Upside Avenue Review 2020: Is This Platform Right for You?

By: , Contributor

Published on: Feb 26, 2020

Before you invest with this crowdfunding platform, here are the benefits and risks you should know.

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Upside Avenue

3.2 / 5 stars

Summary

Upside Avenue's business specializes in providing multifamily property offerings through its Multi-Housing Income REIT. While the offerings look attractive, the company's fee structure and generous use of debt gives us pause.

3.2 / 5 stars

Highlights
    • Offerings for non-accredited investors
    • Attractive portfolio of multifamily housing
    • Extensive industry experience, but inextricably linked to its developer

Bankruptcy Protection 6/ 10

Deal Flow 6/ 10

Deal Transparency 3/ 5

Diversified Fund Options 3/ 5

Due Diligence 7/ 10

Ease of Use 6/ 10

Fees & Commissions 5/ 10

Investment Minimums 3/ 5

Investor Resources 7/ 10

Leadership 4/ 5

Non-accredited Investor Offerings 5/ 5

Platform Financials 3/ 5

Skin in the Game 3/ 5

X Factors 3/ 5

Total 64 / 100

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What is Upside Avenue?

Upside Avenue is the website where investors find access to Multi-Housing Income REIT, Inc., the real estate investment trust that's sponsored and managed by Casoro Group. Casoro Group has nearly two decades of experience investing in and developing multifamily housing assets in Texas and surrounding states.

Upside Avenue's REIT has a lot of appealing aspects. First, its focus on multifamily housing is appealing since this is one of the safest, most in-demand real estate asset classes out there. Next, its focus on Texas and neighboring states is appealing, as Texas is one of the fastest-growing states both in terms of population and a steadily diversifying economy. We like this combination very much, particularly since its sponsor knows Texas' best markets, like Houston, San Antonio, and Austin.

With that said, the close relationship between Casoro Group and Upside Avenue also creates some risk. With many other REITs, the REIT manager works with third-party sponsors to source and develop new real estate deals. With Upside Avenue, Casoro Group does it all, from managing the REIT to sourcing properties to managing construction (it owns a construction company) and operating properties.

Sure, there's the potential for more efficiencies when it's all essentially "in-house," but there's also more risk if Casoro Group struggles. If it were to fail, then every aspect of every deal would be affected, potentially leading to significant losses for investors.

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Summary: Is Upside Avenue a good investment?

One of the challenges many investors face when trying to choose a crowdfunded real estate investment is knowing what investment is right for them. The fact is, there are dozens of real estate crowdfunding platforms offering hundreds of real estate deals every month.

The deals can range from something as simple as investing a couple hundred bucks in a loan to a small developer who flips houses to something as complex as making a $50,000 investment in a multimillion-dollar commercial development project that's slated to take 10 years from start to finish.

In addition to the complexity and investing minimums, there's the challenge of picking the asset class that's right for your personal risk/return profile, and investing in a deal that will deliver the right balance of long-term total returns and short-term income you're expecting.

Where does Upside Avenue fall on that spectrum? It's a simple way to make a long-term investment in a diversified collection of one of the lowest-risk categories in commercial real estate: multifamily housing. It's also an expert in developing these properties in the markets it operates in.

However, we have serious concerns that its relationship with Casoro Group creates substantial risks that investors should not ignore.

Upside Avenue investor portal mobile

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What are Upside Avenue's pros and cons?

Pros

  • Unique asset class with a great return profile: Multifamily housing is one of the safest real estate asset classes.
  • Sponsor is an expert in asset and markets: With nearly 20 years of experience developing these properties, Casoro Group knows multifamily housing well. It's also an expert in the markets it operates in.
  • Open to non-accredited investors: You don't have to earn $200,000 per year or have a $1 million net worth (excluding your home) to invest in Upside Avenue's REIT.

