How Real Estate Crowd Investors Make Returns

Here we explain a few of the most common investment return models

For many investors, crowd investing is equal parts supporting small business, the local economy, and making a return on their money. Supporting small business and the local economy are pretty straightforward. Your money will go toward a real estate project that creates jobs, the real estate serves to improve the quality of the local area in some way and the business owners benefit from the success of the project. As the investor, when the project is successful, you are rewarded in the form of a return on your investment. This return, however, can take many different forms and so it is important to understand the terms of the deal in which you invest.

Here we explain a few of the most common investment return models that issuers may use for their offering.

Common Offering Types
Term Notes

Term notes are a type of loan agreement between an issuer and investors in which the investors are paid back the original invested sum (the principal) as well as interest (the interest) on the principal over a determined period (the term). In the case of crowdfunding, the investors fund the offering (the principal) with the interest and term to be determined by the offering terms. When an issuer makes payments on the note, the money is distributed directly back to the investors via the crowdfunding portal.

Revenue/Profit Share Note

Revenue sharing notes are an agreement between the investor and company wherein the company agrees to pay the investor a percentage of the gross revenue of the business on a periodic basis until the initially agreed upon "repayment amount" is met. In this case, the debt is repaid not on a fixed basis, but is dependent on the amount of revenue the business is bringing in. In this case, the investor is repaid typically on a monthly or quarterly basis where the payment amount is a percentage of the revenue from a property. These payments continue typically until the original investment (the principal) is repaid plus some fixed return amount. For example if the offering terms state the profit share is 50% of the after expense revenue up to 2X the principal, the investors will receive 50% of the profit from a property on an ongoing basis until the principal is repaid twice over. After the total repayment the issuer owns the property outright and no longer pays out to the investors.

Interests Purchase Agreement w/ Revenue Share

Membership units represent an investor’s fractional ownership stake in a limited liability company (LLC). Investors (members) hold a membership interest, which gives the investor profit and voting interests in the LLC, which can be altered by the terms of the contract. (You must carefully read the deal terms to know your investor and voting rights.)
LLCs:

  • Distribute membership interests in any manner they prefer, rather than ranking members by their total contributions.
  • Add the investor’s name to a ledger, rather than issuing stock certificates (like a corporation would).
  • If profitable, the Manager (similar to a President or Chairperson) has the power to make distributions to members. This is similar to dividends made to stockholders in a corporation.
  • If the company is sold or merged, members will receive cash or equity as consideration for their ownership right.

Typically, in offers where the security is an Interest Purchase Agreement, the terms of the deal will outline an agreement between the manager (issuer) and members (investors) for sharing revenues or profits. An example could be a “fix-and-flip” portfolio in which an issuer is looking to raise money to flip houses over a period of time. During this period, typically there is not a distribution. Often for deals like this, at the end of the “investment period”, or the amount of time the manager has to use the funds on the projects, there will be a single distribution with a profit share between the parties. If the profit share agreement is 50%, at the end of the investment period the investors and manager will split the profits 50/50.

Conclusion

At the end of the day, no matter your reasoning for investing, the return is what makes investing different from a donation. We invest for a return.

When evaluating a real estate offering on Pistachio be sure to carefully read the term deals, ask questions if you need to, and make sure you always understand exactly how you will get a return on any given investment.