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RREAF Holdings Review 2020: Is This Platform Right for You?


Jul 27, 2020 by Jason Hall
63

RREAF Holdings

3.1 / 5 stars

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Summary

RREAF Holdings has been in the real estate development business for over a decade but has recently opened up to crowdfunded deals. Its integrated business model has both benefits and shortcomings for investors.

3.1 / 5 stars

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Highlights
    • Long tenured executive team with a track record of success
    • Generous use of leverage
    • For accredited investors only

Bankruptcy Protection 7/ 10

Deal Flow 8/ 10

Deal Transparency 2/ 5

Diversified Fund Options 0/ 5

Due Diligence 8/ 10

Ease of Use 8/ 10

Fees & Commissions 7/ 10

Investment Minimums 2/ 5

Investor Resources 7/ 10

Leadership 4/ 5

Non-accredited Investor Offerings 0/ 5

Platform Financials 3/ 5

Skin in the Game 4/ 5

X Factors 3/ 5

Total 63 / 100

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What is RREAF Holdings?

RREAF Holdings is a real estate developer that also offers a crowdfunding platform with standalone commercial real estate investments for accredited investors. Unlike the majority of crowdfunding platforms that started from the ground up targeted as marketplaces for investors to find real estate investments, RREAF has been investing in and developing real estate for over a decade and only began offering crowdfunding on its online platform in recent years.

RREAF Holdings is a fully integrated company with subsidiaries that manage properties, are involved in construction, handle asset management, and do just about everything else it takes to acquire, develop, operate, and eventually liquidate a property.

Summary: Is RREAF Holdings a good investment?

Based on the track record of deals that have fully exited, RREAF Holdings has done well for investors. But like every other platform, you should understand how it makes money, where its incentives are aligned, and whether its strategy is right for you.

The good things about RREAF Holdings' structure is that as a fully integrated company, it has more control over each investment. This is different from the majority of platforms, which typically feature deals from third-party sponsors who handle all the details.

However, there's potential downside to consider with this relationship. Investors can't pick from deals by other developers, and since RREAF (either directly or through a subsidiary or related party) handles almost every aspect of development and operation, there's more risk to investors if the company were to struggle or fail. While your investment in each deal is in a separate legal entity (meaning it's not exposed to a worst-case bankruptcy of RREAF directly), having one company handle every aspect of every deal could create a lot of problems keeping your investment whole.

What are RREAF Holdings' pros and cons?

Pros

  • Strong track record: Key executives have spent decades in real estate development, finance, and construction. This track record and experience is great to have on your side.
  • Positives of full integration: RREAF has full control over every aspect of each project as well as experienced executives who have a proven track record of operating.
  • Skin in the game: RREAF typically invests 5% to 10% of the necessary capital in deals.
  • Consistent deal flow: They typically feature three to four deals at a time, and across various types of real estate.
  • Self-directed IRA investing: RREAF will work with most SDIRA custodians.

Cons

  • Negatives of full integration: Even with deals structured as bankruptcy-remote entities, investors are counting on RREAF for everything. An RREAF failure would have implications across every deal that could result in losses due to mismanagement.
  • Only open to accredited investors: Only investors with more than $1 million in net wealth (excluding your primary residence) or $200,000 in annual earnings can invest in deals on the RREAF platform.
  • Above-average minimums: Some deals are offered at a $25,000 minimum investment, but higher minimums are common.
  • Highly leveraged deals: Many of its properties are funded with as much as 80% debt-to-value. For commercial real estate, this is a very high amount of leverage, and that creates additional risk of losses for investors.

Is RREAF Holdings legit? How strong is it?

RREAF doesn't offer much information about its financial strength, but we do know that it has over $1 billion in owned real estate assets under management. With property management, construction, and asset management subsidiaries, the company participates in every aspect of commercial real estate, including several (like property management) that generate steady, consistent cash flows across every economic environment.

RREAF Holdings' performance

RREAF's online crowdfunding platform is still relatively new, and only one deal has so far fully returned capital, but that property returned 30% IRR (internal rate of return) in just 22 months. The company slowed down its planned exits due to the COVID-19 pandemic in the second quarter of 2020, pointing out that it's not ideal to be a seller in a buyer's market. To the contrary, management seems to have an appetite for finding opportunities in downturns, a positive for long-term returns across economic environments.

RREAF Holdings management

RREAF is led by CEO Kip Sowden. With over 30 years in commercial real estate, he has been involved in the acquisition, operations, and development of over $400 million of commercial real estate personally and has brokered over $2.5 billion in commercial real estate transactions.

COO Doug McKnight and CFO Mitch Provosty are also key executives, with extensive experience in real estate finance, operations, and construction that rounds out the company's capabilities.

How RREAF Holdings works: How are investments sourced?

Unlike other platforms that feature deals listed by third-party sponsors, RREAF Holdings only lists deals in its marketplace that it is the sponsor for. Additionally, the company's subsidiaries will manage the properties, construction, and other aspects of the development.

