Join Ben Miller and me as we discuss real estate investing, the mistakes architects make when developing their own projects, and more. Ben Miller is co-founder of Fundrise.com, a crowdfunding site for real estate investments. Fundrise is changing the way real estate development happens by giving local residents a say in what gets built in their neighborhood. Instead of developments being funded by large, heavily capitalized institutional investors, Fundrise allows boutique investors to get part of the action by investing as little as $100 to a development project. Fundrise gives individuals the ability to invest directly in local properties without the unnecessary fees and middlemen of conventional real estate equity finance. With Fundrise, people now have the power to earn financial returns while building the city they want to live in – an interesting concept, which is why I invited Ben Miller to be on the show.
In this interview we discuss:
- Why architects often fail at developing their own projects
- How crowdsourcing for real estate investing works
- How Fundrise is changing the future of real estate investing
- The future of architecture and crowdsourcing
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Show Notes:
- Visit Fundrise at Fundrise.com
Interview Transcript and Members Only Resources:
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Enoch: Right. You said you’ve said you’ve seen some architects get involved in development. Are there any common mistakes you see people with that kind of background when they start developing?
Ben: Yeah. I mean, it’s tough because everybody is a product of their experience. So, if you’re an architect you’re really trained to think about design, think about the architecture. That’s, obviously, a critical part of development, but it’s only one piece of it. As an architect, especially as you get older, you become a hammer – you’re trained to be an architectural hammer. A lot of times that’s really not the problem. A lot of times it’s about leasability. Can you lease this space? You have to be a great sales person if you’re going to try to lease this space. Design, especially when you’re doing new development, it may be that you’re selling the dream.
So, a typical mistake architects make is overspending on design. I get it. I get why. You see a great design, and you feel like that’s why the product succeeded. It’s definitely the case sometimes, but other times it’s just one piece of it. If you’re an architect is try to figure out, maybe for your first project, how to basically make architecture not matter.
Enoch: Yeah.
Ben: [Don’t 00:20:07] on it. Just try to almost like handicap yourself. If you’re a boxer and you always lead with the left, tie the left hand behind your back and try to work on your right because your right arm’s weak. If you’re left arm’s strong, everyone knows your left arm’s strong, people will know what you’re going to do and it’s going to, basically, be a disadvantage.
Enoch: Yeah, exactly. Well, that’s a good point.
So, let’s move over to talk a little bit about Fundrise now and what Fundrise is. Before we jump to that, I want to ask you too also, in terms of working with architects, you’ve worked with architects: Could you give any advice to architects who wanted to work for developers? What are some architects you’ve worked with that you see, “Nan, this guy’s got his stuff together. It’s a pleasure working with him.” Let me get inside your head so we can understand how to approach people like yourself and want to partner up with you.
Ben: Yeah. I mean there are great architects. I had some great architects – Oh, my God.
Enoch: What do they do that’s great?
Ben: They listen. They really listen. I mean, it’s tough. A lot of developers don’t listen either. So it’s like when you’re telling them that something’s not going to work, the design’s not going to work, or the construction’s not going to work and they’re not listening. But, I also found some really fine architects. A lot of times when I’m having to build something, the design doesn’t matter in so many instances. It just doesn’t matter.
Enoch: Wait. Wait, man. That’s anathema, dude. That’s heresy to all my listeners. But…
Ben: When I’m saying “design” I’m really talking about aesthetic. I’m not talking about “design” broadly; I’m saying the aesthetic is secondary to function. I’ll be dealing with an architect and they’ll want to put a really perfect one – the look of the building, as a whole. So, it may be an 18-storey building, and they’re looking at the symmetry and how the building feels as an architectural whole. But, the individual in that industry is standing at that front door. He is not consuming the building’s 18-storey magnificence, he’s only consuming the first 10, 15, 20ft.
