If you are an investor in private real estate crowdfunding deals, you are not supposed to discuss them publicly. As an $810,000 real estate crowdfunding investor in 17 deals across the country, I find it too bad I’m not allowed to talk about the specifics of each deal. It’s helpful to learn from the winners and losers.
This post highlights my experience trying to talk about a private real estate crowdfunding deal, and then being asked not to.
Don’t Talk About Your Private Real Estate Crowdfunding Deals
“The first rule of Fight Club is: You do not talk about Fight Club.”
I thought I had a good idea by crowdsourcing knowledge to make better investment decisions. After all, Financial Samurai has a large, financially savvy readership from all over the country and the world. Why not write about a potential investment as part of my due diligence, let thousands of folks scrutinize the investment, and then make an informed decision after further analysis. No brainer right? Wrong.
Apparently, private deals are not to be discussed publicly due to Regulation D, or Reg D, for short. After publishing my post, Crowdsourcing Knowledge For A Commercial Real Estate Investment in Conshohoken, I was asked to take it down and republish the post after the deal was closed. Not wanting to get myself or anybody else in trouble, I obliged. Sorry believers in the 1st amendment!
So why can’t we publicly analyze a private investment? As far as I can tell, the logic is that even though we all can gain access to real estate crowdfunding platforms by signing up and checking out the various real estate offerings for free, not all are allowed.
This is because we aren’t all accredited investors ($200K+ annual income, $1M+ net worth excluding primary residence), the government doesn’t believe it’s fair to let “poorer” people learn or participate in such offerings!
Not Everybody Gets To Learn For Free
Education is one of the keys to financial freedom. Here I was trying to get smart and help others get smart about a commercial property in Pennsylvania, a state I’m not familiar with. And here the government was in all its wisdom denying us the freedom to learn.
I get that people who only make $180,000 a year might not have the wisdom to spend less than they earn compared to those making $201,000 a year. But what I don’t get is why financial education classes aren’t mandatory if the government is so worried about less wealthy people blowing themselves up? Could it be because the government can’t balance its own budget?
Based on government regulation, I can only talk to myself about private investments, A Beautiful Mind style, or to other people who make over $200K or have a net worth of over $1M. Or maybe I can create a private forum where readers have to self-accredit in order to gain access and then charge a high price for entry!
Ah, so THIS is how class warfare starts! Thanks big government.
Commercial Investment Property Decision
I really don’t want to get punished by the omnipotent government; therefore, I will obey their rules. Private real estate crowdfunding deals should be spoken in private. But what I can do is share with you the reasons why I decided to invest $10,000 into a 5-year term, Conshy commercial property investment now that the deal is closed.
1) A slight majority voted “Yes.”
After writing out my pros and cons for the deal, 54% of you voted “Yes.” I’m always afraid of polls that are aggressively positive i.e. if 70% or more of you said “Yes,” I would wonder what was wrong. The sweet spot is really around 55% – 60% because I believe at that range there is sufficient doubt to create enough future upside to make this deal work. If everybody was bullish then who is left to buy?
2) I like to lock my money up for a very long time.
Investments take time to play out. Just like how too many people quit their entrepreneurial endeavors too soon, too many investors have a tendency to sell too soon. I was one of those people all throughout my 20s and early 30s because I was impatient. Many of the investments I sold ended up being home runs years later. All of my best investments are 3+ years long. This Conshy commercial property has a 5-year term.
3) Bullish on income generating assets in this low interest rate environment.
At the same time, I have very little desire to own more than five physical properties due to maintenance, property taxes, liability, and PITA tenants. Instead, I want to surgically invest my money around the country with higher capitalization rates for diversification and hopefully better returns. San Francisco, New York City, and Honolulu have topped out. There’s so much better value around the country.
In suburban Atlanta, for example, the average single-family home generates a 25.8% gross annual yield, not including other potential costs, according to real estate data firm RealtyTrac. That compares with just a ~3% – 4% yield in the San Francisco Bay Area, according to data provider CoreLogic.
