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's maintenance, repairs, finding tenants, kicking out deadbeats, 2AM 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.
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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:
When it comes to investing, how much of one's portfolio should include real estate?Professor Ralph Lim, Associate Professor of Finance and Economics at Sacred Heart University
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. 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. Risk is less than equity ownership, but so is the potential for gain. Investing in debt typically limits the investor to interest income and 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:
They have a mixture of equity and debt deals, including NNN retail (debt) deals, with close to a dozen deals open at any one time. They invest in everything from retail locations to malls to industrial parks to single and multi-family structures. They will often pre-fund a deal and then offer it up to investors, which limits how often a deal may fall through.
The minimum investments vary with the deal type and size. It seems like they're trying to limit the total number of investors in each deal. The absolute minimum is $5,000, which you will see on deals under $1mm.
You can read our deeper review of RealtyShares and form your own opinion.
Learn more about RealtyShares
(This is only for accredited investors only)
Fundrise
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
The NNN Retail fund buys 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 PeerStreet
(This is for both accredited and non-accredited investors)
PeerStreet
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)
RealtyMogul
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)
EquityMultiple
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 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
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:
- Prodigy Network – With a $50,000 minimum and a focus on institutional grade investments in Manhattan, they are hyper focused and have a more personalized service appeal. (This is only for accredited investors only)
- LendingHome – San Francisco-based marketplace with 12-month loans on borrowers with single-digit properties. The properties are rehabilitation projects and fairly conservative (average LTV of 62%, according to an interview in the New York Times). $5,000 minimum. (This is only for accredited investors only)
- Small Change – They invest in commercial and residential real estate projects based on their “change metrics” like mobility (walkability, bike-ability), sustainability (green building, adaptive reuse), and economic vitality (job creation, affordable housing). There are per-project minimums and they have options for both accredited and non-accredited investors.
- Fund That Flip – Back vetted residential real estate loans (hard money loans) in $5,000 increments and they prefund their deals. You can see their open deals without creating an account. (This is only for accredited investors only)
- ArborCrowd – Backed by the Arbor Family of Companies (Arbor Realty Trust, Arbor Commercial Mortgage, AMAC), you get access to large commercial investment opportunities. A recent $12.7mm deal for a multifamily property in Alabama projected an IRR of 16-18% with a 3-5 year old period. The deals tend to be on the larger side and the minimum investment amount is $25,000. (This is only for accredited investors only)
- AlphaFlow – They build a portfolio of real estate loans from the debt offerings of other companies on this list, like PeerStreet, to optimize for risk and return. They will also rebalance and adjust the fund as needed, you can withdraw or reinvest monthly earnings. $10,000 minimum. (This is only for accredited investors only)
- Senior Living Fund – Senior Living Fund is a platform that specializes in senior housing and they project rates of return in the 13%-21% range. They fund and develop new senior housing communities but they don't offer too much in the way of details. I'm sharing it because it's a good example of specialization but I don't know much else about them.
What have your experiences been so far with crowdfunded real estate investing sites?