Wallet Hacks

The Best Crowdfunding Real Estate Investing Sites for 2018

Real estate is a very well understood but often poorly executed way of building wealth. It only takes one episode of an HGTV house flipping show to know that it doesn't take a genius… but even geniuses can mess it up with bad execution.

If you're a buy and hold investor, you're less likely to mess it up but then you run into the “death by a thousand paper cuts.” There are maintenance, repairs, finding tenants, kicking out deadbeats, 2 AM plumber phone calls, cleaning, … you get it

If you read a book about real estate investing, it all sounds so simple. And it is simple. But it's not easy.

As they say, the devil is the details.

That's why so many people invest in real estate investment trusts (REIT). A REIT offers exposure to real estate without any of the work. Vanguard's REIT Fund charges you only a 0.12% expense ratio and you get exposure to a variety of commercial real estate companies. That's only $12 on every $10,000 invested!

What if you don't want to own a fund that only invests in storage facilities, office parks, and malls? Until recently, you were out of luck. You could try to find a real estate syndicate in your area but that's not without its own risks.

The best option may be a crowdfunding real estate investing site.

But what if you're unsure of these new platforms? Do they represent a good option?

We caught up with Professor Ralph Lim, Associate Professor of Finance and Economics at the Jack Welch College of Business at Sacred Heart University. We asked him a few questions and he was gracious enough to provide some insight:

Professor Ralph Lim, Associate Professor of Finance and Economics at Sacred Heart University

When it comes to investing, how much of one's portfolio should include real estate?

I suggest about 10% to 15% of one's portfolio be placed in real estate related investments. This assumes an investor with average risk tolerance. Those with low-risk tolerance (e.g., very conservative investors) should probably not have anything in real estate.

Do you believe this new class of real estate investing is something people should pursue? Why or why not?

The new option to invest in notes secured by real estate appears to be a somewhat more conservative option of including real estate in one's portfolio. Typically notes secured by real estate have priority over real estate equity owners. This is similar to the concept of priority of debt over equity.

So, in this case, the investor would appear to hold debt that is backed by the underlying real estate. The investor is not holding a real estate equity position. However, it is mandatory that investors read the prospectus or offering circular carefully before committing to this option.

How do these new options compare with existing investing options?

Instead of holding an equity position in real estate, this new option offers an investor an opportunity to invest in the debt portion. The risk is less than equity ownership, but so is the potential for gain. Investing in debt typically limits the investor to interest income and the return of principal.

Typically, debt investors do not participate in potential equity gains due to any underlying real estate appreciation. Of course, please read the prospectus or offering circular.

With crowdfunded real estate sites, there are a lot of different investment options. Some are debt, as Professor Lim has mentioned, and others are equity. Some are a mix of both, so it's always important to review the prospectus or offering circular to know what you're investing in.

As for the platforms, let's see some of the options available:

Fundrise

Fundrise is one of the best crowdfunding real estate investing platforms for non-accredited investors because they offer a package of their individual investments in a vehicle they call an eREIT. Being an accredited investor is usually one of the biggest roadblocks to investing in a real estate platform, Fundrise offers an alternative for those who don't meet that high bar.

The eREITs follow an investment strategy, available in their offering documents. They're like regular REITs except the minimum is a low $1,000. Unlike regular REITs that trade on the open market, these are not publicly traded. You can only redeem your shares quarterly. They're more liquid than a syndicate, less liquid than a mutual fund.

We have a full review of Fundrise.

Learn more about Fundrise
(This is for both accredited and non-accredited investors)

Rich Uncles

I only discovered Rich Uncles recently but I'm a fan because their investment strategies are very clear. They have two REIT funds, with $5 minimums, that focus on NNN retail and student housing.

The NNN Retail fund buys a single-tenant commercial real estate with an average 8-year lease. These are creditworthy corporations, like 3M and Williams Sonoma, with a good track record. This fund returns about 7% per year, paid monthly.

The Student Housing fund buys student housing within a one-mile walk from an NCAA Division I university with at least 15,000 enrolled students. This fund returns around 6% a year, also paid monthly.

See what I mean about being focused? You can't easily explain the investment strategy in a sentence like that with many of these crowdfunded sites.

Learn more about Rich Uncles
(This is for both accredited and non-accredited investors)

RealtyMogul

RealtyMogul launched in 2013 and offers accredited and non-accredited investors a way to invest in commercial real estate. Accredited investors can invest in specific deals while non-accredited investors can contribute to MogulREITs. They don't deal with any residential deals and look to invest in targeted commercial real estate deals that the average investor won't have access to.

Whereas the larger REITs focus on large corporations like Simon Property Group (mall owner/operator) and Public Storage (huge storage facility operator), RealtyMogul looks to invest in apartment communities, retail centers, and Class A office buildings.

The minimum investment size for individual projects is $5,000 but for their REIT, MogulREIT, you can get involved for as little as $1,000. You can check out our full review of RealtyMogul to learn more.

Learn more about RealtyMogul
(This is for both accredited and non-accredited investors)

PeerStreet

If you're familiar with LendingClub, PeerStreet is like the LendingClub of the crowdfunding real estate investing world. It's a marketplace of just loans (debt deals only) secured by the underlying real estate asset.

They focus on shorter-term loans conservative loans, they stick with a term of 6-24 months and loan-to-value ratios of 75% or less. There are servicing fees on each loan around 0.25%-1.00% with a minimum of $1,000.

Since these are direct investments, you need to be an accredited investor to take advantage of these deals. We have a Peerstreet review that goes into greater detail.

Learn more about PeerStreet
(This is only for accredited investors only)

EquityMultiple

Equity Multiple is one of the newer entrants into the crowdfunding real estate investing marketplace. They offer debt and equity investments that exclusively focuses on institutional commercial real estate. They also have syndicate loans and they're backed by an existing national real estate advisory firm (Mission Capital), which helps with the pipeline of deals.

Minimum is $5,000 and the fee structure is designed to align their interests with you, the investor, and based on the type of investment. There's typically a 0.5% annual fee, to cover administrative costs, plus 10% of the profits after you've received all of your initial investment back. In preferred equity and debt deals, they also take a servicing fee in a “spread” between the interest rate charged to the borrower and what is paid out to you. Finally, in all deals, they will collect a portion from the total amount raised. This fee structure is typical, you have to review specific deal terms to know the specific numbers in each.

Learn more about EquityMultiple
(This is only for accredited investors only)

Patch of Land

Patch of Land is a peer-to-peer real estate lending marketplace for accredited investors, similar to PeerStreet. They look to work with real estate developers who are improving existing real estate projects.

The minimum investment is $5,000.

Learn more about Patch of Land
(This is only for accredited investors only)

The Rest of the Pack

As more sites pop up, I will continue to take a look at them and how they are different. This section of the post will cover those sites that I haven't more deeply researched, email me if you want me to take a closer look at any single one.

Here are some of the other platforms with a brief word about each:

What about RealtyShares?

RealtyShares used to be the top platform on our list in part because I had first hand experience with the platform. I had two investments with them (both are still performing on schedule) and I really enjoyed how they had a ton of data associated with each deal. My overall experience was fantastic with them so I was sad to see them effectively shut down (no new investments, no new investors) on November 7th, 2018.

We put together a list of what we felt were the best alternatives to RealtyShares and think you'll find a good replacement there.

What have your experiences been so far with crowdfunded real estate investing sites?