Cons

  • Higher minimum than other non-accredited investments: A $2,000 minimum investment puts Upside Avenue out of the reach of some investors, particularly younger investors just getting started.
  • Related-party risk: Casoro Group is a proven expert in multifamily housing development in Texas, but it's also the developer and operator of the assets the REIT invests in. With one party involved in every aspect or both managing the REIT and developing the properties, there's higher risk if Casoro Group were to struggle.
  • Debt risk: Multifamily housing is a great asset class that tends to do well across economic environments, and that does offset our concerns here to a degree. But investors should know that this REIT may use as much as 70% debt to fund property acquisition and development. That can juice returns when things go well, but it also amplifies losses if they don't.
  • Concerns about fees investors may not understand: In addition to the 2% asset management fee paid to Casoro Group to run the REIT, there are also higher-than-average fees that can be charged at the deal level when properties are found and acquired as well as above-average fees to manage construction. While investors don't "pay" these fees directly, they still take a bite out of the REIT's capital, meaning less money it can invest to generate returns for the REIT's owners -- you the investor.
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Is Upside Avenue legit? How strong is it?

With a sponsor that's invested in more than $1 billion of commercial real estate across multiple economic cycles, yes, Upside Avenue looks like the real deal. Moreover, it has a lot of aspects that we really like, including the asset it specializes in and the markets it knows best. Casoro Group's founder and chairman, Monte Lee-Wen, is also the principal of Upside Avenue and owns a majority stake in the business.

But as we have noted a few times already, we aren't crazy about the related-party fees its sponsor can earn out on the front end of real estate deals or the well-above-market rates it can charge for construction and building management. Casoro Group's expertise and reputation have value, but we don't think they're necessarily worth what it is able to take.

Upside Avenue management

Upside Avenue shares its management team with Casoro Group, including CEO Yuen Yung, CIO Chirag Hathiramani (who oversees the entire investment acquisitions process), and COO Laura Klein. Casoro Group founder and chairman Monte Lee-Wen holds the same role for Upside Avenue and is also its largest investor.

In addition to management, Upside Avenue relies on Casoro Group for key personnel across its operations. This means access to a highly qualified group of industry experts, but with the downside that their shared responsibilities at other Casoro Group entities can create conflicts of interest.

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How Upside Avenue works: How are investments sourced?

When you invest in Upside Avenue, you're actually buying an equity stake in Multi-Housing Income REIT, Inc., which then uses your capital to invest in multifamily housing properties, primarily apartment complexes.

The properties are sourced by Casoro Group, which also develops them, utilizing its fully integrated capabilities, including using its subsidiary construction business to perform renovations.

There are positive and negative aspects to this tight integration. The positive is you have a proven developer with expertise and success in the markets and asset type. You also should see benefits from that integration, in terms of cost containment and efficiencies.

However, the potential negatives can't be ignored. Since the REIT's manager is also the sponsor and developer of the real estate projects, and also runs the construction company, there's increased risk to investors if Casoro Group, or any of its subsidiaries involved in various parts of the deal, were to struggle or become insolvent. Simply put, it would potentially lead to substantial investor losses, particularly if ongoing real estate deals were in some stage of uncompleted construction or renovation.

This is compounded by the fact that debt is utilized to fund as much as 70% of every real estate deal that's bought by the REIT. An inability to service that debt could result in a default, and potentially an asset being foreclosed.

To be clear, this isn't a unique risk to Upside Avenue; it's just potentially compounded with so much related party risk across every aspect of every deal.

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Who can invest with Upside Avenue?

The Upside Avenue Multi-Housing Income REIT is open to all investors, so long as you can meet the minimum investment amount as described below. It's also worth considering whether the liquidity requirements of this investment are right for you. As with every other similar crowdfunded investment out there, with very limited ability to sell, it's not a liquid investment, as will be described in more depth later.

What is the minimum Upside Avenue investment?

Upside Avenue's Multi-Housing Income REIT has a $2,000 minimum investment, but of course you can make larger investments, so long as you abide by the requirements under Reg A+ -- you cannot invest more than 10% of the greater of your income or net wealth.

What are Upside Avenue's fees?

Investors in Upside Avenue's Multi-Housing Income REIT will pay a total of 2% in annualized asset management fees. However, there are other fees -- and ones that could be substantially more meaningful -- that investors should be aware of that are disclosed in the company's filings with the Securities and Exchange Commission, better known as the SEC.

In the offering circular addendum filed with the SEC, it was disclosed that the following fees could be charged at the property level:

  • Up to 3% of investment cost in finder's fees.
  • Up to 3% of investment cost in acquisition fees.
  • Up to 1% of "investment level" disposition fees.
  • 2% of total sale in disposition fees.
  • Up to 15% of cost building and contractor fees.
  • Up to 4% (typically of revenues) property management fees.

