Investing in real estate is a proven way to build wealth. I got started by renting out our old home when we moved. This is the easiest way to start investing in real estate. I knew the quirks and flaws of our old home. When something broke, I usually could fix it myself. After that, we invested in a duplex, a 4-plex, and a condo. This worked well when we didn’t have a kid. I had the time and I could drop by when the tenant had a problem. However, I’m a bit older and less motivated now. Also, the city passed more rules and regulations recently. It’s getting harder to be a DIY landlord these days. That’s why I tried to consolidate down to just one property last year. Fortunately, there are other ways to invest in real estate without dealing with tenants. I started investing in real estate crowdfunding in 2017 and it’s been a learning experience. Some projects went well and some struggled. Today, I’ll go over all our investments so you can see how we’re doing with this alternative asset class.
Real estate crowdfunding basics
First, let’s go over the basics of real estate crowdfunding. This is a relatively new way to invest and many investors are not familiar with how it works.
It takes a lot of money to invest in a property. When I purchased our duplex, I didn’t pay the whole price for the place. I had to come up with the down payment and got a mortgage for the rest. I collect rent and pay the bank every month. The bank makes money by collecting interest on the amount they lend out. In real estate crowdfunding, investors lend money to developers so they can acquire a property. They’ll fix it up and sell it.
There are 2 main ways to invest in real estate crowdfunding.
- Equity – A big commercial project cost millions of dollars to acquire. A real estate developer usually can’t come up with all the down payment so they borrow money from investors. Once they have enough for a down payment, they’ll borrow the rest from a bank (like a mortgage.) Investors receive an equity stake for this. Then, the developer improves the property and raises the rent to increase its value. After several years, they’ll put the property on market and sell it with a big markup. Investors receive a portion of the rental income during the active phase and usually a big payout after the property is sold. CrowdStreet is the leading platform here. They connect investors with seasoned companies who know what they’re doing. The commercial properties on their marketplace are big multimillion dollars projects.
- Debt – Another way to invest is to lend out the mortgage directly. These projects are usually smaller, under a million dollars. Most of these debt investments fund single-family home flips or small apartments. The investors receive a fixed interest payment every month. PeerStreet is a good company for this.
I tried both ways and I like investing in equity projects more. If the project works out well, the return is way higher. Another reason, I like equity projects more because the companies are usually much higher quality. At CrowdStreet, many developers have been in business for over 10 years. The smaller debt loans are usually for small companies without a lot of history. The interest rate is also pretty low now so the ROI isn’t as attractive.
*Real estate crowdfunding is a relatively new way to invest. I plan to limit my investment to under 10% of our net worth. As we all know, the real estate market could crash and we could lose some money (like any investment.) The good thing about real estate investing is the underlying properties still have value. They could be sold and we’ll recoup some of our money.
My RE crowdfunding investment
Here is a spreadsheet of the projects we invested in.
There are 3 categories here.
- Active – These projects are ongoing. Usually, the ROI is lower at this point of the project.
- Exited – These projects are done. The ROI looks pretty good after the properties are sold and the developers paid us.
- Problem – This is an example of when something went wrong.
We’ll take a closer look next.
These are our equity investments.
Early phase of an equity project
We invested in this project 3 months ago, this is the early phase of the project. The developer acquired the property and they’re working on it. At this point, most of the rental income is going back to improve the property. Once the project stabilized a bit, the earnings should increase.
The developer plans to refinance the property in 2022 and return 80% of the investment to investors. If it goes according to plan, then our ROI will be about 15% over the first 3 years. Then in 2024, they’ll sell the property and distribute the gains to investors. All in all, the annualized ROI for this project is targeted to be 20%. We’ll see if it works out over the next 5 years. That’s the timeline for this project.
Mid phase equity projects
These projects are in the middle part. The developers are fixing up the properties and they’re distributing the rental income to investors. The targeted earnings for these properties were around 7-9%. Our ROI is a bit lower than expected, but at least they’re paying out. We’ll have a better picture of these projects in a few years.
