JF2310: CrowdStreet With Darren Powderly

Darren has 17 years of commercial real estate experience, he started his career in brokerage, property management, and construction services. He then developed and acquired commercial real estate properties as a sponsor for syndicated investor groups and after 10 years came up with a concept for crowdstreet and has been building his business ever since. 

Darren Powderly Real Estate Background:

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Best Ever Tweet:

“Today online investing is probably more transparent than if you knew someone in person because of the access we have at your fingertips” – Darren Powderly

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Darren Powderly. How are you doing, Darren?

Darren Powderly: I’m doing great, thanks for having me on the show today. I’m a big fan.

Joe Fairless: Well, I’m grateful that you are on the show and I’m glad that you’re doing great. A little bit about Darren – he’s the co-founder of Crowdstreet; he’s got 17 years of commercial real estate experience, and he is, as I mentioned the co-founder of Crowdstreet. On Crowdstreet they’ve done over 460 different real estate investments. He’s also got experience doing his own deals, which he did. We won’t necessarily focus on that much, but he has experience acquiring and rehabbing various commercial products like retail buildings and industrial zone land and retail strip centers.

So with that being said, Darren, let’s talk a little bit about you and Crowdstreet and your background… Would you mind telling the Best Ever listeners a  little bit more about that?

Darren Powderly: Yeah. Thanks, Joe. I started my career out in technology. I was fortunate to graduate [unintelligible [00:04:02].10] in the mid-90’s. And in the mid-90’s, but me at least, I was like “Could I go to Wall Street?” You know, Wall Street was where it was at; prior generation had made all their wealth there. But I took the technology path and I went to San Francisco, and got about five years of experience in San Francisco before jumping ship… So the dotcom boom and the dotcom bust were early lessons for me. It was an exhilarating up ride, and then sort of a stomach-churning, gut-wrenching drop out of that experience.

So I got into commercial real estate… I jumped from tech to commercial real estate in 2003, and I had been doing that ever since. As you mentioned, I did some deals of my own; I was the president of a brokerage firm, and so I got some good cross-functional experience which I think is great for every early career; you learn as much as you can, do as many things as possible, figure out where your passion lies.

My passion was a combination of tech and commercial real estate investing, and that’s what led to the light bulb or the spark that became Crowdstreet in 2012. That spark went off in 2014, and I’ve been fortunate enough to run that business ever since.

Joe Fairless: It sounds like you’ve got the perfect background for your company – tech and commercial real estate coming together, plus president of a brokerage firm, so I would assume you know how to manage teams…

What aspects of doing your own deals have you then used to build out Crowdstreet?

Darren Powderly: Well, I syndicated equity when I was doing those deals. I brought together a couple of like-minded investors like me. I was not only the skin in the game, I was also the sweat equity. And fortunately, I was also bringing in other people that were doing the same thing. We all put a little bit of our money in collectively, we put our balance sheets together to get a loan, non-recourse in most of those cases except for one development that we did that had partial recourse… And decided who would play what role.

We got a number of deals done, and fortunately, the timing was good. When I started to invest was actually during the great financial crisis. Prior to that I didn’t have enough capital or experience, guts, or more importantly, just knowledge to do it. And it was during the great financial crisis where I started to get greedy when I saw real estate values just plummet. I bought some industrial land, I bought some townhomes that I still own… We developed a retail strip center across the street from a hospital that we knew had demand drivers there… So those were all very valuable experiences.

Also, because I was a real estate professional and I owned a brokerage firm, I did property management, asset management, construction services, as well as leasing, which was an important skill at that time. I had the right skills around me to take on these projects… And all of that was instrumental in giving me the confidence to eventually start Crowdstreet.

I had studied real estate investing, I got my CCIM, which some of your early listeners will know what that is; it takes a while to get that. I studied really hard. Some people call it the MBA of commercial real estate… And I think it is. The CCIM is a great program.

So it was a lot of hard work. One last comment on that is the ten-year rule. Malcolm Gladwell in one of his books talks about 10,000 and ten years of experience before you become “an expert”. I passed that. Before I started Crowdstreet, I had ten years of commercial real estate plus five years of technology prior to that… And I’m like a junkie for self-improvement and constant learning. I still am a voracious reader every single day, and all those things led to the ability to have that level of confidence to start Crowdstreet.

Joe Fairless: I assume it’s fair to categorize Crowdstreet as a crowdfunding platform… Is that correct?

Darren Powderly: Yeah, that’s one way to put it. I think, Joe, today a more accurate way to put it is just like online real estate investing. People who wanna build a diversified real estate portfolio online can go to Crowdstreet and co-invest with some of the best real estate operators, developers, owners (otherwise known as sponsors) out there around the country. And they can do so in $25,000 increments. So it really is just more of a form of online syndication or online real estate investing, put even more broadly.

