Investing with Alpha Investing: An Overview
Last month, I made my first investment with Alpha Investing, a private real estate crowdfunding platform that focuses primarily on private multifamily and senior living real estate investment opportunities.
They have also offered investments in student housing, self storage, office, and have made one investment each in each of two real estate funds (as opposed to individual projects), one multifamily and one commercial real estate debt.
Value-add multifamily investments are the most frequent type of investment available via the platform. They focus on projects where large apartment complexes are purchased, renovations are made to improve the exteriors and individual units, rents are raised appropriately, and the property is then sold, presumably for a profit.
This perfectly describes the investment that I made with the $10,000 minimum in a growing Arizona city that I visited earlier this year. It is far too soon to know how this investment will work out since the planned holding period is about five years, but we can look at past investments made, how the investments are chosen, and the relationship Alpha Investing likes to have with investors like me.
Investing with Alpha Investing: An Overview
My Real Estate Investing Experience
I know many investors whose primary source of income and wealth has been real estate. That is not the case with me, but in recent years, I’ve been diversifying my portfolio by adding real estate investments to the mix of stocks and bonds in my portfolio.
For years, I have had 7.5% to 10% of my portfolio in the Vanguard REIT index fund. The mutual fund owns numerous publicly traded Real Estate Investment Trusts. It’s a tax-inefficient fund due to both turnover (24% the last fiscal year) and the fund’s yield of about 4% per year. As such, I own it in my Roth IRA.
More recently, I’ve added individual lakefront property that I purchased, and investments in crowdfunded real estate. In total, I’ve invested nearly an identical amount of money in these crowdfunding opportunities than I spent on our recent home purchase — $90,000 apiece.
As I continue to get my feet wetter in this space, I do believe it’s a good idea to spread your risk around by investing in multiple types of deals on multiple platforms.
EquityMultiple tends to focus more on commercial real estate. Acretrader focuses on farmland. Peerstreet lets you make loans on individual residential properties. Each of these three requires you to identify as an accredited investor — you need to have income of $200,000 as an individual or $300,000 as a couple or meet the net worth requirement of at least $1,000,000 net worth.
I’ve invested with each of them after spending some time learning more about what they do and how they do it. My most recent real estate investment was made with Alpha Investing. I was introduced to them by my friend Peter Kim, MD, who I should mention has a small equity stake in the company.
I will also disclose that this website is reimbursed with referral fees if you register with any of the aforementioned companies to get a closer look at their current investment opportunities. It costs you nothing to browse, and each referral supports our charitable mission. As I recently announced, that includes funding the salary of one full-time physician in Honduras.
Getting to Know Alpha Investing
After registering with Alpha Investing, I received a phone call from Adapia D’Errico, the Vice President of Strategy. The phone call had nothing to do with me being a VIP. In fact, every potential investor is required to speak with one of Alpha Investing’s principals before receiving access to the available offerings.
They want to know about the investors they’ll be working with and also want to ensure the investor has an understanding of what (s)he’s investing in. This, from an operations point of view, is a labor-intensive step, but it adds a personal touch that I have not seen from the other platforms. This is why Alpha Investing views itself as a “private capital network” rather than a true crowdfunding platform.
The company started as a group of real estate investors inviting close friends and family to invest with them. They’re continuing with a similar relationship-based approach while opening the opportunities to a broader set of individuals.
I chose from one of two investments available at the time I joined. They have now made about three dozen investments over four and a half years. An impressive amount of vetting of the sponsors and due diligence of the individual investment opportunities takes place before an opportunity is offered on the platform.
If all goes according to plan with the particular investment that I made in Arizona, I’ll more than double my money in five years, with a 2.13x equity multiple, translating to a 17.4% IRR.
How Alpha Investing Selects Private Real Estate Investments
Rather than screening hundreds or thousands of potential deals, as some volume-based platfoms might do, they focus first on working with the right sponsor.
The sponsor is the entity that puts together the individual private deals. The sponsor identifies the targeted property or properties, does due diligence on the investment potential, creates a strategy and a plan to execute the strategy, and sees it through to completion.
