DiversyFund Review: A Private REIT With No Management Fees

DiversyFund is a real estate marketplace that enables nonaccredited investors to diversify into real estate investing for as little as $500. As an experienced real estate and real estate crowdfunding investor, this is my detailed DiversyFund review.

DiversyFund was founded in 2016, but really only received its Series A funding in early 2018. Therefore, DiversyFund is one of the newest real estate crowdfunding platforms with the least amount of funding.

The leading real estate crowdfunding platform for nonaccredited investors (which includes accredited investors) is Fundrise. Fundrise was founded in 2012 and is the creator of the private eREIT and eFund for real estate.

Based in San Diego, California, DiversyFund has been primarily focused on commercial real estate opportunities in Southern California.

DiversyFund Review

There are literally hundreds of real estate crowdfunding platforms in the market today. What makes DiversyFund unique is that the company owns and manages properties directly, rather than acting as a broker that pairs investors with specific projects. As a result, DiversyFund does not charge management fees on its investments.

However, just like a “no-cost refinance” has fees embedded in the refinance, DiversyFund makes money by earning a performance fee. Therefore, the investor ultimately earns a lower potential return. DiversyFund is a business after all. And businesses need to make money.

Low Investment Minimum

DiversyFund has a low investment minimum of only $500. This matches Fundrise’s investment minimum fee, which is great for new investors.

However, the downside is that all dividends are reinvested. Therefore, an investors will not realize any income until the investment property is sold. There is also no guarantee on when an investment property will be sold. It could be three years from the time of investment or five years.

If you are looking to invest in real estate crowdfunding to earn passive income, then DiversyFund isn’t ideal. The main reason why I sold my investment property in 2017 was because I no longer had the time or patience to manage property as a new dad.

I reinvested $550,000 of the proceeds into real estate crowdfunding to earn 100% passive income. The goal was to also reallocate expensive San Francisco real estate with low cap rates to the heartland of America where cap rates were and still are much higher.

DiversyFund Core Product

Investors buy shares in DiversyFund’s DF Growth REIT, a public nonlisted real estate investment trust.

These types of eREITs are registered and audited with the Securities and Exchange Commission. This helps with transparency and peace of mind.

However, given the REIT is private, there is little-to-no liquidity. If you want to sell your shares, you may have to wait for years. If you need to get out, you might need to take a deep discount to Net Asset Value (NAV).

There is much less volatility with private REITs compared to publicly-traded REITs. For example, we saw publicly-traded REITs decline even further during the Mach 2020 stock market crash. However, the liquidity is the main downside.

Therefore, only invest in DiversyFund with money you don’t need for at least three years.

DiversyFund Review Key Points

No management fees.

Most real estate crowdfunding platforms charge between 0.8% – 1.5% in management fees. DiversyFund does not given it owns and operates all its real estate projects. Its fees are just embedded in the returns.

Specifically, any profits made on the investment above a 7% preferred return are split 65% to the investor and 35% to DiversyFund.

Available to nonaccredited investors.

Real estate crowdfunding has gained a lot of attraction because of the desire to invest in commercial real estate. CRE used to only be available to accredited investors, those with an income of greater than $200,000 or with a net worth of over $1 million, excluding your primary residence. DiversyFund is open to all U.S. resident investors.

Main assets in the fund: 

The DF Growth REIT includes apartment complexes, student housing and luxury homes in southern California and Texas. The company buys the properties with an eye toward improvements and resale within five years.

No ability to pick and choose your investments:

As an investor, you need to have faith that DiversyFund will be investing in great assets. The structure is very similar to Streitwise. Streitwise is a private REIT that currently invests in Midwest properties. You don’t have the ability to pick individually vetted deals.

Delayed in collecting income / profits: 

Once the properties are sold investors get their principal back and a 7% preferred return before the company receives any profits. If assets are liquidated at a profit above 7%, subsequent profits are shared — 65% to investors, 35% to the company — until investors make a return that averages 12% per year. Any remaining profits are split 50/50 between investors and the company.

Of course, if there is a loss, then investors will not receive any profits. But at least DiversyFund will not receive any profits either. In this way, DiversyFund is highly aligned with the investor.

DiversyFund Risks

Because DiversyFund doesn’t charge an origination fee or an ongoing management fee, there is greater platform risk that DiversyFund might not survive.

To pay salaries and company overhead, DiversyFund is relying on private capital. According to Crunchbase, DiversyFund is still only on its Series A round, which generally lasts two years before the money runs out.

Will its $13.8 million in funding be enough to see its first potential exit at the end of 2023? It’s hard to say, especially in this environment. If DiversyFund goes into liquidation, like RealtyShares did in 2018, then investors may have a much more difficult time recouping their investments.

RealtyShares tried to grow too fast. But at least they created separate LLCs for each investment so that when RealtyShares went under, investors didn’t go down with RealtyShares. The RealtyShare portfolio was ultimately purchased by IIRM, which is managing the remaining deals until completion.

Another risk investors should be aware of also has to do with the way DiversyFund wanted to raise capital. See the quote below from a Business Wire article on January 30, 2018.

With another eye on the future, DiversyFund also plans on entering the crypto-currency space by launching an Initial Coin Offering (ICO) as part of its financing plan. An ICO will make it easier for crypto-currency users to invest in DiversyFund and own a crypto-currency that is uniquely backed by institutional-grade real estate assets.

ICOs were great ways for aggressive companies to raise money during the height of the bitcoin mania. It really was smart for private companies to raise a lot of capital through an ICO. However, bitcoin crashed, many investors lost a lot of money, and many of these firms who did an ICO ended up being very suspect.

Give DiversyFund More Time To Mature

To summarize my DiversyFund review, DiversyFund may be appropriate for:

• Nonaccredited investors looking to diversify their portfolio into real estate
• Investors who don’t need liquidity for 3+ years
• Investors looking for a lower-cost, lower investment way to invest in real estate

However, given DiversyFund’s short operating history and risk of running out of capital without further funding, I would hold off on investing in DiversyFund right now.

I’d give DiversyFund at least another three years of operating history so it can gain a 5-year investment track record.

DiversyFund Alternatives

Instead of investing with DiversyFund, I would first try investing money with Fundrise, which has been around since 2012. It also only has a $500 minimum for its various funds.

Fundrise is much better capitalized as a company and has successfully raised funds for its company through several Internet Public Offerings.

What I also like about Fundrise is its performance track record. Fundrise has been tracking its platform portfolio since 2013 below. In general, you would rather invest in a platform with at least a 5-year track record.

As you can see, during times of stock market volatility or when the stock market is down, Fundrise significantly outperforms. If you are looking to diversify your investment portfolio. Fundrise is an option.

Just know that investing in a Fundrise eREIT is also illiquid. Expect to invest your money for several years as well before you get to take out full principal and par value. At least in the meantime, you should be earning a quarterly dividend which is 100% passive.

Here’s my detailed review on Fundrise if you want to learn more.

For those of you who are accredited investors and who want to invest in individual crowdfunding deals, check out CrowdStreet. They concentrate their deals in 18-hour cities, secondary cities with lower valuations, higher cap rates, and potentially higher growth rates due to positive demographic trends.

With so many residents moving out of expensive big cities to less dense, lower cost cities, I really like this long-term demographic shift. The work from home trend is here to stay.

Finally, investors on CrowdStreet invest directly with the Sponsor, thereby removing platform risk. Here is my detailed review on CrowdStreet if you want to lear more.

Both Fundrise and CrowdStreet are free to sign up and explore their offerings.