There is bad news in the RE crowdfunding world. RealtyShares, one of the leading real estate crowdfunding platforms, has shut down part of their operation. That’s very scary for investors. I’m an investor at RealtyShares and I was a vocal supporter. After all, one of my financial goals this year was to increase my RE crowdfunding investment to $100,000. Now, other investors and I are very nervous and we have a lot of questions. What went wrong? Is real estate crowdfunding sustainable? There aren’t many answers at this point, but I’ll add what I know in this post. It’ll be a good learning experience for investors who are looking for alternative investments.
Do you know about real estate crowdfunding? I’ll quickly go over the basics, share my experience, then analyze the bad news.
What is real estate crowdfunding?
Basically, investors pool their resources to invest in a real estate project. I’m one of these investors. I want to invest in commercial real estate, but I don’t have enough money or the expertise to invest in strip malls and apartments by myself. This is where the RE crowdfunding companies come in. The RE crowdfunding platform puts investors together with a developer. The local developer wants to work on a commercial property, but they don’t have the funds to do so. The investors provide part of the down payment to help acquire that property. Typically, the developer provides part of the down payment as well. This shows the investors that the developer has some skin in the game. On my projects, the developers have 10% to 50% of the equity.
The developer makes money by charging a management fee. The developer also collects part of the rent because they have a stake in the equity. The developer’s goal is to sell the property in a few years. Hopefully, the price will increase. That’s when everyone cashes out and the big bucks are generated.
The investors receive part of the rent every quarter. We’ll make a profit when the project is sold.
The RE crowdfunding platforms make money by charging a fee to the investors and/or developers, typically 1-2%. Some platforms charge a listing fee to the developers.
My RE crowdfunding investment
I learned about RE crowdfunding in 2017 and I was intrigued. Real estate investment has been good for us, but I don’t want to spend a lot of time on it. Previously, I invested in local rental properties and REITs. The local rentals are doing well, but I don’t want to be a landlord anymore. It takes time and adds stress to my life. REITs are easier, but they correlate to the stock market too much. When the stock market crashed, REITs followed. The bottom line is I want to invest in real estate, but I don’t want the headache of being a landlord. Yes, I’ve had property managers. They helped a bit, but we still had plenty of headaches.
So that’s why I invested in RE crowdfunding. I planned to increase our RE crowdfunding investment to $100,000 this year. However, I was slow with this ramp up. After all, we didn’t have $100,000 lying around. I’ve been investing as money became available through our various income streams. By the end of October, I had invested $65,000. However, two of those projects hadn’t started quite yet.
When RealtyShares shut down their acquisition branch, they canceled the project that hasn’t started. Anyway, they wired $27,000 back to my checking account. Whew, this is one time I’m glad that I’m behind with a financial goal. Currently, I have $38,000 invested in 5 projects at RealtyShares. You can see more detail at my real estate crowdfunding page.
Bad news from RealtyShares
Last week, RealtyShares sent an email to all their investors. Here it is.
To our platform investors and operating partners:
Five years ago, RealtyShares was founded with a mission to connect capital to opportunity. With over $870 million invested across more than 1,100 projects, we have built one of the top online real estate investment platforms. We’re helping investors meet their financial goals and deploying capital to real estate operating companies to execute value-add and development strategies for properties across the U.S.
As an early stage company, we have relied upon venture capital to fund our operations. Over the past six months, RealtyShares aggressively pursued a number of financing options to continue growing the business. Unfortunately, despite our best efforts, we were unable to secure additional capital. As a result, we will not offer new investments or accept new investors on the RealtyShares platform.
From this point forward, RealtyShares’ focus will be servicing our existing investors and approximately $400 million of assets under management. This transition will have no impact on the underlying real estate investments. Investments will continue to be managed and distributions will continue to be made. Investors will continue to receive asset management updates and year-end tax information.
We are committed to serving our existing investors and sponsors and have a team dedicated to supporting our ongoing operations.
The RealtyShares Team
Wow, that was a bombshell. RealtyShares is one of the big players in the RE crowdfunding. I’m shocked they couldn’t secure more funding. There must be some serious problems that regular investors are not privy to. This email is very scary for investors. We have lots of questions and there aren’t many answers. I’ll attempt to address some of these concerns here.
