Real estate crowdfunding is a relatively new asset class since the passage of the JOBS Act in 2012. But not to worry. Real estate crowdfunding is just like any other private investment in partnership form.
For each real estate crowdfunding investment you will get a K-1. A K-1 is a tax form distributed by many partnerships, S-Corps, estates, and trusts. If you are a general or limited partner of a partnership, a shareholder in an S-Corp, or the beneficiary of an estate or trust, you’re likely to receive a K-1.
A K-1 is just like a W-2 or other tax form. You use the information provided on the form to accurately complete your tax return. Except as illustrated in the opening scenario, K-1s are often distributed much later in the year than other tax forms. Therefore, filing a tax extension is generally necessary, especially if you have other private investments other than real estate crowdfunding.
In 2017, I invested $500,000 in the RealtyShares Domestic Equity Fund. The Realty Shares Domestic Equity Fund invested in 17 different equity deals around the country. One of my worries was that I would get a K-1 for each invest. What a pain! But I was assured before investing that I would receive one consolidated K-1 instead. I had my doubts, but I’m pleased to say that receiving one K-1 was indeed the case.
As you can see from the image, I got a total of two K-1s. My initial investment with RealtyShares was a $10,000 investment in a Conshy, Pennsylvania commercial property deal to test the waters. I found the platform to be intuitive, and the investment process to be straightforward.
Given I wanted to minimize the amount of time spent on analyzing investments as a new father, I decided to invest in the RealtyShares fund so they could invest for me for the cost of 0.8%. The minimum to invest was $250,000, and I had $1.8 million to reinvest after I sold my San Francisco rental property for $2,740,000, equal to 30X annual gross rent.
I’m a big believer in investing in the heartland of America through RealtyShares. Heartland real estate is much cheaper and the net rental yields are much higher.
The new tax policy, which limits the State and Local Tax (SALT) deduction cap to $10,000 and the mortgage interest deduction cap to $750,000, will hurt expensive coastal city real estate at the margin. This will squeeze high-tax states like California, New York, New Jersey and Connecticut the most.
In addition, I predict that over the next 4+ years Red state real estate will outperform Blue states due to economic and demographic trends:
- A Republican president will give back to the people who got him there through the theme, “Hire American, Buy American.”
- There will be a net migration out of Blue states into Red states as more people realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- The rise of real estate crowdsourcing platforms increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments in Red states.
My $500,000 investment with RealtyShares could conceivably generate $75,000 a year, or $15,000 MORE than what I was earning in net rent with a $2,740,000 property. This is the power of real estate crowdfunding and diversification. My goal has been to always generate as much passive income as possible in order for my wife and I never to have to go back to work again.
In 2018, I invested another $300,000 in RealtyShares for a total of $810,000. I’m glad I did because the stock market has been rocky and the real estate market has softened in expensive coastal city markets like NYC and SF. The great opportunity in my mind is Middle America real estate. I have no doubt that wealthy coastal city residents will use their money to buy up inexpensive non-coastal city real estate with 4-6X higher net rental yields. Money is fungible and such profits will be arbitraged away in the long term.
Even if you have to file a K-1 for each individual investment, it takes at most 10 minutes if you using an online tax software. If you don’t use a tax software, then you can simply have your accountant punch in the numbers for an extra fee.
Real estate will always be my favorite asset class to build wealth. With the rise of real estate crowdfunding companies, investors are able to take easily take advantage of larger real estate deals around the country much more efficiently.
Update: Unfortunately, RealtyShares is no longer accepting new investors on their platform. I suggest taking a look at Fundrise, the pioneer in eREITs. They are also currently working on an Opportunity Fund to take advantage of tax-efficient Opportunity Zones. Fundrise was founded in 2012 and is open to all investors – accredited and non-accredited alike.
Fundrise Growth And Performance
According to the latest public offering documents by Fundrise for its IPO, the firm manages roughly $488 million in assets under management, has 63,271 active investors, and 76 employees. Their AUM grow and investor signups have been very promising.
Fundrise’s five-year average platform portfolio has also done quite well, yielding a 10.79% return versus 7.92% for the Vanguard Total Stock Market ETF and 7.4% for the Vanguard Real Estate ETF. Their massive 14%+ outperformance in 2018 versus the Vanguard Total Stock Market ETF is particularly impressive.
By generating a strong 5-year return, Fundrise has taken a huge step forward in proving out what they have believed for so long: that a model of individuals diversifying into real estate through a direct, low-cost technology platform is a superior investment alternative to owning only publicly traded stocks and bonds.
Fundrise is free to sign up and explore.
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.
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