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Our Real Estate Crowdfunding Investment Performance

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Our Real Estate Crowdfunding investment 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.

  1. 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.
  2. 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.

real estate crowdfunding crowdstreet

There are 3 categories here.

  1. Active – These projects are ongoing. Usually, the ROI is lower at this point of the project.
  2. Exited – These projects are done. The ROI looks pretty good after the properties are sold and the developers paid us.
  3. Problem – This is an example of when something went wrong.

We’ll take a closer look next.

Equity projects

These are our equity investments.

Early phase of an equity project

real estate crowdfunding crowdstreet

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

real estate crowdfunding

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

real estate crowdfunding crowdstreet

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.

Debt projects

Next, we’ll look at our debt projects.

Active debt projects

real estate crowdfunding

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

real estate crowdfunding

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

real estate crowdfunding

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

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

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.
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{ 18 comments… add one }
  • Done by Forty January 14, 2020, 9:04 am

    Seems like a neat way to put some alternatives into your portfolio, Joe.

    We, too, had some single family rentals but over time I just was less willing to keep up with the regular work with that investment. It took me owning rental property to realize I prefer passive stock investing. 🙂

    I’m definitely intrigued by the projects you mentioned and like the diversity. But the specific risk outlined in your last item is a tricky one: when you lend, the possibility of default is there. I suppose having property as collateral certainly lowers the total risk though. While it may go down in value if you’re unlucky, it’s always going to have some value: probably never a total loss.

  • freddy smidlap January 13, 2020, 11:18 am

    very interesting write-up, joe. i’ll bet you’ll be glad to have something not correlated to the stock market in the next downturn.

  • Lazy Man and Money January 13, 2020, 10:24 am

    The “RS” is RealtyShares right? I know that’s not an option anymore, but it wasn’t completely clear. I’m nervous about these kinds of investments because RealtyShares went away and I was burned on P2P lending around 2006 and 2007.

    I wonder why not invest in REITs, instead? Seems like you could get the same return (except for maybe the 15-20% Crowdstreet one if that pans out) and it would be more diversified.

    I’m thinking of getting out of the real estate game, myself. Either that or I just need to find a good property manager. I can’t continue to do a 5 hour round-trip drive just to do a 10-minute walk-through.

  • Mr. P2F January 13, 2020, 5:05 am

    Hi Joe, thanks for detailing your strategy and explaining the differences in approaches. I’ve often wanted to diversify some holdings into re beyond a REIT.

    • retirebyforty January 13, 2020, 10:35 am

      REIT is a great way to invest in real estate. We have over 10% invested in REIT.
      RE crowdfunding is more direct, but it could be riskier too. It really depends on the company.

  • Ryan Schlomer January 13, 2020, 3:58 am

    Do you know if the developers are borrowing money via crowdfunding sites because they cannot get a loan from a bank? If not, is there an advantage borrowing this way than from a bank? Are they just getting the money for the down payment from investors, and then getting the rest of the loan from a bank?

    • retirebyforty January 13, 2020, 10:34 am

      For the big equity deals, they’re borrowing money for the down payment. In my Texas apartment investment, the developer put in 2% and borrow 33% from the investors. The rest from the bank. In the past, developers rely on private investors to fund this gap. Real estate crowdfunding is a new way for them to find investors.

  • Xrayvsn January 13, 2020, 3:35 am

    Thanks for sharing all the details on the actual returns of the deals you are invested in.

    When I first started crowdfunded investing I did the debt deals. Sure there was not as much upside as equity but you also were higher up on the totem pole in terms of if something had happened and the property had to be sold. 1st or 2nd lien debts get paid first with the proceeds and then any left over would be distributed to the equity holders.

  • Dave @ Accidental FIRE January 13, 2020, 2:23 am

    This is an interesting way to do real estate but I’m too lazy so I’ll just stick to my REIT fund. 🙂

    • retirebyforty January 13, 2020, 10:30 am

      That’s the easiest way to invest in real estate. I’d probably do the same if I don’t have a PF blog. I need to do some interesting stuff so I can share my experience.

  • Mr. Tako January 13, 2020, 12:29 am

    Definitely this is an interesting new way to invest in real estate! I’m actually surprised at how low the returns are, given the risks taken. I would have expected higher annual returns.

    I guess everyone has their own risk tolerance!

    Just curious — What the typical debt/equity ratios are on these projects Joe? Perhaps they’re more conservative financed than I’m assuming.

    • Derrick January 13, 2020, 2:30 am

      I’d start using Fundrise, 3 years my average return is 10% and I don’t have to pick individual project and the platform ensures diversification.

      More hands off, higher return and haven’t had any projects fails to pay out (yet).

      • retirebyforty January 13, 2020, 10:31 am

        That’s not bad at all. Is the ROI dropping due to lower interest rate?

        • Derrick January 13, 2020, 5:11 pm

          In 2018 I had something like a 10.2% return and 2019 it was 10.0 so it dropped a little bit I also added more funds so things are ramping up on some projects.

    • retirebyforty January 13, 2020, 10:29 am

      The debt deals are basically like lending money out. The ROI is a bit too low at this point because the interest rate is very low.
      The equity deals should have a much higher ROI. 21% annualized ROI is really good.
      For debt deals – LTV is anywhere from 50% to 85%. It really depends on the project.
      For equity projects – It’s a lot less, closer to 20%.

  • Financial Freedom Countdown January 12, 2020, 11:26 pm

    Joe, glad most of your investments other than one are doing well. Realty Shares started having lots of issues and I lost money in a simple debt deal. Hope you have better luck than me. I documented my troubled property with lessons learnt at https://financialfreedomcountdown.com/how-to-evaluate-real-estate-deals-that-will-help-you-avoid-losing-money/

    • retirebyforty January 13, 2020, 10:26 am

      Thank you for sharing your experience. I find debt deals are usually made to less qualified operators, young/small companies or individual developers. That’s why my most important criteria is the developer’s experience. Now, I only invest with developers who went through the last real estate crisis. New companies will have a harder time dealing with a downturn.

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