When you design a building as an 18-storey thing, you actually are not thinking about the first 15/20ft, the 1st storey or 2nd storey. Walk down the street, you’re not usually noticing up, you’re really only looking at the first couple of floors. So, what I’m talking about when an architect will design something, I’ll take a white piece of paper and cover up the whole building except for the first two floors and say, “What does that look like?” “If this is just a 2-storey building, would you have designed this building to look like that?” It’s usually “no.” That’s what I mean by “design.”
Obviously, design matters, but it matters in a way that’s also formed by function, how the consumer is going to consume it. Different consumers are consuming a building from all different vantage points. So, you have to get inside people’s heads. The architect’s design on a piece of paper usually, so it creates a bias.
Enoch: Well, yeah, I get that. I think you nailed that question, great explanation.
Now, when you’re working with architects that are listening, can you give me an anecdote or give me an idea of what “listening” means? Can you give a couple of examples?
Ben: Yeah. I’m thinking about this architect working with now who is great. I don’t know. The problem is if somebody is like a great athlete, you know, they just make everything look easy. It’s great to be on the team. If you ever play team sports, it’s great to have somebody on the team that’s just great. You say, “Why is he good?” “Because he doesn’t hog, he likes to make other people successful, he listens.”
I actually have a better example for you of a great architect. Usually, a great architect will think about a building from the outside-in, which basically thinking aesthetically and work from the outside and work in, and then, completely turn the switch and think about the building from the inside-out – the engineering, and the efficiency. There are all sorts of issues around like the real jobs of the production. This is a part of Architecture that no people talk about, but production VS design are so different, the mentality around each is so different, and they’re empathic with each a lot of times. Great design architects are usually not great production architects, and vice-versa. So, finding somebody who’s able to really think in two levels is amazing.
Enoch: Okay, great. So, Fundrise. Now, Fundrise is, like you said, it’s a crowdsourcing platform. Is there anyone else doing anything like that out there?
Ben: Not yet, but soon people will. What we do is complicated today – to raise money from the public. Basically, what we’re doing for investment, real equity investment or debt, but people get to own and profit from what they’re investing in as opposed to crowdfunding on Kickstarter which is a donation or contribution. We’re basically letting people really own their neighborhood, invest in local real estate, and hopefully profit from it, right?
Enoch: Yeah. So, you mentioned “Invest in their real estate,” give me an explanation really quick of what is Fundrise for people that may have never heard about it, maybe people that have never heard of crowdsourcing before.
Ben: We just call Fundrise an investment platform of a commercial real estate. What it does is you could go on to Fundrise, and as an investor you’d see real estate deals. They’ll see a lot of information on the real estate deals, actually information usually people don’t get to see. An architect may not usually see the financials of the project they’re working on. They may not see the marketing demographic of a nation. So, we thought we’d put all that out there, try to embrace transparency.
So, you’ll see all these things about a real estate project, pictures of it, and then you’re offered the opportunity to invest. Basically, it’s a similar proposition that a developer has where he’d invest in a real estate building, and then profit, hopefully, from the success of it. You get to invest with them, invest in the development.
We transact online, so it’s like e-trade or like a [Unintelligible 00:27:13] trade, but instead of buying a share of Apple, you’re buying a share of a specific property, usually a single building. We have prices – you can buy a share of a property for a $100, and we also have some that are higher, $10 thousand, and things like that. It’s basically the idea of making it accessible to invest in local real estate.
Enoch: Okay. So, this is how a small person who is not a high net worth individual can basically get a piece of the pie and get involved in real estate investing. So, you guys are the platform that brings these parties together, the small investors, and then the developers with the experience? Is that correct?
Ben: That’s part of it. We are very, very selective with the companies we work with, because with investing and raising money from people, there’s a huge commitment in terms of quality and integrity. We really focus on the best real estate companies in the market. That’s how we started. So, Forest City, if you hear of Forest City, and DC MRP, or LA Rising Realty.
We took a, kind of, approach where if you’re doing something new, you want to mitigate the risk, you want to have low risk. One great way to lower the risk is work with the best companies who already have access to capital.
If you’re a great developer, access to capital is primarily not the problem. Now, the questions, “What’s the cost of capital?” “What are the terms?” “How much are they going to try to micro-manage you?” That’s how we started. Usually, if you’re really comfortable with the concept of putting people’s money… When I invest my own money, I want to invest in the best. So, that’s basically why.
