As I’ve written recently here: Allocations III , Real Estate Crowdfunding comprises 32% of my liquid net worth. Some of my readers are probably scratching their heads on this one. “Does he mean rental properties? Or REIT’s?” Not exactly.
Real Estate Crowdfunding has only been around for a couple of years. It is a direct platform for investors to access investment real estate without having to own physical property as a landlord. It’s offered online and there is a vast supply for investors to choose; from real estate credit/debt, to multi-family housing (apartments), to commercial development (such as office buildings and hotels). All of the aforementioned investments are available through crowdfunding. I’ve been investing in this platform for the past year-and-half and I am very pleased with my returns as well as the diversity of my investments. The best part is that I don’t have to chase after tenants to make their rent payments on time. I’ll never receive a frantic phone call at 2 AM when one of my tenants’ pipes burst. All of this is handled by the sponsors. I pay a low management fee and the sponsor/manager takes care of the rest.
What kind of returns can one expect? Virtually ALL of my real estate crowdfunding investments pay a preferred 8% rate (some pay quarterly, some pay monthly) and there’s an IRR (Internal Rate of Return) built into the conservative proforma (a financial statement, estimate of expected returns, provided up-front). These investments provide consistently reliable cash flow. I receive an ACH payment directly to my bank account.
As an example of expected returns; last April I invested in an Industrial Distribution Center through: Realtyshares . It offered an 8% preferred return with a 14.7% IRR for a 2-year holding period. I received notice yesterday that the property is being sold to an institutional investor for a multiple of 1.4x (return after fees). I had originally invested $25,000. in this deal 11 months ago. My estimated proceeds at the completion of the sale will be $35,000!
So this all sounds great MrFireby2023, but what are the caveats?
- First of all, for most of these deals you must be an Accredited Investor .
- These are private deals, they are NOT liquid. Most have holding periods from 2 to 10 years, though you are supposed receive your preferred return during that period and your original principal (+ capital appreciation) is returned at the end of the holding period. I have “laddered” my investments similar to a fixed income bond ladder. My investments vary from 1 year to 5 years.
- These investments are not marked-to-market. Unlike a publicly-trade REIT which is priced by the second (mili-seconds!) or a mutual fund which is marked-to-market daily, these illiquid investments are not valued anywhere similar to these public instruments. Think of it this way; you yourself purchase farmland, a ranch or an apartment complex for a certain amount (say $1 million). The only way you’ll be able to obtain a value in the future is through an official appraisal. Otherwise you sit on the investment property, collect your income stream and forget about it, until someone comes along and makes an offer on the property (hopefully for much more than you paid).
- Holding periods are not definite, they can be extended. Unlike a bond which has a set maturity, these investments have a specified (estimated) holding period but the date is not definite. The sponsors’ exit strategy for these deals is to either sell the underlying property or refinance the debt on the property. Either way, as an investor you’ll be cashed out. My advice: consider them long-term investments. My holding periods are no more than 5 years and I wouldn’t consider a 7 or 10 year hold. Though the returns are higher, the future in unknown.
- Biggest risk? Another recession. This scenario would devalue real estate.
- Bittersweet scenario? An increase in inflation. This will affect real estate values in a positive way.
In conclusion, I am very positive on real estate as an investment and my preferred avenue by which to invest in this asset class is through Real Estate Crowdfunding. There are many platforms available but I’ll provide you the two that I have personally invested in (they both offer high quality real estate projects, the sponsors are reputable and have great track records, and the fees are reasonable and fair): Realtyshares & Crowdstreet
For real estate debt, meaning the investor provides financing for home renovations, fix-n-flip, etc, there is PeerStreet
For more liquid, easily accessible real estate investments, where accreditation is not required, consider publicly-traded REIT’s
This article is informational only. None of this content is a recommendation. Investor is 100% risk-responsible. Author is not an affiliate and receives no income from the sponsors provided in the links above.