Rocket Your Dollar Ep. 41: Top Tier Real Estate Funding with CityVest

Founder & CEO, Alan Donenfeld shares how CityVest, a top-tier real estate crowdfunding platform, is reinventing how people invest in real estate.

Transcript:

Thomas Young:

Welcome back everyone to the Rocket Your Dollar Podcast. My guest today is Alan Donenfeld and Alan is the founder of CityVest and oversees all investment, technology, and administration of the company. Alan has 40 years of experience and has founded several investment and financing companies.

Most recently, Alan was the founder and general partner of a private investment fund focused on making structured debt and equity investments. And for the last 30 years, Alan has been president and founder of an SEC-registered FINRA broker-dealer. In the 1980s, he worked for Bear Stearns, Lehman Brothers, and private equity groups; and he received his MBA from the Fuqua School of Business at Duke University and he also has a BA from Tusk.

Alan, thanks so much for being here.

Alan Donenfeld:

Thank you, Tom. My pleasure to be here.

Thomas Young:

I'm glad we were able to make this time work because I know we've had to be a little bit flexible and recording podcasts from home has been interesting, to say the least for the last couple of weeks for me, or month, I guess at this point.

Alan Donenfeld:

I've gotten quite used to it. Almost everything is through Zoom or some sort of video conference. So my pleasure to be here.

Thomas Young:

Absolutely. So Alan, just to kick it off, what is CityVest and what do you guys do? And then tell me a little bit of the story behind how it came to be.

Alan Donenfeld:

Sure. So CityVest is an online investment marketplace for real estate investments. So I know that's a mouthful, online investment platform for real estate investments. I'll tell you how it came to pass. I was running a hedge fund for about eight years, started to make some real estate investments. My brother was retiring. This goes back about five years ago and he had about an $8 million portfolio and wanted to move the assets out of the stock and more into something a little safer and something that might earn him 10% plus with lower risks than he was seeing.

So I recommended several real estate private equity funds. They were the name brand funds like Blackstone, Apollo, Colony, Carlisle. And as I started to look at the private placement memos of those funds, which had excellent performance in the past, I noticed that all of them had multimillion-dollar minimum investment amounts.

These are the funds that institutional investors invest in, like at CalPERS and New York state teachers or San Antonio firefighters. They invest millions of dollars in these funds at a time and the funds get quite large. Blackstone's latest fund was 20 billion in size. So that ruled out my brother's investment in those funds. He was not putting $2 million into one of these institutional funds.

So I started to look at other funds that were anywhere from $25 million to $200 million in size. And even their minimum subscriptions were ranging from $500,000 to $2 million. And so that was even too much with my brother's fairly significant sized portfolio, still too much. But what I did notice is those funds had a better net return, net IRR, than the Blackstone, Apollo, Colony, Carlisle type funds. So I knew that I was on the right track looking at those midsize funds. They were a little bit more nimble and had niche strategies and had boots on the ground to look at properties as compared to the huge New York funds that aren't on the ground in some growth markets like Portland, Seattle, Denver, Phoenix, etcetera.

So what I came up with is the idea that my brother, who's an anesthesiologist, gave them the name of some other doctors, I aggregated about 20 different doctors. We ended up with around $2 million as a group in a feeder fund. And at that point, we exceeded the $500,000 minimum subscription of the fund I selected. And I even went to that fund and said, could you give us a higher preferred return and lower our fees, which they agreed to. So now not only did we get access to a high performing fund, but we got better investment terms by pooling these funds together.

So from that, I then built CityVest, which does the same thing. We're an online platform where we aggregate many investors together. So that one investor may put in $25,000 or $50,000. But as a group, we might represent four or five or $6 million. And with that buying power, like in the insurance buying group, we go to those high performing funds and we ask for lower fees and better investment terms. So not only do we get access, but better returns.