Enoch: Okay. What cities are you in right now, Fundrise?
Ben: Well, Washington D.C., and New York, Los Angeles. We have some presence in San Francisco, and Houston, and Portland.
Enoch: Okay. How do people get involved in these projects in Fundrise?
Ben: The part where people are being investors?
Enoch: Either or. Yeah, people who may want to invest in a project in the local neighborhood, but then also from an architect’s standpoint. Say, I’m in L.A., in an area where you’re currently in, and there’s building I think, hey, this will be a great candidate for your program… Is there any possibility there to use your platform?
Ben: Yeah. We get a lot of applications every day from real estate companies who want to raise money. We’re working our way through it. We are biased towards experience and reputation. Every developer I’ve ever worked with, I’ve known or a 1st degree introduction or underwriting of them. In real estate, which is an industry filled with difficult characters, let’s say, you really can’t know about somebody unless you’ve gotten a true social introduction, or somebody you’ve worked with is telling you how it is to work with them and invest with them.
But, there are a lot of people interested in raising money this way. We’re working with, actually, more and more with governments who want to, basically, encourage community development [Unintelligible 00:30:55] investment.
So, if you are a real estate company, and you have an incredible reputation, an incredible track record, that’s the kind of company we really want to work with. If you’re somebody who wants to be involved in the process, we want to have you involved, but we’re working our way through how to do that. We, obviously, want to avoid failure, and that means you have to take lower risk in the beginning.
Enoch: Yeah. So, tell me, just really like a Reader’s Digest version, how a typical project would happen. From what we talked about before, it sounds like you make a connection with the developer, the developer finds the project. Give me the step by step if you can.
Ben: Underwrite the developer, substantially underwriting a developer, substantially underwriting the project. The developer comes on to our platform, and starts to basically prepare his network and our network for investing in it. Then, we put the project online with all the information we talked about, and they transact, then we manage.
It’s an investor management platform like E*Trade. E*Trade has lots of investors. You’re managing, they call it “Investor Relations,” IR through technology. We have thousands of people managed through our platform. A real estate company is not going to want to have thousands of investors unless it’s easier, actually, than having one, which it has been because it’s technology-based.
So, our underwriting and our partnership with real estate companies is really similar to how a private equity fund would work – it’s underwriting, it’s relationships, it’s prudence. There are great, really tremendous architect/developers out there.
Enoch: Sure.
Ben: [Unintelligible 00:33:07] architect/developer. They are building a product that’s not very common in the market.
Enoch: Sure.
Ben: Yeah. We have developers building a product that institutional capital doesn’t like to fund.
Enoch: Yeah. Okay. Let me just rephrase and make sure I understand the process here. So, you’ll go to visit these developers, say, you’re flying to L.A. You have your network of people ahead of time selected that you’re going to meet with. You pitch them on what you are doing with Fundrise. Then, once they have the idea in their head, what’s the next step? Do they go out and look for properties that fit within your model? Do they then approach you? From that point forward, I’m not sure how the process works.
Ben: Yeah. I mean, we work together and try to find properties that fit.
Enoch: Okay.
Ben: It’s really similar in any investment. I mean, the fact that we’re raising it from everybody rather than only from a few people, in some ways, that just means we have to be more honest. So, the way you source, and underwrite, and basically acquire real estate, that’s not different.
Enoch: Right. So, then the developers in the local markets are the ones who are identifying this process, or they do it with you to identify potential projects?
Ben: We’re really, really focused on the person, on the partner. You find a great partner, then you just [Unintelligible 00:34:48] The kind of capital we’re raising and providing is a much better form of capital than those that exist in the normal real estate environment.
Enoch: Tell me why for us people that doesn’t know about.
Ben: Sure. Raised capital in real estate is [Unintelligible 00:35:12] of two kinds of investment. Debt is different. Banks are their own animal. Basically, to buy a property, you know, 50% to 75% of it from a lender, and then 15% to 25% are from equity – usually more than that. [Unintelligible 00:35:39] the equity, preferred equity.