The crowdfunding term, while not necessarily inaccurate, has got a lot of stigma around it; it means a number of different things, and we’ve evolved the language that we use around our business to really just broadly online syndication or online real estate investing.

Joe Fairless: Alright, fair enough. So I won’t use that dirty term…

Darren Powderly: Although it is in our name… [laughs]

Joe Fairless: Yeah, right… [laughs] Good point on that one. But alright, online real estate investing. So there are other online real estate investing platforms out there… How do you all differentiate from them?

Darren Powderly: Well, the first thing is the commitment to sponsorship quality, and really institutional-grade sponsors and institutional-grade properties. What does that mean? We really work with firms that have been around for probably ten years on average, and have almost at a minimum had a 250 million dollars worth of track record at the asset level, at  a property level.

Then we also look for sponsors that have experience managing individual investors, their friends, and their family, and what they call the country club set. So we invest to get all that, and we do all of the background checks on sponsors and confirm everything… So it’s a super-high-quality bar of sponsors. The number one thing that sets us apart from anybody else is just that.

Joe Fairless: What types of questions do you all ask, that you don’t believe some other real estate investing online platforms ask?

Darren Powderly: First of all, for Crowdstreet we have a clearly-defined deal review process. You can find that on the Crowdstreet website; we put it all out there, extremely transparent. You can also find every single deal we’ve ever done and fully realized underneath our Marketplace Performance page, but that’s a separate topic.

So when we evaluate a firm, we’re gonna background-check the principals and the firm itself. We have third-party sources to do that; we use something called CLEAR, which is a background check on the company and the professionals [unintelligible [00:10:19].18] broker checks, and so forth. So really deep background checks. We’re gonna do interviews and reference checks.

We’re also going to confirm the track record that they provide us. So they provide us often a spreadsheet. “Here are all the deals we’ve ever done, and here’s how they’ve performed.” We’re gonna spot-check those and confirm that that in fact is true.

Then we’re going to give that sponsor a designation – Emerging, Seasoned, Tenured, Enterprise. So it’s pretty extensive. It’s really an application process; they apply, and go through it all – we go through their application, we do all the background checking, and we’ll accept a sponsor, or politely decline them before we even move to evaluating the asset. That’s step one.

Joe Fairless: If a sponsor comes to you and it’s a new relationship and they say “Hey, I’m looking at a deal to acquire; I’d love to work with you all”, what’s the timeframe for this vetting process? What does your team tell them?

Darren Powderly: The process from the first call – they call Crowdstreet or they ping us online, and we have a call… Let’s say they already have a deal in hand, that’s set up – we’re probably gonna be 2-3 weeks out to approve the sponsor and the deal.

We have an investment committee and a full team of analysts and so forth, that are working 24/7. We also have a tech-enabled deal submission process that gets us to pretty accurate Yes/No indicators. It’s not 100% AI [unintelligible [00:11:40].27] our technology and our data-driven and our predictive analytics, but it’s there. And what it does is it helps make the humans more efficient. So the humans can get to a pretty quick understanding of who is the sponsor, and then is this asset, their business models and their projections on the asset realistic?

We’ve got 4-5 different third-party databases that we’re running models against, and that gets us to ask the right questions. The human engagement on the phone, and — while we don’t actually visit the properties in-person, which some institutional investors do, we have so much online now, and so many things at our fingertips.

So it takes about 2-3 weeks to get to a yes. That’s assuming that the sponsor has everything we need; that often is a cause for a delay.

And then we’ll sign our agreements, and it takes us a couple of weeks to get it published on the Crowdstreet marketplace. So you’re already talking over a month before the deal is launched on the Crowdstreet marketplace.

Sometimes those deals will be fully spoken for or oversubscribed within a day; other times it takes us 30 days. Sometimes it happens very quickly. We typically ask and set expectations to have 30 days as time posted on the marketplace.

And then we have to actually collect the funds and close it out. So probably from first conversation to a fully-subscribed and funded and closed deal we’re talking 8 weeks, plus or minus a couple of weeks.

Joe Fairless: Have you ever had a deal that made it through the process not get fully funded from the crowd?

Darren Powderly: It doesn’t happen very often, because one of the outputs of our screening process is an estimated fundraise projection. It’s not an aggressive number; it’s a number that we feel confident that we can hit based on what we know about our investor demand.

We’ve got 115,000 investors as part of our membership now, or community, and much fewer active investors are those that have written a check. But about 9,000 have actually written a check, and many of them are repeat investors.

Joe Fairless: You said 90,000?

Darren Powderly: No, 9,000 individuals have written a check. But about 60% are repeat investors, and repeat investors often have about 4-5 deals in their portfolio, about a $250,000 portfolio through Crowdstreet.