Part of the strategy involves raising funds, and that’s where wealthy individuals and crowdfunding platforms come into the fold.
As an individual, you may only have access to one of these syndicated real estate investments if you have a six-figure or seven-figure sum to invest. However, a crowdfunding platform can raise this money from a variety of investors who each invest a minimum, usually a low five-figure sum like $10,000.
Alpha Investing only works with institutional sponsors who meet certain criteria. This includes a track record of at least a few hundred million dollars in prior acquisitions. In most cases, the number is in the billions.
Individual investments from these vetted and trusted sponsors will receive additional due diligence by the Alpha Investing team to ensure the sponsors’ goals are aligned with theirs.
Alpha Investing Fees
How much will you incur in fees when you invest with Alpha Investing? First, understand that there are sponsor fees. These will vary by the sponsor, the deal, and Alpha’s position in the particular deal.
In addition, you’ll pay a 2% origination fee and a 0.5% annual fee. Spread out over five years like the deal I invested in, the 2% could be considered 0.4% per year for a total of 0.9% (0.5% annual fee + 0.4% origination fee) per year.
If a deal performs well, with returns above 10%, the investor keeps 80% of the excess return above 10% and Alpha Investing keeps 20%.
To better understand what that looks like, I’ll share an example that I was given when I joined the network.
“Let’s assume an investor makes a $100,000 investment that lasts for five years. Then, let’s assume that net of our
origination and management fees, the investor gets the following distributions over the five years:
— Year 1: $5,000 (5.0%)
— Year 2: $7,000 (7.0%)
— Year 3: $8,500 (8.5%)
— Year 4: $9,500 (9.5%)
— Year 5: $10,000 (10.0%)
In this example, the investor receives a total of $40,000 (40% total) in distributions over five years, which comes out
to an average of 8.0% per year.
Now let’s assume that the project sells, 100% of investor capital is returned, and there is an additional 50% of sales proceeds from the sponsor before our performance-based fee.
Because the investment was active for five years, the investor must receive a total of 50% ROI, (i.e. 10% a year on average) before we take any performance-based fees. The investment only paid out 40% total before the sale, so the investor is owed a catch up of 10%, which is taken from the 50% sales proceeds.
After the catch up is paid and the 10% cumulative preferred return is achieved, there is 40% of sales proceeds remaining to split. That 40% is split 80/20, so the investor receives 32% and Alpha Investing receives 8%.
When that 32% is added to the 50% ROI that was received before the performance fees, that brings the investor’s ROI up to a
total of 82%.
Finally, if one would like to think about investor returns relative to Alpha’s total fees, using the same example above, one can take 2% origination fee at the onset, take the 0.5% annual management fee (2.5% total over five years), and take the 8% performance based fee to get a total of 12.5% over five years, relative to the investors’ 82% ROI.
If one views the two as a whole, an investor would receive 86.8% of the total pie, while Alpha Investing’s fees make up 13.2%. As such, our fees are not overly dilutive to the total return, and the vast majority are only charged if the project performs well, so again, our interests are aligned with our investors’.”
Platform fees can be avoided by investing directly with the sponsors as a limited partner.
However, be prepared to invest a significant sum of money. If you are a multimillionaire and comfortable investing a six-figure sum in a single deal, you can cut out the middleman and their associated fees.
You will lose the ability to spread your risk out across numerous deals and sponsors unless you’re able to invest maybe $500,000 or more. You also lose the benefit of having aditional diligence performed on the sponsor and the deal.
That may be the route I go eventually, but I’d like to see some of my smaller $500 to $50,000 investments perform as expected before taking that next big step.
Getting Started with Alpha Investing
Alpha Investing is one of several crowdfunded real estate platforms that will give you, as an accredited investor, access to value-add multifamily and other real estate investment opportunities.
The personal relationships they like to develop with their investors, along with the extensive amount of sponsor-vetting and due diligence into individual deals, makes them an excellent choice to make your first foray into real estate investing, if and when you’re ready.
Have you registered or invested with Alpha Investing? How has your experience been with crowdfunded real estate opportunities in general?