Real estate investing is a tried and true method for building income streams and wealth. But learning how to invest in real estate is not easy. Finding a deal and managing the property (or paying someone to) is best learned through mentorship, but often learned through hard knocks.
I learned how to invest in real estate by jumping right in. I’ve been lucky with placing good tenants. My rental property has been cash flow positive since I refinanced the mortgage back in 2011. After expenses and regularly adding to a healthy repair and maintenance fund, I make about $100 a month. That’s not bad considering it started off losing money.
I attempted to add a second rental property to my real estate portfolio in 2014. Five days before closing, I had to back out of the deal because of a problem with the condo association. The deal wasted about a grand of my own cash.
It was time-consuming searching through listings for potential investments. Then coordinating site visits with my agent, getting mortgage quotes, meeting contractors to estimate renovations, and putting together multiple offers (and getting rejected). The process was stressful, especially with young kids at home. Had I landed the property, it would have been worth it. But I didn’t.
So after the deal fell through (and because good deals were hard to find), I decided to back away from real estate and focus more on dividend stocks.
I’ve been hearing about crowdfunding as an easier way to invest in real estate. So I decided to look into it deeper. One company that enables real estate crowdfunding through technology is called RealtyShares. Investors looking to diversify incomes streams may benefit from checking it out.
How to Invest in Real Estate Hassle-Free
Most investors know about investing in real estate investment trusts (REITs). REITs are companies that own and operate real estate holdings. You can buy them on the normal stock exchanges. Thanks to federal law, REITs pay 90% of their earnings to shareholders via dividends.
I own a few REITs in my portfolio. For new investors, there’s an ETF called the VNQ by Vanguard. It’s one of 100+ commission-free ETFs available at TD Ameritrade. Another efficient way to invest is to build your own REIT mini-ETF using Motif Investing.
REITs are an easy way to get broad real estate exposure, and yields are typically higher than the market average. Total returns vary, like any stocks.
Private partnerships are another way to invest in real estate without the hassle. If you know the right people and have the money, real estate investors often take on silent partners for various deals to raise capital and spread risk. Of course, you’ll need to vet the partner and make sure they’re legitimate.
Then there’s real estate crowdfunding.
The Rise of Real Estate Crowdfunding
Deemed “Lending Club for Real Estate”, RealtyShares allows investors to diversify their portfolios via professionally vetted real estate investments for as little as $5,000.
I still like real estate as a reliable investment vehicle, but I’m simultaneously trying to simplify my finances, to the point I’m considering selling my condo rental (aka the banana stand) to free up cash.
When I do, real estate crowdfunding may be ideal for me. Had I known about RealtyShares when I was searching for a second investment property, I may not have pursued it so aggressively.
How RealtyShares Works
Developers in need of funding for a commercial or residential property submit applications to RealtyShares. RealtyShares screens for favorable deals from legitimate developers with proven track records. Due diligence is performed on each deal to determine which ones to make available on the platform. Only about 5% of deals make it past the thorough vetting process.
The deal is then listed on the platform where potential investors can perform their own due diligence and decide if they want to invest.
Once a team of investors is identified for a given deal, RealtyShares takes leads from a legal perspective and forms an LLC. Each investor becomes a part owner of the LLC.
You can take a look at some sample deals on their website. It’s free to join and browse current and exited deals.
BONUS for January 2017 only: Earn $100 when you make your first investment using promo code PARTNER100. You can expect your payment to appear in your linked bank account within 30 days of processing your investment.
Here are a few examples of properties:
Investors can invest as little as $5,000, but minimums vary based on the deal and are often higher.
What I really like about this format is you can still do all of your own due diligence. RealtyShares narrows the deals down, then provides ample documentation for research.
Deals vary in structure between debt deals, equity deals, and preferred equity (mezzanine debt). They may be long-term holds or shorter-term flips. It depends on the needs of the developers.
RealtyShares currently operates under Regulation D of the Securities Act, meaning investors must be accredited.
Accredited investors must have a single or joint net worth of more than million dollars (not counting primary residence), or income greater than $200,000 for the last two years, or $300,000 for married couples.
But in October 2015, the SEC clarified Title III of the JOBS Act opening up crowdfunding to non-accredited investors. RealtyShares is not yet available for non-accredited investors. However, the company was built with the intent to include non-accredited investors. But a decision has not been made yet.
How to Sign Up for RealtyShares
It’s easy to create an account and look at current and past deals. Setting up an account is a five-step process. It takes about two minutes.
