How I invest in real estate without buying property

With the stock market so high and the threat of a pullback so real (inverted yield curve!), you and many others are thinking more about real estate.

For decades, real estate has been a very popular and very reliable way of building wealth. If you want an alternative to the markets, this is it.

For many Americas, their only exposure to real estate is their primary residence. It represents a huge percentage of their net worth, as measured by the Census Bureau every few years. It's a great way to build wealth but the only way to extract it is to sell your home.

What if you want to invest in real estate but you don't want to become a landlord? It is one of the best performing asset classes after all!

Or you don't mind becoming a landlord but you simply don't have thousands of dollars for a down payment in your area?

What if you feel your local area is overpriced and you'd prefer to invest in an up and coming neighborhood?

These are all good ways to build wealth but until recently, very hard to do.

In 2012, Congress passed and the President signed the Jumpstart Our Business Startups Act. Title III was known as the CROWDFUND Act and it was important because it made it possible for companies to use crowdfunding to issue securities, something they couldn't do before. And with Title III, they could now sell those shares to the public.

That opened the door for what is now known as Crowdfunded Real Estate Investing.

What is Crowdfunded Real Estate Investing?

When a real estate developer starts a project, they always create a new company. It creates an entity that shields the rest of their holdings from liability. Each property is itself their own company and in the event of a catastrophic failure, the company folds but the other properties remain intact.

With the JOBS Act, real estate developer can now raise money to fund the purchase and improvement of real estate projects. Instead of turning to stingy banks or expensive hard money lenders, they can turn to savvy investors who want to get involved in real estate.

Courtesy of FINRA
There are two ways regular investors can get involved in real estate investing through the JOBS Act:

  • If you are an accredited investor, you can invest in individual properties.
  • If you are not an accredited investor, you can invest in funds that invest in individual properties.

An accredited investor is someone with a net worth of at least $1,000,000 (excluding primary residence) or have income of at least $200,000 each of the last two years (and expectation to make the same amount this year). The amount is $300,000 of combined income if you are married.

It doesn't matter how much money you have – if you want to invest in real estate without buying property, you can.

RealtyMogul and Fundrise are free to join. I've joined both and recommend you check them out.

Best Accredited Option: RealtyMogul

RealtyMogul is one of the older of the crowdfunding real estate platforms having over $100,000,000 in investor disbursements since their founding in 2012 (though launched in 2013). They were the first platform to have funded over $200 million in debt and equity deals.

You can invest in a wide variety of deals. There are bridge and permanent loans as well as joint venture equity deals. The debt deal terms can vary from just a single year to as many as ten years but distributions are on a monthly basis. The equity deals have a holding period of three to ten years.

It does require you to be an accredited investor. This high minimum is required because the deals are often quite large and there's a limit to the number of individual investors that can participate.

Another big benefit to RealtyMogul is that they also offer deals that are 1031 exchange eligible. This allows you to reinvest the proceeds of an investment into a similar property without having to pay capital gains tax. Their framework makes that transaction very easy.

If you are not an accredited investor, you can still invest through their MogulREITs. These non-publicly traded REITs that invest in another LLC or partnership that owns the property.

Learn more about RealtyMogul
(free to register and look at their deals)

Best Non-Accredited Option: Fundrise

Fundrise is the best option for non-accredited investors because they offer an eREIT fund that follows a specific theme, but all the deals are private real estate projects you wouldn't otherwise have access to.

What I love about Fundrise is how transparent they are. Some platforms will hide the address of a property or give it a fancy name that doesn't match its actual name, making it harder to do research. Fundrise lists some of their deals on the homepage for you to look without any commitment.

For example, a recent deal seen on the site involved Elysium Fourteen Apartments and you can google it to find the exact property. The homepage says it's a “Stabilized commercial in 14th Street Corridor, Washington, DC” and you can find it easily. They are raising $6,475,000 in a debt deal offering a realized return of 11.4%.

What also makes Fundrise very appealing is that the eREITs have a minimum investment of just $1,000 but you can expect 8 – 11% annual returns.

Learn more about Fundrise
(free to register and look at their deals)

Both of these platforms are great but they are not filled with thousands of deals. While they make their money by setting up these deals, they know that they need high quality or investors won't bite. So far I've been impressed with the high quality of their equity and debt deals, it's far better than what I'd be able to get locally.

Regardless of what you decide, there are a lot of new options out there courtesy of the JOBS Act and you owe it to yourself to check them out.

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