Yes, these kinds of fees are typical and customary; moreover, it shouldn't be expected that anyone would work for free. However, the amounts for the fees above are potentially much higher than the typical market rates, particularly the finder's and acquisition fees and the contractor fees.

This is another risk of related-party dealings: Paying too much for services versus having arm's-length negotiations with third parties. With that said, Upside Avenue's management did confirm that they have not actually paid fees that high on any deals so far.

Upside Avenue returns: What should you expect?

Since the Multi-Housing Income REIT is relatively new, we don't have a substantial track record of results to go by. However, we do know that Casoro Group has spent nearly 20 years acquiring and developing over $1 billion in real estate, primarily for institutional investors and very high-net-worth individuals and families. And that's a positive for Upside Avenue.

We also like the asset class it focuses on -- multifamily housing, which tends to perform well across economic environments -- and its focus on Texas and neighboring states it knows well, which are also some of the fastest-growing metro areas in the country.

Combined, we expect this should result in acceptable returns and a dependable dividend that's supported by the cash flows multifamily housing tends to generate in every economic environment. The REIT's stated projection is 12% to 15% average annual returns, with about half of that coming from dividends.

There's a caveat: Frankly, we don't like the sizable fees that may be charged at the property level, reducing the upside for investors when the project is realized. That's particularly true since investors are the ones taking on the bulk of the risk by putting up the capital to fund these projects. Moreover, it's not particularly investor-friendly that these fees are only found deep in SEC filings that most investors will never see.

When (and how) can you sell Upside Avenue investments?

In general, investors should consider this to be a long-term investment. Upside Avenue does have a liquidity provision, under the following redemption plan:

How long have you owned? What you get if you sell
Less than 1 year Cannot sell during year 1 of ownership
Between 1 year and 2 years 98% of per-share net asset value (NAV)
Between 2 years and 3 years 99% of NAV per share
More than 3 years 100% of NAV

The redemption plan also states that it will only repurchase shares as liquidity provides, and not more than 5% of weighted shares outstanding in any one calendar year. In other words, don't count on being able to cash out quickly.

This redemption plan is similar to that offered by other non-traded REITs you may be considering and serves as a reminder that none of these kinds of investments are good places to put capital you may want to access quickly, because you may not be able to.

Going mobile: Is there an Upside Avenue app?

Like most other online real estate investing websites, Upside Avenue doesn't have an app, but its website is optimized for mobile; you can do anything on your smartphone or tablet that you'd be able to do on the desktop website.

Upside Avenue risks: Is Upside Avenue safe to invest with?

Like with other online platforms, there are two main sources of risk:

  • Platform risk.
  • Developer risk.

With Upside Avenue, those risks get rolled together, since Casoro Group is both the sponsor and asset manager for Multi-Housing Income REIT, Inc., and the developer and sponsor of every real estate deal the REIT invests in.

Let's break it down: Yes, the REIT is a separate, bankruptcy-remote legal entity, so the assets it owns are removed from Casoro Group. However, since Casoro Group, through its subsidiary businesses, is involved in every aspect of every project from acquisition through stabilization, renovation, and sale, a failure at Casoro Group would have serious negative consequences for every asset owned by the REIT.

Debt is another source of risk for this REIT since it can use debt to fund as much as 70% of each real estate project. Responsible use of leverage can boost returns, but it also increases the pressure to execute well, since leverage can also amplify losses significantly.

Those are the risks, but Casoro Group has a strong track record, including across the Great Recession and housing crisis. But when it comes to this kind of investing, investors need to understand the worst-case scenario and work backward from there. The reality is, most other platforms work with third-party developers to source and develop real estate projects, which helps reduce the risk of losses related to a single party going out of business.

Our bigger concern is the sizable deal-level fees the REIT may pay to acquire properties or to construction managers. Considering that REIT investors are the ones taking on the bulk of the risk, we prefer to see fees that reward investors for taking on the risk, with developers compensated when a project outperforms its targets. The fee structure here could create a bigger guarantee for Casoro Group, or the third parties it works with, and reduce the potential profits for investors while increasing their risk. It's up to you to decide whether the company's experience and expertise are worth paying up for.

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