- Enter an email and password
- Enter your first name, last name, and telephone number
- Choose how you are accredited, either income, net worth, joint income, or investing as a business (I chose net worth and it didn’t ask for any more info)
- Enter a bank account (you can skip this step)
- Verify your email address
Once you’re signed up, log in to check out your dashboard. From here click Explore Investments and look at the current and exited deals. Make sure to dig into the supporting documentation of the deals.
To start investing, you’ll need to fill out a suitability questionnaire providing further details about yourself. They recommend a 30-day “cooling off period” before actually putting money to work (though it’s not required).
Pros and Cons of Investing with RealtyShares
On the plus side, RealtyShares opens up opportunities to invest in commercial and residential real estate deals straight from your computer. Professional RealtyShares analysts vet the viability of each deal and the company forms and runs the legal entity. At tax time, the investors receive either a Schedule K-1 or Form 1099-INT (depending on the type of deal), to include with their tax returns.
The platform is simple and easy to navigate. Deals available are accompanied by a ton of detailed documentation for due diligence including financials, a property summary, market summary, management bios, and a detailed investor package and other deal-specific material.
The dashboard tracks multiple deals. So investors can create a portfolio of geographically diverse properties to balance risk.
Returns for investments can easily yield above 10% returns annually, without the volatility associated with REIT investing. As always, with higher return, expect more risk.
Investing in individual deals is risky because if the deal goes sour, you can lose money. Spread risk by investing smaller amounts in multiple deals.
RealtyShares is in this to make money too. For equity and preferred equity deals, they charge the investor a fee of 1% of the invested amount. Deals also include an “over-raise” fee to cover initial legal fees.
For debt deals, RealtyShares takes a servicing fee in the form of a “spread” between the interest rate being paid by a borrower and that being paid to investors. This can be as high as 3% or more. Investors should weigh the fees like any other investment and include them in expected return calculations.
Investing in crowdfunding real estate deals is illiquid. Meaning, assets are tied up for a period of time and you can’t cash out of a deal. No secondary market exists. Investment opportunities have expected holding periods that last a few months up to many years.
The holding period can be longer than initially stated.
Investing is currently for accredited investors only. This is a bummer for those of you under the accreditation limitations. However, rules have relaxed and more real estate crowdfunding companies may open to non-accredited investors in the future.
Your taxes may become more complicated as an investor through RealtyShares. You’ll receive a K-1 or 1099 at tax time, however, you may also need to file additional state tax returns if you’re investing outside of the state you reside in. Talk to a CPA to be sure you understand what you’re getting into (I’m not a CPA, neither is RealtyShares).
Due to the enormous potential opportunity for real estate crowdfunding, other companies offer similar services. Some of the other startups include:
- Fund That Flip (debt deals only)
- Realty Mogul
- FundRise (creates eREITs, ok for non-accredited investors)
- Patch of Land
As a small-time landlord for the past five years, I’ve experienced some of the hassles of real estate investing. But I consider myself lucky. My rental is in a nice part of town and attracts good paying tenants (I’ve never had a late payment). The luck could run out. That’s one reason why I’m considering selling my property.
Crowdfunding is an interesting new way to invest and might be a good option for me once I sell the condo. I haven’t yet invested in RealtyShares, so I can’t give you my personal experience on any particular deal. I have explored the dashboard and the technology is sound. And it’s supported by top silicon valley venture capital funds.
Aside from the technology and crowdfunding, each individual deal will have a different outcome like any other real estate investment.
RealtyShares is there to provide you the information you need to research investments and structure the legal aspects of the deals. That’s much easier than private investing. And it makes it easy to geographically diversify your real estate investments without catching a flight.
I am actively looking at deals on the site to get a sense of what’s available. I’m not quite accredited by the definition of the SEC, but I’d be comfortable putting $5,000-$10,000 to work in certain kinds of deals. Mostly likely debt first, then equity deals.
If you’ve invested in real estate crowdfunding, please chime in below. We’d like to hear about your experience.
Real estate investing and crowdfunding is not suitable for everyone. For some investors, this is a cool opportunity looking to diversify and build income streams. Expect to see more technology enabled investments in the future.
As with many products and services I mention on this site, I may be compensated if you choose to sign up with RealtyShares using any of the links in this post. It’s my own opinion that crowdfunding will play an increasing role in investors’ portfolios for the foreseeable future. As another tool for diversifying our broader asset allocations, investors may benefit from this exciting platform. Check it out.
Have you invested in RealtyShares or another real estate crowdfunding company? What has been your experience? How did you learn how to invest in real estate?