Thomas Young:

That makes perfect sense. And the story is just, it's very clear, right? It's a need that you had and that your brother had and then you filled it. So I guess a question that I had for you, so you guys invest solely in funds. You guys aren't looking at individual projects and then actually doing the work on the rehab of maybe a 50 unit building or a single house. You guys are just going into funds as a group, as CityVest. Correct?

Alan Donenfeld:

So these are reasonably large institutional funds. The one we're doing right now has about 400 million in assets, under management. These are not a solo sponsor going out and finding properties and doing a rehab. These are institutional funds with a group of five or six people going out to do acquisitions. They have a full accounting staff, a full staff of people doing value add work.

And so it was my belief when I got this idea to create these access funds is that the other crowdfunding platforms, which have done a great job, like Realty Mogul and Real Crowd and Crowd Street. They typically do individual properties. There's a sponsor or a guy or two or three guys in a small company. They've never achieved the ability to manage money. Institutions wouldn't give them money because there are some aspects of their business, either they don't get audits or they don't have an administrator. They just don't have the track record to be able to attract institutional money.

So we only deal with the best institutional funds, but they have $500,000, $1 million, $2 million minimum subscriptions because the institutions have done this vetting, they'd like what they're doing, the staff, they undergo fairly significant due diligence by the institutional investors, background checks, check out the deal docs to make sure that they've achieved these kinds of returns in their past deals.

And so overall, it's more professional investment management with a fund manager. We would never do an individual deal. Not only are those generally smaller and smaller deals just aren't as attractive because they're small deals. The smaller deals don't usually have the best financing terms. They don't have the capital market to people, to know who to go to get those financing terms. And typically those individual sponsors who would end up going to a crowdfunder to raise that money, that's the last place you go to get your money when your friends and family and the funds haven't invested in those properties.

So by their very nature, deals that end up on real estate crowdfunders are, I'm ashamed to say, but they're the worst deals in the market. Nobody else will do them so they up on a crowdfunding site. It's very different from a real estate fund. They are looking at literally hundreds of deals in a year. They have a pool of capital. They can be opportunistic in what they buy. They can get the best financing.

You know, if you're a real estate broker with an attractive property to sell in Denver, you're not going to go to a sponsor who doesn't have the capital to buy the property. You want to go to a fund that has capital that can close, that can get financing for the property that they're making a bid on.

So the best properties end up going to the funds. And you know, if that fund says, well, we'll pay 25% less than you're asking, but we'll pay all cash. You're likely to accept that over a sponsor that says, well, we'll put the deal on Realty Mogul, and maybe we can raise the equity, and maybe we can close in two months after they raised that capital for us.

So obviously, you don't want that sponsor who needs to raise the money through a crowdfunding platform. You want the real estate fund that has the capital that can close, even if they're offering a fairly low price, which means the funds get the best deals.

Thomas Young:

Right. And that makes perfect sense. But do you think that could be changing? I mean, do you see a future for these crowdfunding sites like Realty Mogul, like Fundraise, some of these other players, do you think that they have a path to being sort of a proper channel or do you think it's always going to be the sort of deals on the sidelines that aren't able to go through funds?

Alan Donenfeld:

I don't see that change. You know, there are some great individual deals. There has to be some. I do think that those platforms right now have, they have some issues because they've done some hotel properties, some retail centers, strip centers, malls, and all of those properties are suffering today. This is May 21st that we're recording this so worldwide we had the most number of COVID cases that we've had to date. So it's not a good time and I think that retail centers, hotel properties, even some office properties are going to suffer and those other platforms have done those deals. We only do multifamily properties and select industrial properties.

And our basic philosophy is people have to live somewhere. We don't see any reduction in demand for residential real estate. Right now, it's 2020. By 2050, the United States has projected to have 60 million more Americans. That means 60 million people have to live somewhere. New housing starts this year will be about 600,000, 650,000. And so there's no way in the next 30 years that 600,000 housing starts a year are going to make up the housing demands for the 60 million more Americans coming here, as well as the average millennial is about 30 years old, just starting to have kids. And that growth in population means new housing purchases. It's just no end in sight for residential housing.

