Real estate crowdfunding or crowdsourcing is one of the most promising investment fields today. I've invested over $800,000 in real estate crowdfunding across lower cost areas of th country.
Let's say you only have $10,000 and want to invest in real estate to diversify your investment portfolio. Unfortunately, with the median home price in America at around $250,000, and the median home price in coastal cities such as San Francisco and New York City over $1,200,000, you're unlikely to put your $10,000 to work.
But real estate crowdfunding company, Fundrise, allows individual investors to gain exposure in specific commercial real estate and multi-family real estate projects with as little as $10,000. Some project have a hurdle rate of as little as $5,000, but those are much rarer.
The question is, should you invest in real estate crowdfunding? Based on the historical returns data, the answer is yes. Real estate has traditionally been a great investment for investors since 2000 and offers a good way to diversify.
I've personally invested $810,000 on the RealtyShares platform after selling my San Francisco rental house in 2017 for 30X annual rent. I believe there is a tremendous arbitrage opportunity to buy heartland real estate at lower valuations with much higher rental yields – 2.5% in SF versus 10% in Austin for example.
Real Estate Returns Over Time
In some places such as San Francisco, real estate has serious outperformed the S&P 500 if you include the leveraged returns. For example, if you put 20% down and the property goes up 20% in one year, your cash return is actually 100%. One property I own in San Francisco has appreciated from roughly $1,700,000 to $2,700,000 in 2017. Therefore, I sold it and am now redeploying the proceeds into the heartland of America. The valuations are much lower and the yields are much higher.
“Roughly 90 percent of millionaires—yes, 9 out of 10—created their wealth through real estate,” says Kurt M. Westfield, managing partner of WC Companies in Tampa, Florida. “Not stocks. Not gold. Not baseball cards or other seasonal or whimsical investment vehicles.”
What is Real Estate Crowdfunding?
Real estate crowdfunding lets small-time investors fund bigger real estate projects. Think $50 million commercial buildings, a fast food restaurant, or hotel, or multi-unit condominium building. Below are some recently funded deals by Realtyshares.
The Jumpstart Our Business Startups Act (JOBS Act) went into effect in May, 2016 and, for the very first time, allows “non-accredited” investors to back private companies. Before that, to invest in private companies, investors needed to be “accredited,” meaning they needed to have at least a $1 million net worth or have earned at least $200,000 for at least two years.
In the planning stages for the better part of four years—ever since President Obama signed the JOBS Act in 2012—crowdfunding awaited the green light from government regulators. Now that it’s a go, the investment channel provides an accessible mode for individuals interested in putting real estate in their portfolio—and, boosters say, reaping returns that can surpass 10 percent annually.
The major reason the JOBS Act got help up was that government regulators feared what might happen should unsophisticated, mom-and-pop investors get caught up in an unsavory scenario. This is why before you make ANY investment, it's very important to do your due diligence and thoroughly understand WHAT you are investing your money in.
Like all investments, real estate is cyclical in nature, but generally less volatile when compared to other investment classes. Just never confuse brains with a bull market and take on too much leverage.
GROWTH OR INCOME?
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.
Real Estate As an Alternative Asset Class
Real estate crowdsourcing is considered an Alternative asset class. 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.
To generate revenue, Fundrise 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 over 150 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 Fundrise's current investment offerings. The arrows are where I'm focused on deploying capital. Texas, Alabama, Utah, Nebraska, Mississippi, Louisiana, and Georgia are my top picks due to higher cap rates (returns). If anybody is from one of these states, please share how the real estate investment environment is.
Surgically Invest In Real Estate
Instead of overly concentrating new money into one very expensive property, I'm now going to surgically deploy capital into multiple types of investments with potentially greater returns, less hassle, and more liquidity across the country. It's important at this stage in the cycle to diversify.
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, and are looking to diversify your investment portfolio with real estate exposure, take a look at the Fundrise platform.
Please note there are liquidity and platform risk when investing in real estate crowdfunding.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
About Financial Samurai: Based in San Francisco, FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.