4) Have to start somewhere.
By the end of 1Q2017, I will have over $700,000 in cash based on my current savings rate, an expiring CD, and the final tranche of my severance from 2012. I have a goal to get as smart as possible about real estate crowdsourcing investments before then in order to invest the cash with more confidence.
A $10,000 investment is a good start. My hope is that I’ll have the confidence to invest $25,000 – $50,000 in particular deals I feel strongly about. If not, then I will be more aggressive in paying down a bad mortgage with the proceeds.
5) Hot tub party.
As fate would have it, I met a couple from Conshy in the hot tub at my place in Lake Tahoe before the deal closed! They were at The Resort At Squaw Creek for a Digital Media conference. I got the scoop on Conshy traffic, the competing neighborhood, the reputation of the area and so forth. They actually made me want to invest $50,000 in the deal. But I held back since it’s always good to start small and work your way up.
The Conshy private real estate deal ended up returning 40% three years later. In retrospect, I wish I had invested $100,000, not just $10,000. However, it’s always good to start small.
Slowly Deploy Your Money
When it comes to private real estate crowdfunding deals, slowly deploy your money. It’s always good to start small and work your way up as you get more comfortable with the asset class.
Fundrise is great because you can invest in a diversified fund with as little as $500. Fundrise is the leading real estate crowdfunding platform, having been founded in 2012. They are the creator of the private eREIT category which has boomed since.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
I’ve personally invested $810,000 in private real estate crowdfunding deals to earn income 100% passively. Further, I want to take advantage of cheaper properties in the heartland of America.
Private real estate deals continue to grow in popularity. For more information, check out my real estate crowdfunding learning center.
I realize this is an old post, and oldie but a goodie, but the point you raise is worth another response.
Based on my review of the JOBS Act titles (II, III, and IV) along with Reg D which provides the safe harbor exemption from registration, I don’t not see anything in the language of the law that states that one cannot discuss crowdfunded real estate deals on a public blog.
In particular, you are not advertising, marketing the deal on behalf of RealtyShares (r.i.p.), or involved in fundraising. Therefore, I don’t see why you couldn’t legally discuss it on your site. Other than possibly upsetting the platform owner by posting their content on your site if that were to be deemed proprietary by them, I don’t a reason why you couldn’t discuss the specifics of a deal.
At the end of the day, the investor would still have to join the platform and certify as being ‘accredited’ prior to investing (which is not your responsibility, legally speaking).
Having said all of this, do let me know if I’m missing something.
Sam, I agree with you on the coastal cities and affordability. The world is getting smaller with Internet and cell phone technology we can live anywhere and participate in businesses regardless of location. Thus, the affordable cities with infrastructure and community have big upside. Austin is a prime example. Plus with Soutwest airlines, Vrbo/airbnb/uber travel is more affordable than ever. Allowing those of us who are from less expensive cities (okc Thunder!) closer than ever to the coast.
However, I just was in Dallas last week and the building of apartments in uptown is off the charts. I’m a little cautious that we have entered a period where money has flowed to real estate investments causing a “frothy” market because of the hunt for yield. Long term real estate will hold the test of time and I’m also committed to it but am a little cautious with the 3rd party(realty shares) until they have a longer track record. I’m looking into adding another crowdfunding site soon.
I’m also in agreement with you that the real rate of returns will be in the 5-8%. If I acheieve those marks I will be extremely happy.
Looking forward to both of us achieving great results with crowdfunding!
Sam, I have been investing in RS since July and am in 5 investments. So far so good. But, none of these have seen a downturn in Real Estate or the economy yet. What are your thoughts on the safety of crowd funding investments? I’m planning to invest no more than 10% of my total portfolio in crowd funding for now. How much do you plan to commit to crowd funding? I’m also looking at other crowd funding sites including fundrise, Crowdstreet, and yieldstreet. Are you also considering others? I have 33% of my portfolio in my Rental properties and the balance in stock/bonds. Like you I’m concerned about Wall Street but still see physical real estate and Wall Street as the best options for investing capital.