So we love that, because they’re actually fulfilling our vision for them, which is enabling them to have an online marketplace where they can actually build and diversify their real estate portfolio. These are the VIP investor members.

So we make that estimate on how much we can raise for a deal, and  we’re at like 95% batting average on that, which is really great; oftentimes we’re exceeding it within a short period of time, but we hate to fall short. Sponsors don’t like that scrambling at the end. Sometimes they’ve got earnest money at risk, and  we take that responsibility quite seriously, to estimate a number that we can hit.

Joe Fairless: And what are the reasons why those 5% don’t get the funds?

Darren Powderly: Sometimes things change from the point that we make the estimate and post the deal on the marketplace. We had that in Q4 2018 – we got a little above our skiis, and [unintelligible [00:14:42].04] the stock market dropped 20%, and we felt we were going in a recession, and our investor community reacted like normal individuals do; psychologically, it was a difficult time, and they kind of said “Hey, I’m gonna take a pause until I figure out what’s going on here”, and actually, things came roaring back in Q1 of 2019 and took off again. So sometimes it’s an external event.

Other times, honestly, we just misread it. We’re like “Wow, we really thought that this deal–” Let’s say it’s a core deal, and it’s fully stabilized and cash-flowing, income-oriented property; there’s a big place for that in every investor’s portfolio, especially people who might be a little older, approaching retirement, and so forth… But honestly, we raise a little less money on those income-oriented properties than we do on more opportunistic or growth-oriented investments, and that could be it. It could be we just slightly over-estimated the demand, and we try to get better at that. That’s the area where we need to constantly do better; constantly comb the data, and not be erroneous in our projections.

Joe Fairless: You’ve got (I think I heard you say) 150,000 investors…?

Darren Powderly: It’s 115,000 investing members.

Joe Fairless: 115,000 in the community, and then 9,000 have written a check, right?

Darren Powderly: That’s correct.

Joe Fairless: Got it. Are they all accredited?

Darren Powderly: Well, the investors who write the checks are. Everyone’s welcome to join, and they’re welcome to learn; we’ve got a ton of educational materials on Crowdstreet, and someday we may have offerings for them. But today, Crowdstreet is designed for the accredited investor, in line with some of the federal regulations related to compliance.

Joe Fairless: So how does your team attract the accredited investors to join your platform? What are two or three main ways?

Darren Powderly: Oh, sure. Well, first of all, we have been around since 2014, and we have executed on our business model, and [unintelligible [00:16:38].20] one of the leading online real estate investing marketplaces, especially for the institutional-quality commercial real estate. There’s other platforms that do single-family, and fix and flip, and things like that. We don’t do any of that. We stick to what we’re good at. What we’re good at is underwriting, working with really experienced commercial real estate developers and owner-operators.

So it’s the reputation and referrals from other sponsors now, that has really been [unintelligible [00:17:04].00] People call us nearly every day, companies call us nearly every day, “Hey, I spoke with a peer in the multifamily industry, and they said you did a great job with them.” Of course, that is the goal.

Investors are referring us, because they might  have invested locally, through a country club type deal, with a sponsor, and then they meet us and they say “Hey, there’s this local group in Kansas City you really should meet”, as an example. And they make the introduction. That makes us feel great.

And then beyond that, we are attracting investors to Crowdstreet through a variety of digital marketing and demand generation. We’re really good at that, thankfully; we have a great marketing team. You’ll find us all over the industry publications, and just different financial and personal finance websites. We do have some strategic partnerships with other finance-related firms, and firms with their own communities, that like to introduce them to Crowdstreet because they know the quality of our deal flow is so high.

So it’s a variety of things, but definitely digital marketing and demand generation specific to that accredited investor audience is probably more fruitful than anything else that we do.

Joe Fairless: You mentioned when you were talking  about how you qualify the sponsor – you first qualify the sponsor, and then you look at the deal. And regardless of if someone joins Crowdstreet or not, can you talk about the importance of first qualifying the sponsor and then looking at the deal? Because some percentage of investors who are looking at passively-investing in a deal will go straight to returns, or straight to the type of property, or go straight to the underwriting, and not do an extensive background check and review of the sponsor itself.

Darren Powderly: Yes, it is incredibly important, and for wherever you invest in the private equity real estate space, or just private real estate… I can’t emphasize that enough, how important it is to know who you’re investing with, because ultimately, that is going to far exceed any other factor of the real estate deal itself. If you invest with a jerk or an unscrupulous person, chances are that’s gonna doom that deal, even if everything else goes right.

But if you have a great fiduciary of capital, an experienced developer or owner or an investor who has done this exact product type, in this exact location, many times before, and they can demonstrate a track record for it – and we actually require that… Somebody can be awesome at multifamily in Texas, and then they come to us and they’re like “We wanna do an industrial deal in Seattle”, and it’s like “No. Go do three of those before we’ll do one with you. Prove that you’re awesome at a new product type in  this city.” So that’s the way we look at that.