To go to institutional investors, that is going to a guy who is managing someone else’s money. It’s not his money. He’s got a job, and his job is basically to follow rules so that those investors make a decent return. When you’re [Unintelligible 00:36:02] your own money, you don’t want rules you have to follow – maybe if you’re married. But, in general, follow rules; you make decisions about, “Is it a good investment?” “Do I like it?” “Does it resonate with me?”
If you raise money with an institutional investor, they have rules they have to follow. They have to follow. If they don’t follow them, they get fired. Those rules come out of a process where it’s safer to do things that have been done before, that are low career-risk, [Unintelligible 00:36:49] getting fired.
Short term profitability over a long-term profitability, that’s a very, very classic institutional bias – to look for the short, fast money over long, steady money. Because, the guy who’s in that seat who’s making the decision, he’s not going to be there, likely, seven years from now. He’s only going to be there for the next… I mean, there’s almost nobody thinking past ten years.
Enoch: Yeah.
Ben: You’re [Unintelligible 00:37:22] IRA, right? At your age, you’re not going to [Unintelligible 00:37:27] on IRA for more than ten years, or twenty/thirty years. There’s a mismatch. So, institutional capital, they’d rather have McDonalds than a local restaurant. He’s not going to get fired for signing a lease with McDonalds even if that’s not the right thing for the neighborhood. Even if you do that local restaurant, the neighborhood will improve, and have a lot of other ripple effects. [Unintelligible 00:38:02] the ripple effect, and that’s not what institutional capital usually worry about.
Enoch: Okay. So, it sounds like with this model you have a lot more flexibility and creativity.
Ben: If you’re speaking to the right customer, essentially talking to people, yeah. If you’re a manager of money and the person has just a different way they think about investing. So, if you’re able to basically have the credibility and the vision that people embrace, then, yeah, they’ll back you. There are so many stories of this where people end up doing something, and everybody is like, “Oh, surprise. How is that successful?” People get it, and institutions, they’re backwards-looking, inherently backwards-looking. So, it just opens up a new kind of capital.
Enoch: Okay. So, really quick, Ben, let’s touch on company culture, because you have some strong views and are doing some interesting things in terms of that. Could you tell us a little bit about the way you run your company and your views on that?
Ben: Basically, there’s a revolution happening in small businesses. I used to run a real estate company. We had thirty-five employees, five accounting, two HR, five admin, yadda, yadda, yadda. So, the thing about that, out of the thirty-five half was admin – they’re not doing real estate. That’s what I mean by admin. They’re doing bookkeeping… They’re managing the organization effectively.
What technology has been doing is you’re shedding that kind of overhead. You can basically outsource the accounting to a cloud. You can outsource all expensive management, HR, to the cloud. You can outsource the admin effectively to outsource combination, sort of, [Unintelligible 00:40:13] in the cloud. You have a software platform that you put your business on that lets you do these things.
Now, there are ten or eleven of us, and we do ten times the business we were doing before. Basically, we don’t have [Unintelligible 00:40:33] and we’re technology-enabled. [Unintelligible 00:40:39] every person.
Enoch: Okay. When you say a “software platform,” is there a specific software platform that you’re using? Give me an example of what some of the software platforms out there.
Ben: My favorite, the expense management one, is called ExpenseCloud. It’s on your phone. It’s tied to your credit card and it’s tied to your accounting software. Your expenses are all done very quickly through our web portal, and you never have any paper.
The key or the enemy of [Unintelligible 00:41:09] is paper. If you stay digital, you have perfect [Unintelligible 00:41:16] and incredible efficiency. Second, you have stacks of papers, stacks of files, you break the system. So, ExpenseCloud is a great one. Bill.com – it’s an accounting, bill-paying software. Incredible. We use Ruby for admin and Hamster, another admin software [Unintelligible 00:41:44] company.
