That’s “buyer beware” for you non-Latin scholars. It’s a phrase common in the real estate investment world to caution investors from buying properties that have problems not visible to the trained eye.
These days, however, the phrase seems more applicable when real estate investors are looking for the right online investment platform. They all seem to forecast high returns, but what differentiates one from the other? Caveat Emptor!
Don’t let the enticing profit headlines distract you from the fine print – where the true story lies. This is where online investment platforms really make their money, charging fee after fee, eroding the take home returns to the investor. Fees reduce investment portfolio returns so substantially that the SEC issued a warning to protect investors.
This article will help you weed through the fine print of the online real estate platforms so you can quickly discern the low fee providers from the high fee providers. Armed with this information, you’ll be able boost your real estate returns… and look great doing it!
Types of Fees
Generally speaking, there are four types of fees in any passive real estate investment vehicle, including online real estate investment platforms: 1) one-time offering fees, 2) ongoing asset management fees, 3) transaction fees, and 4) performance fees. Let’s delve in.
#1) One-Time Offering Fees
This is the initial fee charged by a sponsor for setting up the investment vehicle, and is intended to cover legal, marketing, and organization formation costs. Seems reasonable.
But sponsors often say they target a certain percentage, say 5% of your initial investment, but that percentage only applies if they reach their fundraising goal; otherwise the percentage grows if funding comes in short.
Say that platform marketing a 5% “target” setup fee only raises a third of its goal – your actual setup fee could triple! That is unless you select a platform such as stREITwise, which guarantees a low 3% fixed offering fee, regardless of fundraising success.
#2) Ongoing Asset Management Fees
This is the ongoing fee charged to help cover the sponsor’s costs associated with employing the personnel and maintaining the infrastructure to acquire and manage the properties. Also seems reasonable.
But what if the sponsor running the online platform isn’t actually running the properties? Then what are they earning a fee for? Good question!
Instead of hiring a team of seasoned real estate professionals and managing the properties themselves, a lot of online platforms are merely online banks that take your money, charge an asset management fee for “managing” your money, and then give it to someone else to actually invest in real estate. And guess what – that someone else is likely charging fees as well to do the work you think you’re paying the platform sponsor to do. The key is to find a sponsor like stREITwise that employs a bench of real estate veterans to manage the properties directly and charges a low ongoing asset management fee.
Feeling slighted? We’re just easing you in. It’s about to get a LOT worse!
#3) Transaction Fees
This is where the really offensive fees start to set in. Transaction fees are charged by sponsors for events or actions over the lifecycle of a real estate investment. The sponsor buys a property – charges an “acquisition” fee; puts a loan on the property – “financing” fee; signs a lease with a tenant – “leasing” fee; completes a renovation – “construction management” fee. And when all is said and done and the sponsor sells the property – “disposition” fee. These are just a sampling of the transaction fees sponsors buried in the fine print, and they are all coming out of your pocket!
But wait a second, what was the asset management fee for? Isn’t the asset management fee supposed to cover all these? Another good question! Sponsors such as stREITwise, which doesn’t charge any transaction fees, say yes!
And we saved the worst for last!
#4) Performance Fees
And now for the worst one of them all, and predictably the hardest for novice real estate investors to understand. Performance fees, aka “incentive fees,” are charged by sponsors based on the performance of the underlying properties or funds.
While we could spend pages on various performance fee structures, we’re going to illustrate two general ends of the spectrum just to give you the basics.
- MOST “Fair” Performance Fee Structure – In this instance, the performance of all the properties is bundled together or “cross-collateralized” so that if some properties fail and others perform well, you likely don’t end up paying performance fees on the entire portfolio. Additionally, the performance fee is subject to the portfolio hitting a “preferred return” that the investor needs to achieve before the performance fee kicks in.
- LEAST “Fair” Performance Fee Structure – In this instance, the performance of all the properties is NOT bundled together or “cross-collateralized,” so the sponsor could charge performance fees on the successful properties while leaving you holding the bag on the rest. And rather than paying their investors a “preferred return” first, the most egregious structures allow sponsors to charge performance fees on “revenue” even if the properties are not generating enough revenue to pay property expenses. Translation – the sponsor is getting paid for “performance” even though the properties are under water!
Sufficiently confused? And these are just the basics on performance fees – imagine what the real fine print looks like! Instead of mining that minutia, how about instead choosing a sponsor such as stREITwise that charges NO performance fees? Sure makes things easier, right!
So you’ve made the informed decision to invest in real estate through an online real estate platform. Congratulations! That’s a great first step, but your work isn’t done. You now must find the right opportunity with the right platform. Even the most experienced investors will tell you the best place to “peek under the hood” is to see how much the sponsor is taking in fees. There are online platforms with no real estate expertise charging excessive and hidden fees, and there are a select few such as stREITwise that employ seasoned vets in a platform grounded in a low and transparent fee structure.
So instead of doing a lot of unnecessary exercise to boost your real estate returns, why not try a low fee diet!
stREITwise – No hidden or excessive fees. No BS. Begin your journey.
Eliot Bencuya is the co-founder and CEO of stREITwise. Eliot has extensive experience identifying, underwriting, and executing value-add real estate investments.
Prior to forming stREITwise, he was a Vice President of Acquisitions for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for originating, underwriting, structuring and executing transactions in the Pacific Northwest, Northern California and Midwest regions. Mr. Bencuya also held positions at Sovereign Investment Company (a subsidiary of the Marcus and Millichap Company) and the investment banking division of Merrill Lynch & Co. He holds a Bachelor of Arts degree in Economics and International Studies from Yale University, and a Masters of Business Administration degree from the Haas School of Business at the University of California, Berkeley. Mr. Bencuya is a member of ULI.