Will we get our money back?
This is my main concern. I have $38,000 with them. That’s not a huge amount like some people have invested, but they were hard earned dollars just the same. We don’t have a lot of information right now, but here is what we do know.
RS is shutting down of their acquisition team and stopping all new deals. However, they (or a third party) will continue to service existing investments. Each project is run by a developing company. As long as the developing company continues to honor the deal, it should work out fine. On each of the projects I invested in, the developers have a stake in the project. A reputable company will work with investors and close out each project in a timely manner. That’s the best case scenario.
There are many things that can go wrong, though. The developing company could go out of business, screw up the project, or real estate could crash. In this case, the investors would recover a part of their investment after the project is liquidated. The team at RS will facilitate with this.
A developer could also stop making payments and renege on the deal. In this case, RS will work with a lawyer to motivate the developer to honor the deal. For example, I read that one developer stopped payment and RS filed an injunction to vacate the property. Hopefully, the team left will be able to support the existing projects in this way.
I’m an optimist, but we’ll have to be prepared to lose part of our investment. Some unscrupulous developers may try to take advantage of the situation.
What went wrong?
At this point, we don’t know exactly what went wrong. Obviously, if they run out of funding, it means they were spending too much money. We can infer from the communication that the acquisition arm of the company is bleeding cash. From what I read, it costs thousands to attract investors and developers. RS needs to advertise, retain a staff of excellent employees, and improve the user experience. All of these are expensive. They probably burned through their operating fund too quickly and couldn’t work out a deal with the VC. I believed they raised $27 million in 2017. Their burn rate must be incredible.
From what I read, none of the RE crowdfunding companies are generating profit at this time. It seems the fees alone aren’t enough to fund the companies. Of course, RE crowdfunding is very new. Some companies won’t make it. Hopefully, a few can figure out how to run a sustainable business and keep this investment option open for individual investors.
Also, I read that Nav Athwal, RealtyShares’ co-founder and CEO, left recently. That might have interfered with their ability to raise more funds. It’s just speculation, I don’t know.
Is RE crowdfunding sustainable?
This is my next question. RS is one of the leading RE crowdfunding companies. If they couldn’t make it work, can the other companies become profitable? It seems like the acquisition part of the business needs a ton of fund to operate. What about the loan servicing team? Can that part be sustainable? It seems like the business will become easier to handle as each project closes out. However, the income will be reduced and they’ll have to get rid of some employees. If I was on that team, I’d be looking for another job. Nobody wants to work in a company with an expiration date. In 5 years, all projects will be closed out. Will there be anyone left to turn off the lights?
I guess we’ll see if RS can keep this part of the business going. Maybe another RE crowdfunding company can buy this part of the business and merge it with their team. This would be the best case scenario to me.
Would I continue to invest in RE crowdfunding?
I’m scared at this point. The stock market is already volatile this year. I was hoping for some stability in RE crowdfunding, but that turned out to be a false hope. I still like RE crowdfunding. However, I’ll probably wait a bit to see how things shake out. If none of the RE crowdfunding platforms become profitable in a few years, then the future looks bleak for this form of investment. Funding will probably continue to dry up as the stock market continues to gyrate. The economy is great now, but nobody knows what’s going to happen next. The real estate market is already softening in expensive coastal cities. We might be in for a correction soon. At that point, it’ll be survival of the fittest.
In any case, I limit our asset allocation in alternative investment to less than 5%. Alternative investments are always more risky, especially if they are new. Over 95% of our investment is in low-cost passive index funds and solid dividend stocks. I encourage you to do the same.
Where can we get more info?
There isn’t a lot of information at this time. I’ve been checking the news and Financial Samurai’s forum. Sam has over $800,000 invested in RE crowdfunding with RealtyShares so he’s trying his best to get more info for us. He also has connections within the company.
Here is a link to Financial Samurai’s real estate crowdfunding forum. Check it out if you’re an investor with RS.
Sam’s post about RealtyShares shutting down part of their business.
Real Estate Crowdfunding Industry Ponders The Future at Crowdfund Insider.
More to come
I’ll keep this post updated as we receive more information. I really hope RealtyShares can continue to service the existing loans. Best of luck to all the investors out there.
Image by Micah Williams
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.