I think it's a different market for hospitality. People will be traveling less in the aftermath of the virus. Retail centers, people, we've already seen Amazon explode in the last couple of months. So I think the place to invest is multifamily and that's what we're focused on.

Thomas Young:

Yeah. And that makes sense. That makes perfect sense. And the logic is very clear. Do you think that in the aftermath of COVID, there's going to be a change in appetite from millennials, namely flocking to city centers and sort of a flight to the suburbs? Because I know about a year ago I saw an article, I think it was on Bloomberg, talking about how the suburbs are dying, but now that we've all been inside for so long and I'm in an apartment and you're in New York City. So, you know, we've been inside a lot. Do you think that the appetite for the type of housing will change or do you see, after the recovery, people are still going to want to live in city centers and multifamily type buildings?

Alan Donenfeld:

Yeah. I think you have a right, just demographically, because you have to start with the facts. Baby boomers who were born in the 50s, there's about 74 million of them. They have driven almost all demographic business decisions for the past 30 years. However, millennials, I said their average age right now is 30, there are about 77 million millennials. And the next two age groups, gen Z is even bigger.

So these 30-year-old millennials who were going to be having kids for the next 10 years will move out of Brooklyn and move out of every city that they have moved to in the last 10 years when they were in their 20s, having fun. They're done having fun. We know what the environment's like out there and they will start having kids. And the only way that they can afford the housing for their spouse and kids is to move to the suburbs.

And so I think you're right. We will see a fairly swift exodus from cities. I think the high rents that we've seen in cities will still be high, but we're not going to see any increases, I don't believe, for the next 10 years. I think we will see a big building boom in the suburbs of single-family homes. There is this new category of single-family residences that are built to rent. We've seen some of that to date. And I think we will continue to see a very strong fix and flip market where some of the older housing stock that was built in the 60s, 70s, and even 80s gets fixed and resold as refreshed, renovated properties to those millennials who are leaving cities and looking to live in the suburbs and everybody prefers something that's renovated and new and I think that trend to fix and flip will continue.

Thomas Young:

Right. Absolutely. I completely agree with you. I had a follow on question. So as we go through this crisis, right, and I keep coming back to it, but it's the topic of the day. You know, there's been a huge explosion in small syndicators, one or two-person funds, doing a lot of real estate deals. Do you think that unemployment and people aren't going to be able to pay their rent and some of these landlords have expensive mortgages or expensive loans out? Do you think that creates an opportunity for bigger funds? Like the ones that you participate in to be fairly active in the second half of the year and beginning of next year? As if you bought a property in the last 10 years, you'd likely made money on it. But now, we're going to start seeing how strong the financials of some of these smaller syndicators are. And do you think that that presents an opportunity for you and your funds?

Alan Donenfeld:

Yeah. So if those properties that are on the other real estate crowdfunders, there's an individual sponsor. They bought a multi-family. If they did any deals, real estate crowdfunding kind of got started in 2013. So there are seven years of these multifamily deals that have gotten done. Many of the interest rates were at relatively high prices, relative to today. And if you're an individual property owner and you bought a property, a small sponsor, you might find that because 10% of people aren't paying the rent, you can't pay your mortgage and there's no leeway. It's an undiversified pool, right? It's one asset that got bought by a syndicator. And if he can't pay the rent, notwithstanding the fact that in New York state, we do have some mortiferum on foreclosures, but that's quickly coming to an end. And I think foreclosures will skyrocket for the next two years or so as rents come down a little bit and certain people don't pay their rent. There will be foreclosures on properties where lots of tenants don't pay rent.

It's very different with a fund. They can easily, it's a diversified pool, so they might own 10 different multifamily developments. We're at the very end of raising a fund right now where they have 120 million that they've raised, and I don't want to seem insensitive, but there are incredible distressed opportunities where a syndicator simply can't pay their mortgage. They're not dipping into their pocket to meet those mortgage payments and maybe there's no equity left. The bank may take it over and sell it. All the bank cares about is recovering their money. And so the funds that we work with and the one that we're closing right now is going to be opportunistic, looking for distressed opportunities, where someone had a problem and there's going to be a lot of product on the market, which means the acquisition prices will be extremely attractive and funds can withstand shocks like the current one that we're seeing. And so over the next five to seven years, we should see many really attractive pricing on multifamily developments to resell them in five to seven years at much higher prices.