The company says it almost never acquires properties that are publicly listed, instead acquiring off-market properties and utilizing the extensive background and connections of its key executives. Sowden, for example, has a deep background as a real estate broker and has maintained his Texas broker's license for more than 20 years.

Who can invest with RREAF Holdings? What is the minimum investment?

RREAF Holdings is only open to accredited investors, meaning you must have a net worth of $1 million, excluding your primary residence (single or combined jointly), or earn at least $200,000 (single) or $300,000 (jointly) per year with the expectation of earning at least as much in future years.

Different investments have different minimum investment amounts, with the lowest listed minimum we have seen of $25,000. However, most deals require a larger minimum, typically between $25,00 and $50,000, though some require even larger investments.

What are RREAF Holdings' fees?

As a fully integrated real estate company, the potential fees RREAF Holdings can earn are broader than most platforms that only make money from listing fees paid by sponsors or asset management fees paid by investors.

At the platform level, RREAF earns a 2% acquisition fee, a 1% financing fee (when applicable), and a 2% annualized asset management fee.

As the sponsor, the company can earn various fees depending on the structure of each deal. From what we have seen, a typical structure pays investors cash distributions to a current return minimum of between 7% and 8% (sometimes more or less), and the remaining distributable operating cash is split 80% to investors and 20% to the sponsor. So investors get paid first.

When a property is disposed of or refinanced, a similar split is typically in place, paying investors first up to a minimum amount, typically 10% or more, with the incremental net proceeds then split between investors and the sponsor.

It's really important to read the placement memorandum for each deal, as the split can vary greatly from one deal to the next. For instance, two deals open for investment at this writing had very different payout structures: One rewarded investors with 70% of net transaction proceeds while the other paid out only 50% to investors.

It's up to you to read the fine print to know how you make money and how RREAF makes money.

As the operator of each project, the company (more accurately, typically a subsidiary or related party) also earns property management fees that can vary, paid out of operating cash flows. The benefit to having RREAF act as property manager is the higher level of control; the downside is that the negotiations for the rates it earns are not arms-length negotiations and they may be above-market rates.

RREAF Holdings returns: What should you expect?

With an experienced management team that has developed real estate through multiple full cycles and a fully integrated model, there are things to like about its prospects. It's also easy to parse the specifics of each deal it lists, to understand what you're investing in, the fee structure, and the targeted returns.

With that said, investors should consider the potentially higher risk profile of the deals offered, which can use more debt than is considered conservative. More leverage can create more risk, particularly if a property is under construction, not fully occupied, or exposed to cyclical risk. (For instance, right now would not be a great time to be building a hotel from the ground up with a lot of debt.)

Put it all together, and make sure you dig into each individual deal you're considering and read the placement memorandum so you know the fee structure, the upside potential, and the risks that could cause losses.

When (and how) can you sell RREAF investments?

The nature of private commercial real estate investment is different from publicly traded investments. There is no secondary market for RREAF investments, and none of the placement memorandums we reviewed offered an early redemption plan. In other words, once you invest, your capital is not accessible for the duration of the investment.

This could be only a few years or much longer, depending on how the deal is structured as well as unexpected market conditions. The company pointed out multiple deals it was looking to sell or refinance in the second quarter of 2020 but due to the COVID-19 pandemic that's sent commercial real estate prices falling, it has chosen to continue to hold. This is in the best long-term interests of investors but means their cash is tied up for longer than expected.

So don't risk capital you can't afford to lose, and don't tie up money you may need to access in any commercial real estate deal.

Going mobile: Is there an RREAF Holdings app?

RREAF doesn't have a mobile app, but my experience using the web browser on an iPhone was similar in look and function to accessing the platform on a desktop computer.

RREAF risks: Is RREAF Holdings safe to invest with?

With a management team that's experienced in every aspect of commercial real estate and with a long track record of success, RREAF has a lot going for it. Management is deeply connected, which can aid in sourcing the best deals. Since it -- or a subsidiary or related party -- handles development, property management, construction, and other areas, the company has a lot of control that other platforms lack. This can help improve execution and lead to better potential returns.

On the downside, since the crowdfunding platform is only part of RREAF's business, investors may not be getting the best deals, since the company also caters to institutional investors and other private investors, and not every deal it's involved in shows up in the online platform. There's also greater potential risk of losing money if RREAF were to fail, since it handles so many parts of every project. Investors should also consider whether the costs of full integration outweigh the benefits, since the sponsor isn't sending projects out for bid but rather using in-house assets, subsidiaries, or related parties.

Lastly, there's also more risk due to the higher amounts of debt leverage that it may use to fund real estate deals.

Put it all together and investors must decide, on a deal-by-deal basis, whether the positives of its management team and integrated model are enough to outweigh the higher risks integration brings, plus potentially higher risks related to higher debt leverage.

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