Real estate is one of the best asset classes to build long term wealth. As an owner of five properties, I’ve seen my net worth soar over the past 15 years as my principal values and rents have increased far beyond inflation.
I came close to buying my 6th property, but instead of taking down a Hawaiian dream home for my parents, I’ve decided to invest more surgically through RealtyShares, the leading real estate crowdsourcing platform in America.
Here are three reasons why I didn’t want to own more physical property:
1) Property taxes. I’m already paying over $50,000 a year in property taxes. If I buy another property that costs let’s say $2M, I’ll have to pay another ~$23,000 in taxes a year. That’s just way too much.
2) Dealing with bad tenants. If I were to buy this Hawaiian home, one of the plans was to rent out my parent’s old house for ~$40,000 – $50,000 a year after they moved. Tenants can be great, or they can be a real PITA. The older you get, the less you want to deal with tenants.
3) Too much financial risk. To add millions of dollars in illiquid real estate exposure near the top of the Honolulu market, when ~40% of my net worth is already exposed to real estate seems like a really bad move. It’s much better to invest smaller sums in higher yielding markets instead.
REAL ESTATE INVESTMENT SOLUTION
Given I’m no longer parting with so much cash, I’ve decided to invest some of the money in RealtyShares, a real estate crowdsourcing company based right here in San Francisco. They’ve raised over $32M in company funding from the likes of 500 Startups (top incubator), General Catalyst Partners, and Union Square Ventures in order to open up investment opportunities for accredited investors in the sub-$50M real estate market. As of May 21, 2017, they’re in the processing of closing their Series C round.
RealtyShares offers a mix of fix-and-flip loans, preferred equity and mezzanine products, joint venture equity and commercial loans. Those commercial buildings with higher returns that were once out of reach are now more readily available. So far, RealtyShares has had over $170 million go through its platform from investors like myself investing in over 2,000 properties.
So why did I decide to invest in RealtyShares rather than another real estate crowdsourcing company? A relationship. I had lunch with an old colleague who used to work at a fintech company I currently consult for. He’s now a VP of Finance at RealtyShares. We had gotten along well at his previous company and he and his colleague made me an offer I couldn’t refuse.
They are giving me $5,000 to invest in their platform. In return, I agreed to write about my experiences with their platform, good and bad, on Financial Samurai. I love the synergies of blogging!
The timing of this proposal was superb because not only am I passing on buying another physical property, I also have a $330,000, 4% yielding, 7-year CD expiring. Then I’ve got my final tranche of deferred compensation negotiated in 2012 hitting my bank account in 2017 as well. My main goal is to find suitable income investment replacements for these funds.
Assets that provide yield in this low interest rate environment are attractive. Just look at the 20-year bond ETF, TLT, up over 15% in the past 12 months. The same goes for VNQ, the Vanguard REIT ETF. During this same period, stocks have had a much more volatile ride, and are only up about ~5%. Past performance is not a predictor of future results. But given I believe interest rates will stay low for a long time, and given yield alternatives are so low, I want to continue allocating my cash towards high yielding investments.
I’ve started with a $10,000 RealtyShares commercial property investment and will work my way up to $25,000 – $50,000 investments in 2017 and beyond. It’s always good to start small.
REALTYSHARES SIGN UP PROCESS
The sign up process is pretty straight forward and takes about three minutes.
Step 1: Input your first name, last name, telephone number
Step 2: Self accredit by choosing how you are accredited: income, net worth, joint income, or business
Step 3: Link a checking account or skip to first explore the various investments.
Step 4: Verify your e-mail address.
Step 5: Reach The Cooling Off period. This is a great step for all new investors. The Cooling Off period is suggested by the SEC for all investors to get comfortable with an investment before deploying capital. It’s not mandatory, just recommended. After you fill out the questionnaire, you’ll get a phone call from someone at RealtyShares to talk about the product and answer all your questions.
GROWTH OR INCOME?
You’re either looking to invest in growth or income on the RealtyShares platform. My main focus is income given I’m satisfied with my current financial nut.
Three main investment categories:
1) Single family residential property. Target 9% – 11% annual return. You are the senior debt holder (first position on lien). The investment duration is usually 6 – 24 months and income usually paid out monthly. This product is considered their least risky investment for investors and has been around since the beginning. Roughly 40% – 45% of total investments on the platform are in this category.
2) Preferred Equity/Mezzanine debt. Target 12% – 14% annual return. You provide bridge loan for sponsors and are a lower position in the capital stack. The investment period is usually 2 -3 years. Investments are mostly in commercial property. Roughly 20% – 25% of total investments on the platform are in this category. This is where I will probably focus most of my investments since I already own single family residences.
3) Joint venture equity. Target 10% – 16% annual return. You are an equity owner alongside the sponsor and take part in profits once preferred returns are hit. Typical duration is 5 years, but can be as short as 3 years. Income is usually paid quarterly once the deal is closed. This category accounts for roughly 25% – 30% of all investments.
OTHER IMPORTANT INFORMATION
Real estate crowdsourcing is considered an Alternative asset class. Therefore, it’s recommended you only allocate as much as you feel comfortable investing in Alternatives. Although these investments are more liquid than a Hawaiian dream property, you still have to lock up your money for 6 months – 5 years. Further, there may be additional capital calls if an investment turns out to require more capital than has been committed upfront.
Many private wealth advisors recommend a 10% – 20% allocation. Meanwhile, we know that some large university endowments invest 50% or greater in Alternatives. The whole idea of investing in Alternatives is to capture outsized returns from inefficient markets.
The minimum investment is usually $5,000, but it can go as low as $1,000 for certain investment opportunities. Equity investment minimums are usually higher because there can only be a total of 99 investors per deal, and the sponsor may require more capital depending on the deal.
To generate revenue, RealtyShares take a 2.5% to 3% origination fee on the debt it raises for projects. On equity investments the company takes a cost reimbursement and makes a 1% to 2% percent management fee. That’s better than me paying a property manager one month’s rent (8.33%).
Finally, there have been 134 investments successfully completed so far, and there are currently 240+ active investments on the platform. I want to find cap rates in the Midwest or South that are over 10% compared to just 2% – 4% in SF and Honolulu for diversification purposes.
Below is a map of RealtyShares’ current investment offerings. The arrows are where I’m focused on deploying capital. Texas, Alabama, Mississippi, Louisiana, and Georgia are my top picks. If anybody is from one of these states, please share how the real estate investment environment is.
SURGICALLY DEPLOYING CAPITAL
Instead of overly concentrating new money into one very expensive property in Hawaii, I’m now going to surgically deploy capital into multiple types of investments with potentially greater returns, less hassle, and more liquidity. As of 2H2017, I’ve invested a total of $260,000 in their platform to gain more exposure to the heartland of America where real estate values are lower and yields are higher.
If you’re looking for yield in this low interest rate environment, don’t want the hassle of managing rental properties, don’t have the downpayment for a physical property, want to more easily allocate real estate dollars around the country, don’t like buying REITs or real estate ETFs that have already run, and are looking to diversify your investment portfolio with real estate exposure, take a look at the RealtyShares platform. I think you’ll be pleasantly surprised by their various investment opportunities. This post contains sponsored links from RealtyShares.