much risk as it does opportunity. And over the next 12 to 18 months, it will require careful maneuvering and some very smart decision making.
I believe Charles and his team are up to the challenge. Charles has a decade of real estate experience behind him. And his leadership team has the technical, financial, and legal expertise to perform at the highest levels. While not exactly reinventing the space, some of the company’s products are breaking new ground. EquityMultiple’s last reported annual revenue of $8.5 million is in line with its $90 million valuation cap.
Remember, as a cap, that $90 million represents the maximum possible valuation investors would be assuming. If things don’t go as well as expected, investors will automatically be converted to equity at the lower valuation of the company’s future round.
Startup investors are, by definition, long-term investors. And the long-term trends for online real estate investing are bullish. The big prize is tapping into a potentially huge non-accredited real estate investor market.
EquityMulitple fully understands the stakes. If all goes according to plan, it will be one of the very early online companies offering attractive real estate return rates to online investors. And it doesn’t have to be the biggest company in a market of this size. If it simply becomes a major player, investors will be handsomely rewarded.
Deal Details
Startup: EquityMultiple
Security type: SAFE
Valuation cap: $90 million
Minimum investment: $100
Where to Invest: Wefunder
Deadline: April 30, 2023
How to Invest
If you choose to invest in this Top Deal, EquityMultiple is raising capital on Wefunder. If you don’t already have an account with Wefunder, you can sign up here.
Once you’re logged in, visit the EquityMultiple raise page. Be sure to review the deal page and offering documents thoroughly before making an investment. When you’re ready, click the red “invest” button. Enter in the amount you want to invest, starting as low as $100, and then move through the required steps. Make sure that your investment is confirmed, and then you’re good to go.
Risk
Startup investing is inherently risky, and startup investors should expect to hold their investments without liquidity for five to 10 years. Never invest more money than you can afford to lose.