Now we just encourage all investors to know who you’re getting involved with first and foremost, by far; even if [unintelligible [00:20:10].22] digital format. But if you’re going to also rely on the collection of data from a  third-party, do the background checks, do the Google checks. It’s not hard to find information on  people these days.

In fact, I’d say that’s one other thing, a misconception about an online platform like Crowdstreet – “Oh, online investing… How are you supposed to trust it?” Today it’s more transparent what you can find out about somebody, and the amount of diligence, background check today online than you can probably even if they live in the next town over, because you didn’t have all the access to the information at your fingertips like we do.

So I think I made that point super-clear, that’s how we look at it. Of course, it doesn’t meant the property evaluation or the deal structuring and all the legal documents that back up the legal structuring are not important; it’s all important. But the fiduciary is the most important.

Joe Fairless: Taking a step back based on your experience, what’s your best real estate investing advice ever?

Darren Powderly: Real estate is so much driven — so beyond the fiduciary and the sponsor, real estate is such a demand-driven business. It’s wonderfully exciting, it’s constantly stimulating because the evaluation is influenced by so many factors. Right now – more important than ever – there’s so many things changing across our nation, whether it be political, economic, social… There’s just so much change going on. It’s delightful if you’re not actually owning some of the things that are being hurt by the shifts of change in America today… It’s delightful if you have the ability to study these changes and then just try to go where you think the demand drivers are favoring.

So think about why a particular property or investment – what will it be like a year from now or five years from now, given demand drivers like migration… Migration is something that’s fascinating right now, because of people moving  either from city to city, or from city to suburbs, and so forth… So tons of opportunities right now and over the next five years. So study the demand drivers and make sure you understand what those are prior to making a big investment.

And also, the age-old diversification. The beauty of online real estate investing is that you can make  smaller investments into a lot of different deals. Publicly-traded REITs were invented in the 1960s to do something similar, to give individual investors the ability to diversify across a lot of different properties… And they served their purpose. I own REITs. I’m buying REITs right now; they’re undervalued in my opinion… So that’s a way for me to diversify on private real estate. I’m investing in public real estate as well.

But it’s also a way for me to diversify, and diversifying in private real estate is often difficult, because you’re limited to who you can co-invest with, often the ticket sizes are $250,000 to participate/get into a deal… Crowdstreet lowers the bar on that quite a bit, which enables more diversification.

So those are a couple of things that come to mind. Nobody [unintelligible [00:23:13].01] Nobody. So you’re gonna have deals that under-perform in every portfolio.

Joe Fairless: We’re gonna do a lightning round real quick. Are you ready for the Best Ever Lightning Round?

Darren Powderly: Let’s roll!

Joe Fairless: First, a quick roll from our best ever partners.

Break: [00:23:30].09] to [00:24:10].20]

Joe Fairless: Okay, best ever way you like to give back to the community?

Darren Powderly: I’ve become really passionate about DEI initiatives and ESG initiatives. I’ve had sort of an enlightenment moment just recently through what’s gone on across America, so we’re trying to figure out a way to help minority-owned real estate companies grow their platforms; women-owned businesses, people of color-owned businesses. We’re spending a lot of time thinking about that.

I’m also an environmentalist. I became an environmentalist when the Exxon Valdez crashed in Alaska when I was a child, and I still have horrific memories of that. That was the moment I became an environmentalist, and I’m a huge believer that America can have a thriving economy, the best economy in the world, and also lead with environmental change and efforts to reduce CO2 in the atmosphere, and address climate change as we know it. It’s incredibly important and I’m passionate of these things.

Joe Fairless: How can the Best Ever listeners learn more about Crowdstreet?

Darren Powderly: Well, you can go to Crowdstreet.com and spend some time just searching the site, looking around… It’s free to register, so everybody is welcome at Crowdstreet to register and study the materials; not only the resource page, but actually each deal is fascinating to look at, and watch the sponsors present themselves. You learn from the best.

Download the spreadsheets and study those materials. The underwriting that goes into each one of these deals. It’s really a fun way to learn about real estate investing. And if you feel so compelled and if you qualify, go ahead and think about making an investment, or call a Crowdstreet representative to talk more about what it’s like to make your first investment.

Joe Fairless: Darren, thanks for being on the show, thanks for talking about your background, lessons learned building Crowdstreet to where it’s at, and the types of deals that you all do, as well as the vetting process that you all do, and the mindset and approach that anyone should have, regardless of if they participate in Crowdstreet or not, whenever they’re looking at an opportunity to invest.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Darren Powderly: Thank you so much, Joe. Have a great day.

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