Great job on the discussion!
Financial Samurai says
Glad to hear your investments are going well. I will keep real estate crowdsourcing to no more than 25% of my investable assets, and 10% of my net worth, whichever is less. But I’d be willing to invest 50% of my investable assets in real estate crowdsourcing because I believe in the long term value of real estate, the ability of savvy developers to make improvements to improve returns, and the hard asset that doesn’t go poof.
I mentally cut all real estate crowdsourcing returns in HALF, while making sure I build a 10+ diversified portfolio once I get to my target investment amount. RE crowdsourcing has been returning 9% – 16% for since it started. By expecting a 4.5% – 8% return instead, I hope to have a realistic expected return.
With more and more people becoming freelance workers, I see a relative outperformance in NON-coastal cities for the foreseeable future b/c places like SF and NYC have gotten way too expensive. I know so many people who work at startups in SF, but work from places like Portland or Austin. I’m confident this employment trend will continue.
“Education is one of the keys to financial freedom. Here I was trying to get smart and help others get smart about a commercial property in Pennsylvania, a state I’m not familiar with, and here the government was in all its wisdom denying us the freedom to learn. I get that people who only make $180,000 a year might not have the wisdom to spend less than they earn compared to those making $201,000 a year. But what I don’t get is why financial education classes aren’t mandatory if the government is so worried about less wealthy people blowing themselves up? Could it be because the government can’t balance its own budget?”
Gotta say, I thought this was beautifully written.
Financial Bloke says
I’m with you on education! It’s so important early on and can benefit so many.
Regarding the income generating assets you are going after, has anything changed since October? Are you leaning towards crowdsourcing or physical?
This has been an internal conflict of mine recently. I’m considering physical assets in Austin and Houston Texas, mainly due to the large cash flow potential. Housing prices stayed consistent over the last 10 years and rents are considerable high. But I am in California and that crowdsourcing is looking very attractive.
Financial Samurai says
I’m DEFINITELY leaning more towards real estate crowdsourcing for 2017 and beyond for the following reasons:
1) The coastal city markets are slowing down as prices have outstripped demand. Now they are falling back down.
2) I don’t have much confidence investing in equities given the market is at all-time highs. I’ll still asset allocate 40% equities / 60% muni bonds this year, but not huge amounts.
3) The heartland of America is where there should be better returns with Trump as president now. They voted for him. They should benefit.
I just invested $25,000 in a Class A, multi-family real estate deal in Austin, Texas with Realtyshares today. I’m going to build a heartland of America real estate portfolio to diversify away from slowing SF/Honolulu! Higher yields, much cheaper valuations, and a supportive macroeconomic backdrop.
Financial Bloke says
It seems to make more sense. The cost of a property management company or traveling myself win the argument for crowdsourcing. Realtyshares here I come!
I’ve been eyeing some of my local city minis. I like the idea of a good local project I can get behind, and the return.
Greetings Financial Samurai,
I was wondering… what are your thoughts on buying property in Mexico? I can buy a nice condo on the beach outside of Cancun. Is this a wise decision? Cost 180k. I will rent it out when I am not using it. Should I just put the 180k in the market or buy real estate in Mexico? I have a C corp in the USA. Should i buy as a business or person?
Thanks for any advise.
I replied to one of these comments and I’m not sure if it went through, so maybe there will be 2 of the same comment!
Reg D had it’s time and place (created in 1933 so great depression / WWII era) where it was set up so that average Joe investors who didn’t understand how to invest were shielded from high-risk hedge funds and scam-like brokers taking a life savings and investing it poorly. These people didn’t have the knowledge (or ability to obtain the knowledge) and the impact on a poor investment would end in disaster. You also have to realize that this rule was trying to prevent another financial collapse as the country was just getting back on its feet. The thought behind Reg D was that people with a higher net worth / income streams could either have or obtain the knowledge to make a sound financial decision and they’d have a better chance to recover if the deal went sour.
