Real estate investing is often seen as one of the most reliable ways of growing and accumulating wealth but investing in individual properties was never appealing.
It takes a lot of time to research and vet individual properties. It requires a lot of domain expertise that I don’t have, like how to evaluate the various parts of a house, and don’t have the bandwidth to learn and internalize. Also, commercial real estate is what I’m most interested in and many of the best projects simply aren’t available to individuals unless you have a large amount of capital to deploy…
… until crowdfunded real estate investing. 🙂
I think the future of real estate investing is in the crowdfunding route and one of the most notable companies in the space is RealtyMogul.
Table of Contents
Who is RealtyMogul?
RealtyMogul was founded in 2012 by CEO Jilliene Helman, when she was a Vice President at Union Bank in Los Angeles, CA, and launched in 2013 after she recruited Justin Hughes, RealtyMogul’s CTO, and raised a small seed round. Since then, they’ve raised money five more times for a total of $46.6 million, including lead investors such as Canaan Partners and Sorenson Capital.
They’ve signed up over 150,000 members and invested in over $2 billion real estate value, disbursing over $82 million to investors. They’ve been at this for a while and had good success with the deals they’ve closed. They boast that they see a thousand deals before approving one that meets their standards.
If the name sounds familiar, perhaps you heard of their most famous deal – $1.5 million for the Hard Rock Hotel in Palm Springs, CA. The raise happened in 2014 and it was the first crowdfunded hotel deal in the nation. Hard Rock Hotel spent millions of dollars renovating the former Hotel Zoso and reopened the location in October 2013. If you were one of the equity investors, you got special perks like 25% off room rate discounts, $50 in food and beverage credits, use of luxury Owner’s Cabana, plus upgrades and other VIP perks. (if you’re on the platform, here’s the archived offer page)
Types of Investment Opportunities
RealtyMogul offers both equity and debt/loan deals for accredited investors as well as a REIT-style investment.
They started by offering equity deals, like many other crowdfunded real estate investing sites, but quickly added debt and loan products. They only offer commercial deals – commercial, industrial, office, hotels, retail, as well as multifamily properties like apartments. They used to offer residential deals but no longer.
The deal structure will be familiar if you’ve done any crowdfunded real estate investing before.
What is the Income REIT?
The Income REIT is one of RealtyMogul’s REIT product. The Income REIT, formerly called MogulREIT I) was launched in August 2016 and holds a mixture of debt and equity assets (55% debt, 45% equity) in the commercial real estate space within the United States. It aims to distribute 8.00% annually, though distributions are made on a monthly basis.
You do not need to be an accredited investor to invest in the Income REIT as long as your investment in the fund does not represent more than 10% of your annual income or net worth (whichever is greater).
The minimum investment is $5,000 and it’s managed by Opus Fund Services, a fund administrator based in Illinois. You can invest in the Income REIT through a self-directed IRA but the minimum initial investment increases to $5,000.
The Apartment Growth REIT, formerly MogulREIT II, is their second REIT fund and the difference is it targets multifamily apartment buildings, rather than commercial real estate, and distributes quarterly.
Fast Sign Up Process
The signup process was quick. You have to fill out a brief investor profile, which starts by asking your net worth and your income for this year and the two previous years. This is to determine if you are an Accredited Investor (net worth greater than $1mm excluding primary residence or income of at least $200k for this year and two previous, $300k if you’re married).
Then it moves into six questions about risk like your risk tolerance, holding periods, and investing experience. All pretty standard. After the signup process, they will call you (or you can call them, they send an email with a number to call) to confirm your information.
Until you do this, the only opportunities you will see are the two REITs.
Review Open, Funded & Closed Opportunities
After a quick phone call confirming my accredited status, my account could see all of their offerings.
I poked around their past offerings first. What’s nice about their “past investments” page is that they have Completed and Funded. Completed means 100% done whereas funded means they’re funded and paying out. It’s a good distinction.
The past offerings included all types of properties (office, multi family, self-storage, industrial, etc.) sprinkled around the country (IL, GA, AZ, CA, NC, TX) with investment types of both equity and debt. They also are brave enough to show actual IRR (internal rate of return), something you know because it’s completed. More often than not, they were higher than the IRR Objective, a nice bonus.
At the time of this writing, there were five open investment opportunities, three of which were 1031 Eligible.
What does 1031 Eligible mean? Section 1031 is the part of the tax code that says you can defer capital gains if you exchange like-kind properties. With RealtyMogul, these properties are (passively) held in Delaware Statutory Trusts and if you sold existing property that is 1031 eligible, this DST is available to completely the 1031 exchange. Existing 1031 investors may have a higher minimum than cash investors.
RealtyMogul Fee Structure
The fee structure depends on the type of deal and they’re spelled out clearly under Fees in the Financials tab of each deal.
For direct equity investments, they list all fees paid out to all entities involved.
When I reviewed a deal that would purchase an apartment building, there were one-times fees of 2% to the real estate company and 4% to the broker-dealer. Then there are recurring fees of 4% of gross income to the property management company and 1% to RealtyMogul as a management and administrative fee. You need to check the fee list because not all deal types are structured the same way, some have more fees and some have less.
For the REITs, the fees are listed in the offering circular and take a little digging. There is an asset management fee of 1% paid to the manager.
Benefits and Drawbacks of RealtyMogul
The biggest Pro for RealtyMogul is how they have options for both Accredited and Non-Accredited Investors. The REITs are solid offerings with clear differentiation (commercial real estate or multifamily) and a decent distribution rate and frequency. You have to dig a little deeper into the fees as they’re more expensive than other REITs but it’s a different product (Vanguard’s REIT just invests in publicly traded real estate companies, it doesn’t source, vet, and coordinate the funding of individual projects).
There is a great variety of direct investments and the ability to take advantage of Section 1031 means you can be more tax efficient in your investments. The minimums on these direct deals are higher than some other platforms (of the five available deals, the minimum was $25,000) but all other aspects of the deals were similar (hold time, projected IRR and Cash on Cash returns, etc).
This is not a drawback on the platform but for the investment type – it’s illiquid. When you invest in a property, you can’t sell your portion on a secondary market. With the REITs you can redeem your shares but it’s limited. This is how it is with actual real estate investing, so it should come as no surprise, and most REITs have limitations on trading (they’re not meant for trading, so they limit you on purchases and redemptions).
I like how they shared the actual IRR on previous deals but they don’t show any of the offering documents. You can review the funded deal documents, which can be fun if you read about them in the news and are curious how they were pitched, but once they close they’re closed. It felt like I was cheating when I read the offering for the Hard Rock Hotel and could see all the perks they were offering even though it closed a while back.
That said, we all know real estate investing is not without risk. In mid-April of 2018, Hard Rock Hotel announced it was shutting down the Hard Rock Hotel in Palm Springs. So… perks are nice but not if the hotel shuts down. 🙂
Anyway, give it a look if you’re interested and it’s free to sign up.
- Open to accredited and non-accredited investors
- $5,000 minimum for the Income REIT
- Wide variety of asset types - commercial, retail, residential, multifamily, etc
- Clearly identified Section 1031 opportunities
- Fees on MogulREITs
- High minimum on direct investments ($25k)