I've always been fascinated with the idea of owning real estate outside of our primary residence. Most people stumble into it when they move from one home to another, renting out their first home to generate a side income.
When we moved, I did some research and while it was possible to generate a little cash flow from our house, I didn't want to be a landlord and we sold our first home.
Real estate has always remained in the back of my mind and so when there was a proliferation of crowdfunding real estate investing sites (like peer to peer lending sites but for real estate investing), I thought it might make the perfect vehicle.
The one I chose to check out first is a company called RealtyShares.
Athwal was a real estate attorney in San Francisco and represented institutional clients like REITs and developers. He used his experience in that arena to create RealtyShares because he wanted to introduce the idea of real estate investing to individuals.
RealtyShares allows you to invest in real estate opportunities, both commercial and residential, with a minimum of just $1,000 per investment and a maximum annual fee of 2%. On equity and preferred equity investments, the fee is closer to 1%. On a debt investment, RealtyShares takes a servicing fee in the form of an interest rate spread (difference in what investors get paid vs. what borrowers pay). There is no transaction fee.
Here's a quick promo video of “how it works:”
Signing up takes just a few minutes. The process involves creating a login and optionally linking up a bank account. You can skip linking a bank account at the beginning (which is what I did because I wanted to see what's inside before I dug up my banking details).
The investor profile asks some pretty standard investor questionnaire questions like net worth, income, whether you work in the financial services industry, plus a few other ones like whether you or anyone in your household is currently or formerly a senior military, governmental, or political official. It takes about ten minutes.
Once complete, you can schedule a call (they're 20 minute blocks) to exit the cooling off period.
The cooling off call was mostly information, the person I spoke to gave me a run down of what they do. It was really fascinating and here's what I learned about their three different, though broadly categorized, investment types.
Shorter term, senior debt: These are deals with a target 8-10% return on a 12 month duration senior debt note with minimums from $1,000 to $5,000.
They fall into one of two types:
- Single family homes, like real estate flips – You're the 1st position lien on these homes and your recourse on default is foreclosure.
- Commercial debt funding the construction of a franchise location – They've only been doing these for 3-4 months (and they've only done a handful) but they fund the construction of a single free standing franchise location. These locations already have franchisees who have signed a triple-net lease.
Medium term, preferred equity deals: These are 2-3 years long and you're usually in 2nd position (to debt) with a target return of 12-14%. They usually go to multifamily residential projects, sometimes larger loans ($1-$3mm) to real estate investors looking to scale. Minimums on these are closer to $10,000 – $15,000.
Longer term joint venture equity deals: These are 3-5 year deals where you take ownership with developers and targeting a 16-20% IRR. On these, you will get quarterly payments (sometimes based on operating profits) as well as participating in an appreciation when the property is sold.
Obviously these are just the types of deals they've seen on the platform (as of January 2017). The fun part is that you can see all of the investments they've made (of which there have been 500+).
A Quick Look at Actual Investment Opportunities
After I signed up and existed the cooling off period, I poked around and saw that there were a handful of open investments. You can't invest in any deals that opened before you exit a cooling off period (that's the note below each listing) but you can still look around. You can also view closed deals too, which is always fun.
I peeked at the first debt deal listed, a $1.65mm 12mo note paying 10% interest with a $10,000 minimum. The “prefunded” label indicates that RealtyShares already funded it so now they're backfilling it with investor money.
The information included with this investment is relatively light. I suspect it's because this is a fairly straightforward debt deal. Other deals may have more information (like the preferred equity deals) in part because they carry more risk. If you're doing a joint venture, you need to know who you're getting in bed with.
Back to this deal, they give you some basic stuff – insight on the purpose, the track record and credit score of the borrower, plus how much leverage is involved. There is also additional “Documents,” in this case there is an appraisal of the property plus the borrower's track record with RealtyShares.
It's not that different than what you'd see at a peer to peer lending site, though with different details (like property). Sometimes there's even a drone video flyover!
The information provided should be looked at as only the start. You must do your homework. While RealtyShares does vet these deals and reports it only takes a fraction of those offered, you can't be an investor without doing some more research when you're putting your money to work.
You can find a tremendous amount of information online, working strictly from the address, and I recommend that on any deal you start digging up that information.
Fees: In this particular deal, the investor doesn't appear to pay any fees. The borrower pays $25 per $1,000 raised (revealed in the investor package). Additionally, the interest rate on the loan is 11% to the borrower and 10% is paid out to the investor (revealed in the note listing).
If you view this as a private placement, it's very similar to how those are structured fee-wise. I've done a few of these and these numbers are consistent with the risk involved.
How Taxes Work
For each investment, you'll get a Form 1065 Schedule K-1 at the end of the year. The K-1 is a form used to report the income, deductions, credits and other salient details of a partnership, which is what you're entering into when you make an investment.
It's not a difficult statement to understand and one that your tax preparer or tax software will be able to handle without difficulty.
Is It a Good Investment?
I've invested in a small group of single family homes, I've invested in REITs, and I've loaned out money for real estate deals to people I trusted (hard money loans). My experience with direct ownership (albeit in a syndicate with people I trusted) was mixed, there's just a lot of volatility in owning properties in one geographic region… plus landlording isn't a picnic.
My hard money loan experience has been stellar but again you're basically loaning money to an individual. I've done only one of these, I trust the person I loaned money to (and he's done nothing except pay on time!), but the whole “eggs in one basket” is just a dangerous way to do business. (and I've been fortunate!)
But there is — many REITs aren't invested in property as much as they're invested in property companies. VGSIX's top holdings are the equity positions of commercial property groups and storage companies. It's real estate in the sense that you're buying companies with massive real estate holdings but not directly into real estate.
I think it's really cool to window shop and I might dabble a little just to see how it is (it's a little like scratching my dividend investing itch).
If you're interested, you can sign up to learn more about them.
Have you used RealtyShares? Or have any thoughts about it?