With the rise of the internet and things being so much more transparent, anyone can (and should) go online regardless of their income/net worth and research whatever they are choosing to invest. There’s so much material out there on investing that it makes this rule look silly. It probably needs to be revamped or repealed all together to adapt to the changing times, but we all know how the government works, so we just keep abiding by the law.
Financial Samurai says
No problem. They both went through. Thanks for sharing your thoughts.
It totally makes sense to INCREASE transparency by having a discussion BEFORE investing any money in anything. I suspect the government will work on new regulation to allow for such increased sharing of knowledge for the greater good.
WOW! Kind of late to the discussion, but a lot of vitriol around the rules for accredited investments.
What doesn’t seem to have made it to the post or the comments is that the availability via crowdsourcing of accredited investments has actually grown because the Gov’t is LOOSENING the restrictions on advertising them etc.
As part of the JOBS ACT, Congress gave authority to loosen the regs, and it is still a work in process, but it is happening! Back in 2011 you could not even put one of these up on the web at all, sponsors had to network and pay huge broker fees to sell these things to investors. This made them high cost investments from a fee perspective. Also made it hard to compare what was available as they were hard to find. Thanks to crowdsourcing more people have had access to these types of deals for the past several years.
Now in 2016, sponsors can do deals using Reg A+ which allows non accredited investors to invest. I believe fundrise and realtymogul both have reg A+ offerings for non accredited investors. They can’t do everything with Reg A+, but they can do some types and sizes of deals.
The potential for scams is quite real with these types of investments, and while the SEC is moving slowly to open them up to more people, we all know that if there are massive failures of these types of deals and they were open to everyone, we would all be hearing calls of “why did the government allow them to do this?”.
Seems either way some portion of folks will have an issue of how this is being handled.
The whole accredited investor thing is a load of c***. Understand that this is not about protecting people and this is not government incompetence. It’s about ensuring that the majority of Americans don’t obtain financial freedom.
George Carlin said it best, “They don’t want a nation full of critical thinkers capable of independent thought. They want obedient workers. People smart enough to work the machines and file the paperwork, but not smart enough to figure out how they’re being f***ed by a system that threw them overboard thirty f***ing years ago”.
If even 25% of the American people obtained financial freedom at a young age, Sam, at an age where they can still be politically active and energetic, where would that leave those in power who have held that power forever? The government requires you to be an accredited investor for the same reason they tout–and “invest” in–higher education. When a college education leaves people with nothing but decades of debt and a degree that only gets them a job in McDonald’s, you have to realize that the politicians that go on TV and talk about how utterly important a good college education is are fully aware of this.
Ultimately, they want an American people that’s too distracted by hours and hours and years and years of working to become politically active and protest the powerful elite’s wrongdoings and possibly take power away from them. They want an American people that works and works for years and years just to rise to the status of zero–to become “debt free”. They don’t want people saving and investing; that takes away from them working for the powerful business interests that rub elbows with Washington politicians.
NEVER forget that. When you wonder why high schools don’t teach financial education, or why you have to be an accredited investor to invest in anything that pays more than 2%, this is why. Show me a financially free person and I’ll show you someone who isn’t working everyday to make money for a politically connected giant corporation. It’s pretty much compounding interest with our labor instead of money. Hard to argue with the results.
ARB–Angry Retail Banker
As always Sam, thanks a lot for doing all the research and reviews you do for us on all these vast amounts of different types of investments out there. Its helped me out a lot!
Any way about the accredited investor thing… so let me get this straight, our government who has racked up 19 trillion dollars of debt is looking out for us?
ZJ Thorne says
That is frustrating. I am no where near your investment ability or prowess, but seeing the way you think through these decisions has been extremely helpful to me.
I’m not a person who thinks the government is worthless, but I wonder at the folks who think the government could or would supply helpful financial education to its citizens. I’m pretty horrified at what my high school relatives don’t know as it is, and they are doing “great” in school.