Exited equity project
Okay, here is the best-case scenario. The timeline for this project was 3 years, but the developer flipped it in just 25 months. The targeted annualized ROI was 16.3%. However, the real return was 21%! This project worked out quite well.
I invested $5,000 and got $7,184 back. That’s 44% total return over 2 years. This actually beat the S&P 500 over the same period. Remember, 2018 was a down year for the stock market.
Next, we’ll look at our debt projects.
Active debt projects
The good thing about the debt projects is that the interest rate is fixed. These ROI for these projects are pretty close to the projection. Generally, the debt projects pay better equity projects during the active phase of the project, around 6-8%.
The only issue is the property in Florida. The developer is late with the payment. I’m a bit worried about this one and I’ll keep an eye on it.
Exited debt projects
These projects exited and paid off their debt early. Actually, I don’t like early exits because I had to spend time finding new projects to invest in. The SC project paid off the loan in 20 days. The interest was 7%, but it was just $4. That’s not really worth it to me.
If you’re looking for income, this might a good way to invest. However, I’d rather wait a bit longer and see a bigger total return. That’s why I’ll focus on equity projects in the future.
Troubled debt project
Here is the risk of investing in real estate crowdfunding. The developer ran out of money and couldn’t finish this project. They stopped paying interest in January 2019. The platform company negotiated a settlement with the developer and they’re working to pay back 100% of the loan. However, this is contingent on the developer being able to raise money. The payment is scheduled to start in Q1 2020. If the developer doesn’t pay, then the platform company will foreclose the property, sell it, and return the proceeds to investors.
At this point, I’d be very happy with a 0% ROI on this project and just get our money back. I update my real estate crowdfunding page every month so you can check there if you want to keep a tab of this saga. (This recap post is updated just once per year.)
Real estate crowdfunding so far
I’m generally happy with our real estate crowdfunding investment so far. The following are what I like about this class of investment.
- Asset class diversity – A vast majority of our investment is in stocks and bonds. They are great, but I want to add some diversity by investing in real estate properties. I did this by being a DIY landlord when I was young. Now, I can achieve similar diversification with real estate crowdfunding.
- Location diversity – We live in Portland and our properties are local. I think the real estate market here is overpriced. That’s why I want to invest in Texas, Arizona, and other more affordable locations.
- Passive income – I don’t have to go up on the roof or fix the toilet with this class of investment. At some point, I want to travel more and our investments need to be 100% passive by then. The only work I had to do was to screen the projects I want to invest in. Actually, CrowdStreet has region-specific funds you can invest in. They’ll screen the projects for you if you’d like.
- Returns – The ROI is impressive when everything worked out. We had one project that didn’t perform. Even when the project didn’t complete on time, we should get most of our money back. This is way better than P2P lending. Of course, the economy is strong so most projects are doing well. It might be a different story when we get an economic downturn.
I’ll update this post every year so you can see how we doing with real estate crowdfunding. Let me know if you have any questions.
Sign up to invest
If you’re interested in real estate crowdfunding, signup with CrowdStreet to see the projects on their marketplace. There are quite a few impressive office buildings and apartment complexes on offer right now.
Other real estate crowdfunding platforms that I work with.
- PeerStreet– PeerStreet has a very good reputation. Accredited investors can invest in private lending with real estate backing.
- RealtyMogul– All investors can invest in their REIT. In addition, accredited investors can invest in private projects and do a 1031 exchange.
- Fundrise– Non-accredited investors can invest in iREIT here.
*Accredited investor needs to have over $200,00o of income over the last 2 years or has a net worth of over $1,000,000.
*Disclosure. We may receive a referral fee if you signup with the websites above.
Image credit – Hohyeong Lee
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.
Latest posts by retirebyforty (see all)
- Why I Love Tracking Our Expenses - January 19, 2020
- SAHD Recipe – Thai Ginger Chicken Stir-fry - January 18, 2020
- What Should We Teach Kids About Money? - January 15, 2020
- Our Real Estate Crowdfunding Investment Performance - January 12, 2020
- SAHD Recipe – Soft & Crunchy Turkey Taco - January 11, 2020