Thomas Young:

I think we're all sort of toeing the line between realizing that there are opportunities that are going to be coming up, frankly, and not seeming insensitive and opportunistic, but you know, for the people that do have strong financials and some of those funds and syndicators that do have the strong financials, it does represent an opportunity for them and their investors. And we just have to be cognizant of that without, like you said, seeming insensitive.

So on CityVest, if I go to city vest right now and I opened an account or get in touch with you guys, what does that process look like? Are you guys always raising? Do you identify opportunities and then open it up to investors? Walk me through sort of the process for an individual investor wanting to go through CityVest.

Alan Donenfeld:

Sure. If you go to cityvest.com, you'll see some of the reasons that you should invest in real estate, some of the benefits of what CityVest offers, and there's a button that says investment. When you click on investments, you'll see a bunch of different tiles. We have quite a few closed deals and we typically like to focus on one investment fund at a time. That's the best deal that we see in the market. It's not appropriate to say we have eight different best deals like other sites do. We have one best deal and this is the one that we're focused on right now. So we have a deal today that's called the Apex Access fund. And starting in June, we have a JKV access fund, which is a single-family residence fix and flip home specifically in the Los Angeles area.

So when you click investments, you'll see those tiles. One deal will be open, whether it's the Apex today or JKV next month in June. And once you click on learn more for, say JKV, it will give you many buttons to dig in and do your due diligence on that particular investment opportunity, including their strategy, market, track, record team. And you can look at the underlying fund's documents as well as our investment fund documents. And there's lots of explanation of their strategy, past deals they've done, past returns.

JKV, for example, is this single-family residence fix and flip fund in Los Angeles, and in 2019 on investments that they made and then sold, they had around a 29% IRR. So it's an institutional type fund, very attractive historical returns. And what they're seeing right now in Los Angeles is that single-family residents market, they're focused on the low end of it so that the home buyers can get an FHA or VA mortgage, which is very attractive. It's two or 3% down for 30 years at very low interest rates.

So typically when they fix these homes and sell them, the buyer can get this FHA loan with very little money down. The mortgage payments approximate what they'd have to pay in rent so they get homeownership for the same pricing as buying and Los Angeles is a very housing constrained market so there's no end to the number of properties that they could fix and then sell because there's very little product at that low end, below $800,000, for the FHA mortgages.

Thomas Young:

I like the fund that you guys are working on, you don't have just a buffet of funds, which might be overwhelming. And so do you decide on all these funds personally?

Alan Donenfeld:

So we do have a small group of people. It takes a significant amount of analysis to find a fund. To date, we've looked at about 2000 real estate private equity funds. So it's a pretty big number. That's over a couple of years. We're looking at a couple of funds every week to see what might be an attractive fund for the future actually after JKV, which we're focused on doing in June. We have another fund targeting a capital raise in July and August, and that's a California based fund also focused on value add acquisitions on the West coast, mostly San Francisco, Seattle, and Portland.

Thomas Young:

And do you think that cities like San Francisco, especially with what's going on, the rise of working from home and all that, do you think that's going to affect cities like San Francisco? I know that's kind of off-topic from what we were just talking about, but the San Francisco thing raised the question. Do you think that there's going to be more appetite for housing for cities like San Francisco, or do you think that they might suffer a little bit?

Alan Donenfeld:

It's hard to say. We know that Elon Musk is threatened to move Tesla out of the Bay area to Boston and maybe Nevada or Oklahoma. So that might happen. I think it's going to take him a while to move operations out of the city. I know that Square and Google, they've already announced. I think Square announced that they have work from home forever policy. So if you don't want to go into an office, you don't have to.