So, there has been a revolution in small business in the last few years that didn’t exist ten years ago. This only happened in the last three years, accelerated in the last eighteen months. It’s going to have this incredible effect and productivity gain for small business.
Enoch: So, these are things that architecture firms who want to be more profitable and be more nimble, they can apply it in their business also?
Ben: Yeah. [Unintelligible 00:41:44] How many accounting departments that can eliminate themselves? Are you going to do that? Firing the accounting company, the accounting department? No. How many HR departments are going to eliminate themselves? Not going to happen.
So, the problem is it’s very difficult for existing companies with existing organizations to do it. It was really an accident that we started the company at this time and we ended up not needing all that overhead because of the technology. But, it’s [Unintelligible 00:42:47] engineer in to this.
Enoch: Fascinating. So, just on a bigger picture, what do you see the world going with this change?
Ben: I’m not an architect, I’m a developer, I’m a financier, and now a technologist. I think there’s an incredible opportunity in Architecture. I can see, but I’m not enough of an expert to know how to apply it. But, crowdsourcing Architecture, opening it up, a bottom-up approach…
Architecture is such a top-down business. It’s really comedic that you have these big, big name architects doing these big ideas. But, in reality, it’s tons of staff doing the actual architecture – drawing the plans. So, it’s very top-down, very hierarchical. If you look at other sectors, that kind of structure broke down and failed, or at least competed out of business by bottom-up approaches.
Architecture is ripe, because these information [Unintelligible 00:43:16] digital as it is 3D. It’s ripe for destruction, which is good for the Architecture industry because you can start doing things abroad, you can start doing things with artificial intelligence – if you’re really far out – and you can do things with 3D modeling. Check out Floored. Insane. Insane, what they’re doing.
So, if I’m an architect, I would be thinking how these new technologies and cultures are changing the industry, and just basically go out and be one of the early-adopters of them.
Enoch: What’s Floored?
Ben: It’s a 3D rendering software company.
Enoch: Okay.
Ben: But, it eliminates the interior designer. They send a machine in to a building and a room. Automatically, it goes around the room like a Roomba, scans everything. For hundreds of dollars rather than hundreds of thousands of dollars, it can 3D render anything you want. Do you want it to be a restaurant? Do you want it to be an office space? Do you want to have this design? Do you want to have that design? It basically completely changes the Interior Design process. [Unintelligible 00:45:05] building everything.
If you’re going to do Interior Design you have somebody to actually go out and draw stuff. In reality, think of the hundred thousand people drawing things in the world, are they really drawing substantially different things?
Enoch: No.
Ben: No. There’s 80% of it that’s the same. That’s where software can really be disruptive.
Enoch: Okay. I know just from the Architecture industry, we felt pressure on that. We felt pressure from our jobs as technicians being under fire because it can be done somewhere more efficiently now. So, is that, sort of, what you’re talking about when you say this stuff is being outsourced? It sounds like we need to start moving, being thought leaders, and more creative.
Ben: Yeah. You’re saying “outsourced,” I’m saying “crowdsourced.”
Enoch: Okay.
Ben: That is thinking about like having an expert in India do it, and there are a lot of problems with that model. You don’t usually get the quality. But, crowdsource is when a twenty-two year old architect or twenty-five year old architect has somebody says, “Look, would you do this architecture for, basically, free?”
Let’s say a design architect. A twenty-five year old architect does a design for free for me as a developer, and does a better design because it’s more avant-garde because he’s younger and he’s more in to cultural zeitgeist. I can also, maybe, put it out there and let hundred young people do it and collaborate online, and produce this insane architecture, which I then have to take to production and have to actually concretize. Can the crowd come up with better designs than a single, more senior architect? That’s not [Unintelligible 00:45:39] right now. You’ll say, “No, that’s a crazy idea. Not going to happen.” I’m telling you, that is exactly, exactly wrong. It has happened in every sector, and Architecture is not going to be the exception.
Enoch: Ben, that’s a good place to end it, man. That’s a fascinating insight. I think there’s going to be some big conversations about what you just said there within the industry because it’s happening. So, thanks for sharing that insight.[/DAP]
