Real Estate crowdfunding is a relative newcomer to the crowdfunding space. Kickstarter, Indie Go Go and other crowdfunding sites have revolutionized business investing, but until now, Real Estate crowdfunding was not legal. That all changed in 2012 with the passage of the Jumpstart Our Business Startups (JOBS) Act. Now, real estate developers and investors can get together on deals the same way many small businesses get started – with small amounts of money from a large amount of people.
Former AT&T executive Aaron McDaniel hopes Real Estate crowdfunding is “the next big thing” and he wants at least one Shark to think so too; he pitches his solution, Tycoon RE, in episode 620. Tycoon RE is still in its infancy stages, but it hopes to be a big player in what promises to be a lucrative space.
In the past, if you wanted to invest in Real Estate, you either needed to incur a lot of debt, shell out a lot of cash, or invest through a Real Estate investment trust. These are all very good ways to invest in real estate, but they require large amounts of money. With Tycoon RE, you can invest in a property or development for as little as $1,000. This opens up Real Estate investing to the masses and provides capital to developers that wasn't there before.
What Tycoon RE does is act as kind of a middleman between developers and investors. The website lists properties and ranks them for risk on a scale of one to five. They also make projections for profits. When an investor plunks down money on a project, they become a shareholder in an LLC for each particular project. There are income property opportunities and “flips” listed on the site, so investors can diversify. Tycoon RE acts as a manager for each project, managing the money, handling the various LLC's, and conducting all the paperwork. Just like Kickstarter, if a project doesn't get funded, no money changes hands.
The company operates in San Francisco – a “hot” market with rapidly appreciating values and high rents. Their goal is to operate in most major cities across the country. Real Estate crowdfunding is new, but they hope the familiarity the public has with the concept will help fuel sales and create a new source of capital in real estate investing.
My Take on Real Estate Crowdfunding
I like the idea. Making markets available to more people is always a good thing. I think Tycoon RE will help many people who would otherwise not get involved with Real Estate make money and build wealth. That said, with 30 odd years in the Real Estate business in the legal, financial, and sales side, I don't think it will be easy. But, as Tom Hanks said in A League of Their Own, “it's the ‘hard' that makes it good.”
Every Real Estate deal has its problems and each one is different. Even “smooth” transactions have a fire drill-like quality; people get pretty hopped up when there is so much money at stake. Tycoon RE better have an efficient and patient staff if they are going to manage this operation successfully.
The other question I have about the business is will it work in every market? The way the market is in San Francisco right now, you have to try to lose money. Prices keep going up and there's no sign of the market cooling anytime soon. I wonder if Tycoon RE can get traction in more tepid markets.
My last objection is the potential for fraud. Unscrupulous developers could abuse the system and not fulfill their end of the bargain, leaving investors holding the bag. Mr. McDaniel claims the market will ultimately correct fraud and root out the bad actors; he also is very upfront with users of his site about the risks involved with Real Estate investing.
Even with so many potential issues, I still think Tycoon RE is a good business idea. Real Estate crowdfunding is here and it's likely here to stay. Someone will figure it out, why not Tycoon RE?
Are Sharks Investors?
The Sharks will likely have the same reactions as I did. There are a lot of obstacles and objections to making a successful business out of Real Estate crowdfunding, but some or all of the Sharks should see the bigger picture. I am very interested to hear Barbara Corcoran's take on this business model.
What this deal will come down to is the people involved in the company and, for the sake of the Shark Tank appearance, that means Aaron McDaniel. He's going to have to give a perfect pitch and have all his numbers lined up for the Sharks. We'll likely hear Mr. Wonderful's standard “I can start-up Mr. Wonderful's Real Estate crowdfunding company, what do I need you for” speech at some point during this pitch.
While the Sharks may have the vision to see Real Estate crowdfunding as a model for the future, I can only see Mark Cuban taking a flyer on this business. It has the potential to be a huge business, the question is, is Tycoon RE going to be a long-term player in the space?