Distinguishing Diversified Real Estate Investment Funds vs. “Crowdfunding”
As we continue our Impact Series today, we identify some fundamental differences between investing in: a) real estate investment funds that manage well-diversified portfolios of equity or debt in properties and; b) investments on “crowdfunding” platforms that aggregate investors for stand-alone properties. Unfortunately, these distinctions relate to recent headlines focused on investor losses due to greater investor risk on crowdfunding platforms.
Due Diligence Limitations
Crowdfunding platforms, unlike diversified fund portfolios, typically direct individual investors to make investments in a single project. Those investors choosing to invest in a particular project then pool their investments to fund that project. By forcing investment in a single project, investors, to an extent, need to be a bit of an expert in their selection of a project. This approach benefits those investors who have strong real estate experience and local market knowledge. It also allows individual investors to enter real estate markets for far less money than investing in properties on their own, since their investments are aggregated with other small investors to capitalize specific properties.
The question is, just how many investors have the due diligence knowledge to discern local market conditions and specific property dynamics? If you live in Raleigh, will you be able to amass enough market knowledge to choose an asset in Dallas? Even if an investor has local market knowledge, chances are they would not have access to market/demographic studies that report and forecast future market growth, occupancies and rent rolls, or other due diligence resources. While the crowdfunding platform is expected to vet specific deals, the platform is essentially syndicating out to each investor an investment in a stand-alone asset.
On the other hand, diversified real estate investment funds, such as those which DLP Capital manages, can mitigate such risks. An investor’s investment in a fund spreads the risk across a portfolio of multiple properties rather than a single one. Investors benefit from a robust due diligence process that can involve hundreds of criteria performed by the fund manager. Many funds also spread the portfolio across a wide geographic area, which further limits risk. In our case, our funds’ investments are spread across many markets in more than a dozen states. DLP Capital, in most cases, has its own experience operating properties and long-standing sponsor relationships in those markets where our funds invest. We’re able to pass along the benefit of our market knowledge to our investors so they don’t need to be the experts in each and every market. That expertise is the business we’re in, day-in and day-out.
Performance-Based Approach: Asset vs. Property Management
Another distinction among platforms may be whether the platform utilizes active asset managers on staff or relies solely on property managers. Most deals offered on crowdfunding platforms rely on a sponsor/operator to provide property management. What’s the difference between an asset manager and a property manager? The main difference is that real estate asset managers focus on maximizing a property's value for investment purposes, whereas property managers handle the property’s daily operations including maintenance.
Chances are, anyone reading this has been a renter at some point in their lives. When the heat or air conditioning goes kaput, or a property’s physical structure poses hazards, the property manager typically steps in to fix a problem.
That’s quite different than an asset manager who is continually keeping an eye on how to maximize the total worth of a real estate investment. An asset manager’s duties can involve: analyzing market conditions; enhancing an asset through renovations; mitigating financial risks; altering the rental pricing strategy; branding the property; and developing an exit (sales) strategy for the asset. In our case at DLP Capital, we have an entire asset management team to optimize the investment value of each and every asset in our portfolio—in addition to ensuring that property managers keep individual assets well-maintained.
In essence, in our case we take a performance-based approach to assets. Our active asset management approach is aligned with the interests of our investors.
By its nature, real estate is not a liquid asset when compared to, say, a stock that can be sold on a minute’s notice. However, when it comes to real estate investments, there are degrees of liquidity, for sure.
An investment in a single, stand-alone property, for example, is an investment that cannot easily be sold for cash if the need arises. Instead, the investor may have to wait on other investors or in some cases the approval of the sponsor/operator or the platform manager. If ever there were an emergency, an investor could be hard-pressed to cash out on an investment.
A diversified investment fund, on the other hand, does not rely on any one asset for liquidity. To maximize portfolio values overall, various assets may be acquired and/or sold over time, allowing for a degree of liquidity. DLP Capital, for example, offers its investors 90-days’ notice for redemption on select funds and annual redemptions on other funds that it manages.
Real estate operator or middleman?
In essence, perhaps the most significant distinction between real estate crowdfunding platforms and diversified real estate investment fund managers, such as DLP Capital, boils down to this:
Crowdfunding is an online marketplace that aggregates investors, using the aggregate pool of capital, typically to fund a specific real estate project. The crowdfunding platform acts like a broker.
DLP Capital, on the other hand, is a real estate operator. We are evaluating deals from the perspective of investors—not just as brokers. This distinction is crucial because it means that when investors participate in our funds, they directly invest alongside us in our real estate projects—and our professional asset managers take care of the underlying real estate investment decisions. This investor-centric approach allows us to make decisions that prioritize long-term growth and protection of capital.
More on the DLP Capital Approach
We have skin in the game
Many of our team members, including senior leaders, have personally invested in our funds. This highlights our confidence in the investments that we offer to others. We invest alongside our more than 2,500 investors because we believe that our real estate funds offer some of the best investment opportunities for growth and preservation of wealth.
We prioritize relationships with trusted partners
Building direct personal relationships with the real estate sponsors we partner with is paramount. We turn to those with proven track records whose business models align with our mission, core values and investment strategies. In addition to performing extensive due diligence on those with whom we partner, there are ongoing, rigorous reviews to satisfy compliance with our stringent risk-management policies. By fostering strong partnerships, we strengthen the overall success of our projects.
Transparency and open communication
We host regular webinars that delve into the details of each of our investment funds, including fund structures, asset updates, and portfolio performance. These webinars are usually hosted by our CEO, who always makes time for live Q & As. We also offer easily accessible quarterly reports for each fund—available in our investor portal, where investors have on-demand access to performance history. Our continuing and transparent communications may differ significantly from other investment platforms where the post-investment experience may depend on the sponsor/operator and their willingness to openly communicate.
In short, real estate can be a great addition to an investment portfolio, providing the opportunity for superior returns while generating passive income. But not all real estate investments are the same, and the approaches to investing differ significantly. Since the inception of our investment funds portfolio, we’ve experienced zero principal losses, never missed providing a preferred return, and have consistently paid out millions of dollars in distributions to our investors.
At DLP Capital, we are stewards for our investors’ capital, and every decision we make prioritizes our investors and the trust they have placed in us. Throughout our 17+ years in business, we have worked tirelessly to build and manage private real estate funds that make a difference in America’s affordable housing crisis—while increasing the wealth of our investors.
Risk Disclaimer: Investing in private real estate funds and notes secured by real estate has certain inherent risks, which could result in the loss of some or all of your principal investment. Your decision to purchase and invest should be based on your own particular financial circumstances and investment objectives. DLP Capital Partners, LLC (formerly known as DLP Capital Advisors, LLC), its officers, and representatives can in no way guarantee or warrant your success. Consult your tax advisor or financial advisor before investing. Past performance does not guarantee future performance.
Note: DLP Capital shall not be bound by or held responsible for typographical errors or omissions. In the event of an error, please reach out to DLP via email or phone.