But there does have to be some people in offices. And I think certainly by 2022, we will get back to working in offices. Even if we don't, people can work from home. Maybe those homes end up being further away from San Francisco, which has a high cost of living.

So we'll see, and most of these funds are focused on real estate constrained markets and San Francisco is one of them. That particular fund, if they can't underwrite to the kinds of returns that they're seeking, which is typically mid-teens, then they'll go to the cities that have better opportunities. Many growth markets are places like Phoenix, Denver, Las Vegas, Portland, Seattle have been a big growth market. So the money will follow where the market growth is.

Thomas Young:

Right. And I agree with you, just and like we said, I don't think that iconic cities like San Francisco and LA and some of those other places, New York, are going to suffer longterm, which means that there is an opportunity for these funds, but that's fantastic.

So apart from going to cityvest.com, if someone listening wants to get in touch with you or your team, what's the best way to do that and how can someone sort of move forward with you guys?

Alan Donenfeld:

Yeah. So the best thing to do is go to cityvest.com, C-I-T-Y V-E-S-T. You can read quite a lot about what we do. There is a button that provides the ability to learn about real estate investing terms like the all-important cap rate, but there's a whole learning center with about 30 different articles that we've written.

Otherwise, I am happy to field calls directly and explain what deals we're offering today and coming up. So my phone number is on the website or my email is Alan@cityvest.com. But the site is pretty self-explanatory. When you do get the point of saying, I want to invest, there's a button that says invest now and it's a fairly easy process to click that, fill in DocuSign, wire transfer money. We give you a dashboard, which shows you what you've acquired, quarterly information that comes from the underlying fund. From us, quarterly distributions are posted at the site so you can see when you've received distributions. We asked for ACH information, which we then send your quarterly distributions to the account you've specified. K1s get posted to the site, which is password protected. So the dashboard is fairly robust in helping you manage the investment or investments that you've made so that it becomes a, I think, one of the best real estate investment sites out there.

Thomas Young:

Yeah, and I agree. I've been clicking around your site before our recording and when we booked it and I like, all of the information that you guys have is fantastic. And for anybody that wants to dig in, you guys certainly do a fantastic job of providing a ton of information. So anybody listening, definitely check out cityvest.com.

But Alan, I want to thank you so much for taking the time out of your day to talk with me. I thoroughly enjoyed our conversation. And I hope we stay in touch as this all plays out.

Alan Donenfeld:

Tom, it's been my pleasure. Hopefully, I hear from some of the Rocket Dollar investors. We didn't discuss the advantages of investing through a Self-Directed IRA account. We do have many Rocket Dollar customers who you've shown them to us, and we've brought some customers to you to make investments. And it's a great way to invest in real estate through a Self-Directed IRA account and not pay tax on that income that you receive because it's in an IRA account.

Thomas Young:

Right. And just as a personal thing, with a Rocket Dollar account, I love the idea of funds because if you do a single-family home or you buy a rental property, there are just so many more rules that you have to keep in mind. Not doing too much work on the property, not doing any work on the property on your own, and paying plumbers out of the account. And they can just get a little bit, it can get a little messy. And then it's also hard to diversify if you're buying a single-family home.

So I love people taking advantage of funds through like you guys with the Rocket Dollar accounts because it is a simple process, for both you and for the investor and that'll be my plug. But I hope that people listening do check it out and consider it because it makes a lot of sense and it's pretty simple.

Alan Donenfeld:

Absolutely. It is. Investing in real estate through CityVest access funds is the best, most diversified, and safest asset class. And then doing that through a Self-Directed IRA account makes a tremendous amount of sense because these investments are safe. That's the kind of asset that you want in an IRA.

Thomas Young:

I couldn't agree with you more.

Alan Donenfeld:

Tom, thank you for giving me this platform. I hope to hear from some of the Rocket Dollar customers and they're always welcome to click around on the CityVest website.

Thomas Young:

Absolutely. Thank you.