Collaperty: P2P Real Estate Investing

by JT McGee

There’s a new site out there that I’m in love with. The concept is great.

Meet Collaperty, a website dedicated to funding real estate investments from multiple parties. Basically, it’s a mix of P2P lending and crowdfunding.

Investors can find other real estate investors who are willing to put up the capital to partner on individual real estate investments.

I’m basically giving them a free ad today, hoping that maybe we’ll get a few answers into how they plan to develop the service and how it can work to fit new crowdfunding legislation.

Real estate made easy

Collaperty is in its early stages. So far, the service works only to connect accredited investors (you gotta be rich!) to one another. It provides little servicing, unfortunately, recommending that deals be worked out between two parties offline, not through its website. For now, it is mostly a listing service.

That’s a bummer, but it’s a step in the right direction.

If nothing else, it’ll get the idea out there that multiple parties can come together through the internet to purchase real estate. Here’s what I’m hoping for:

  1. Crowdfunding exploitation – A new law allows businesses to raise equity financing from individuals who are not accredited investors. The law gives a cap of 2,000 shareholders for up to $2 million.
  2. More participants – The crowdfunding law allows for people to invest as much as $2,000 or 5% of their income in the equity of a small business. A small business could be a piece of real estate slapped into an LP with the Collaperty “sponsor” member being the GP. Why they aren’t opening this to more people, I’m not sure. I bet that’s the next step; right now they want to target the big money, and I can’t blame them.
  3. More liquidity – Prosper and LendingClub allow you to sell notes at any time. Collaperty could easily divide projects into shares and allow homes to trade on an exchange. Make the minimum share something like 1% of the equity value in the property, which would be sizeable enough to avoid mass participation but small enough to be manageable for anyone with a remotely serious desire to get into real estate.

Ultimately, this service could really change the way real estate works. Real estate is tremendously illiquid, and this could really wrap up all the smaller parts of the real estate chain.

Flippers could use the service to sell a home quickly to investors who have a lower cost of capital. Community banks holding scores of foreclosures could list the properties for investors and sell equity in piecemeal. Property management companies would find it easier to attract long term contracts by buying homes and selling them to investors with embedded contracts for their preferred, low-capex part of the real estate pie.

Would you invest in other people’s real estate projects?

I know there are more than a few real estate investors – past and present – who read this blog. Knowing only what I know about them, I’d be willing to throw in a pile of cash on a deal with them, even if I were only going to be a limited partner. Why not? All-cash returns are probably in line with P2P lending returns, but with the safety of a hard asset and cash flows that should increase in line with inflation. Nothing wrong with that!

At the end of the day, I think the benefits of diversification outweigh the control issue of being an LP. Collaperty could quite easily collect historical information from seasoned real estate investors, which would stand as a resume for someone’s real estate credientials. Let the market decide!

On the retail investor side, I can’t help but think that Dave Ramsey fans would love this. Ramsey advocates unlevered investments in real estate, which despite being a position I’ll never wrap my head around, is a popular idea that could be exploited by Collaperty. There’s your man, Collaperty! Take it to the masses with Dave!

This is an idea worth developing. I know with certainty that I would happily invest in real estate projects if I had the opportunity to shop various opportunities in my area and around the country. If there were a liquid market post-IPO, I’d probably stop poking around in the stock market all together.

So I’m curious to know – would you invest in other people’s real estate as a limited partner? How small would each share have to be to pique your interest?

{ 7 comments… read them below or add one }

Value Indexer March 4, 2013 at 09:46

It could definitely be an interesting new option. But the real estate takes a lot of management, and you would have to trust in the small property management companies that would be drawn to this. I’m not in real estate but I don’t think a lot of property managers are quite that reliable. You would also have to get agreement from all the investors on whether major expenses are worthwhile; if a few investors don’t want to pitch in that could prevent property improvements. There’s probably an efficient size where a manager could establish a good reputation and pool cashflow to invest in improvements – maybe 100 units? They would turn into a mini-REIT then.

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JT McGee March 4, 2013 at 10:27

You got me with mini-REIT! That was pretty much my ideal scenario – Collaperty could basically allow for small-scale REITs made up of residential real estate. There’s no good publicly-traded pure-play for residential real estate. Collaperty could fill that void in some way. I’m sure investors would eat it up.

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STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION) March 5, 2013 at 08:47

From being involved with the law for over 35 years, I would be very, very careful here. It is very easy to get scammed these days and due diligence sometimes does not protect against fraud or a smooth con man. I would never get involved in this type of investment scenario. But that is just the opinion of a dumb tax attorney.

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JT March 5, 2013 at 16:58

I guess I’m just less skeptical of people’s intentions.

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Brick By Brick Investing | Marvin March 5, 2013 at 10:25

This is a very interesting concept. My first thought is people will exploit this service to fund their own houses. However, I’m sure there are safeguards for that. I have to admit I subscribe to the “Pioneers get slaughtered and settlers flourish” camp. I will sit back and observe how this site unfolds and may jump into it 6 – 12 months from now. Thanks for introducing it to us!

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Darwin's Money March 5, 2013 at 15:48

I’d be surprised if the returns end up where people would expect them to be. Good real estate projects will always have investors with capital to fund them. Crappy ones will be sold here. Kinda like the constant ads I hear on the radio for “lakefront property, guaranteed returns, blah blah blah.” If the deal were so great, the funds would be there and they wouldn’t be advertising to the public (suckers). The reason Prosper and P2P work is bc there’s arbitrage against higher rate credit card and student loan debt. In this case, it’s just plain lack of interest from real investors so they’re opening up the base to people who will not have the means to conduct due diligence or have a controlling stake.

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JT March 5, 2013 at 17:01

You know, that’s a really good point. There’s survivorship at play here. Why aren’t these funded? Then again, the market for money for real estate deals isn’t as good as it was a few years ago, especially since all cash deals get the first look.

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