In 2017, I started investing in real estate crowdfunding. My experience has been positive so far and now I’m ready to write about it. I’ve been a real estate investor for over 10 years, but that’s just in the local market. The Portland real estate market has been great and our investment properties are doing well. However, it can be a lot of work sometime. One of our tenants just gave me a notice to move out. Next month, I’ll have to fix up the unit and find a new tenant. We probably will need to replace the carpet and light fixtures. I will be able to raise the rent a bit, but turning over a unit is not a fun process. You never know what kind of tenant you’re going to get. I’m also somewhat concerned about having such a big chunk of our net worth in one location. What if the Portland real estate market crashes or a natural disaster hits? A big decline in the local real estate market could impact our retirement greatly. These are the 2 main reasons why I want to diversify into other markets with RealtyShares.
Investing in real estate crowdfunding was confusing at first. There are different types of investments and it took me a while to figure them out. Now I have a better understanding and next year I plan to ramp up my investment quite a bit. Eventually, I hope the income from real estate crowdfunding will replace our rental income. I don’t mind being a landlord now, but I’d need to wind it down in 10 years or so. We want to travel more and simplify our lives when we get older. Okay, let’s go over the basics of real estate crowdfunding first and then I’ll share my experience with RealtyShares.
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What is Real Estate Crowdfunding?
RealtyShares is a real estate crowdfunding platform that brings investors together to finance various real estate projects. The platform enables individual investors to access various real estate projects with a modest amount of money. At RealtyShares, each project has a minimum investment starting from $2,000 to $30,000. Investors can invest in single family homes, apartments, or commercial properties. There are three types of investments you can make.
- Debt. You invest in the mortgage loan for a property. The investors receive an interest payment every month. The invested capital is returned at the end of the holding period. These debt investments generate around 8-10% return and the holding period is relatively short, just 1 to 2 years. Most of these debt investments fund single family home flips. The investor hold the lien on the property.
- Preferred equity. Investors provide an unsecured loan to the sponsor. The ROI is higher at 12-14%, but the risk is higher as well.
- Joint venture equity (Equity). The investor receives an equity stake in the property in exchange for funding the project. Payments are realized from the rental income generated by the property and usually payout quarterly. The goal of the property manager is to increase value and sell the property off in 3 to 5 years. The equity investments usually have longer holding periods than debt investments, but the payoff could be higher. Investors receive quarterly payments, typically 5-9%, and get a bigger payout after a successful exit. The projected total return is usually around 16-18% annually. The equity investments are apartment complexes, retail properties, restaurants, and office buildings.
Personally, I like joint venture equity more. The projected returns are higher. However, the risk is higher as well. If the exit plan doesn’t work out, then the holding period will be longer and the return will most likely be lower than projected. You can read more about the different types of investments on RealtyShares’ blog.
Example investment at RealtyShares
Here is an example of an equity investment available at the beginning of September, 2017.
I pick this example because I lived in this apartment when I was a freshman in high school. Wow, talk about flashback! I remember cutting across the football field, leaving by the back exit, and walking home through the alley. Back then, this apartment was a typical grimy courtyard apartment among hundreds like it in San Fernando Valley. The rent was cheap and the tenants were working class people. They must have improved the property at some point because the interior looks much nicer than I remember.
Let’s take a look at the projected cash flow.
|Sample Investor Cash Flows|
|Sample Investment Amount||$50,000|
|Average Quarterly Payments Objective||$712|
|Total Quarterly Payments (Net of Fees) Objective||$8,541|
|Distribution at Sale (Net of Fees) Objective||$69,590|
|Net Earnings to Investors Objective||$28,130|
The yearly income would be 5.7% of the amount invested. The distribution after exit is projected to be about 11% annualized. So the total gain would about 17% if everything goes as planned. The exit price seems high to me, though. This area is part of the Los Angeles suburb and there is no shortage of renters. However, can the price really increase that much in 3 years? The purchase price for this complex is $6,125,000. The projected sale price is 8,282,925. That projection is a huge increase in just 3 years.
I want to diversify from Portland, but I want to avoid California and Washington. The west coast markets are very similar. From my experience, the Portland real estate market usually trail California by about a year. I think it’d be a better idea to invest in the Central region instead. There are new projects every week so I can pick the ones I really like.
My investment so far
I started off slow and invested in 5 projects so far.
- A strip mall in Arizona ($8,000) This was an equity investment. The estimated cash on cash return is 7% per year. After 3 years, the property will be sold and should generate about 10% (per annum) more. Payments have been on time so far.
- A fast food restaurant in Florida ($5,000, 1-year holding.) This one is a senior debt loan and the payments have been on time. The interest rate is a flat 9.5% per year.
- An apartment in Texas ($5,000) This equity deal is going well so far and the first payment came through in January. The estimated cash on cash return is 10% per year. After 3 years, the property will be sold and should generate about 6% (per annum) more.
- An apartment in Arizona ($10,000) This deal is WIP and we haven’t seen a payment yet. The estimated cash on cash return is 10% per year. After 5 years, the property will be sold and should generate about 6% (per annum) more.
- An apartment in North Carolina ($10,000) This deal just closed in January and it will take a few months before we see a payment. The estimated cash on cash return is 8% per year. After 4 years, the property will be sold and should generate about 9% (per annum) more.
We didn’t have a lot of liquidity earlier this year because we were concentrating on maxing out our 401k, Roth IRA, and 529. Now those things are mostly done so I’m ready to invest more with RealtyShares. We have some cash now and I’m planning to sell off some dividend stocks to raise more liquidity. I’m nervous about the stock market at this point because it’s been so long since we had a crash. Also, real estate crowdfunding can generate more income than dividend stocks. I want to increase our investment in real estate crowdfunding to $100,000 by the end of 2018. We’ll see if this move pays off in a few years.
Sign up with RealtyShares
So that’s my experience with real estate crowdfunding so far. RealtyShares has been good, but I need to invest more to see if the income can be sustained. One bad project can derail our total ROI. I’ll have to be careful and pick the projects with good management.
You can sign up to browse the various projects and see if real estate crowdfunding is a good match for you.
Here are a couple of alternatives if you don’t like RealtyShares. Currently, I’m concentrating my effort on RealtyShares so I don’t know as much about these other platforms.
- RealtyMogul – All investors can invest in REIT. In addition, accredited investors can invest in private projects and do a 1031 exchange.
- Peer Street – Invest in debt only. Peer Street is only open to accredited investors. I will try them next year and report back. I heard they are very good.
- Fundrise – Low minimum investment starting at $500. Open to non-accredited investors.
Have you tried real estate crowdfunding? Is it working out like you expected?
Lastly, let me know if you have any question or suggestion on how to improve this post. I will refer back to this post from my passive income report so I’d like to be useful for everyone.
Disclosure: We may receive a referral fee if you sign up with a service through a link on this page. The content contains testimonials from Joe. Actual experience of other customers may differ from the testimonials. The testimonials do not represent guarantees of future performance or success. Moreover, no person nor any other entity assumes responsibility for the accuracy and completeness of the testimonials.
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.