** Updated Post: This post has been updated with the latest information on my crowdfunding experiment with RealtyShares.
As I indicated in a prior post, I’ve decided to experiment with Equity Crowdfunding to determine if it’s a viable passive income stream. I narrowed the field down to 3 online platforms, each with their own particular twist on equity crowdfunding.
The plan is to invest $10,000 with each platform over the next 12-18 months to get some hands-on experience with how they operate. The ultimate goal of course is to turn the experiment into a permanent investment strategy to help fund my Freedom Years.
This review covers RealtyShares, the third online platform I funded recently.
I intend on updating this post throughout the experiment, by adding sections to it based on different milestones and events.
I signed up for the RealtyShares account last, which gave me some perspective relative to the other platforms. Their process was a bit more thorough and involved in comparison.
Upon registration, I was allowed into the site to browse current and past investments. None of those investments were available to me since they have a standard 30 day minimum cooling off period.
An intake call was scheduled fairly quickly after registration. It’s not mandatory, however doing the intake interview accelerates the cooling off period.
The interview also helps them understand the types of investments I may be interested in, and they will send notifications of available opportunities based on my preferences.
I linked my bank account, but unlike the other platforms, I didn’t need to transfer any money to fund. They don’t pull funds from your account until the actual deal closes.
RealtyShares focuses on real estate debt equity and preferred equity investments. The positions will vary based on the opportunity. Here’s the graphic from my prior post to help illustrate…
The investment opportunities will range across the capital stack, so you would need to be very careful in examining all the details before investing.
Their opportunities are very diverse, so you have multiple options to choose from depending on your risk tolerance.
Most of the recent opportunities appear to be in residential real estate and debt based, although there are some commercial and preferred equity deals available as well.
The returns seem to be in a tight range of 9-10% interest for the debt offerings, although you can get more aggressive on the preferred equity side. Loan to Value (LTV) ratios are not prominently displayed compared to the other platforms, so it’s hard to get a feel for them in general.
The majority of the investments tend to be Single Family Residences, with terms of 12 months or less. They do offer some good Commercial Real Estate deals as well.
My RealtyShares Strategy
It took me a while to find an investment I was interested in on the platform. Either the minimum investment was too high, or the holding period was more than my 18 month limit.
I was also looking for something that was different from my PeerStreet investments. Either a commercial property or a multi-family property. I was also interested in exploring investments higher up the capital stack for contrast.
What I ended up settling on is a portfolio of multi-family housing units for student housing. The portfolio is made up of 9 properties total, all within 1.5 miles of the University of Washington.
I invested my total allocation of $10,000 at the 12 month term.
This investment is different from the other ones due to the fact I was holding a Mezzanine Debt position, second to the senior loans. In case of a default, I would be second in line. This explains the higher expected return which should be in the 12-13% range due to the extra risk.
The Loan to Value (LTV) ratio is fairly good at 69%, and the borrower’s credit rating was high.
The investment process was a bit more intimidating because I had to sign a document associated with the investment, which made the process feel much more formal than the other platforms.
Based on the investment returns anticipated, and assuming the borrower doesn’t default or pay back his loan early, here’s what I should be expecting about a year from now:
Seattle Student Housing Loan: $10,000 Investment @ 12-13% for 12 Months = ~$1,200 in Interest
My initial investment of $10,000 should return ~$1,200 total.
The loan does have a provision for a 6 month extension, so it’s possible the return could be higher once it’s paid off.
Although the investment was made a few weeks ago, the loan just recently funded, and no interest is accruing yet. So far, it seems like the process takes much longer to generate income than the other platforms, and their communication is not as robust.
Unfortunately, my first RealtyShare investment came to an abrupt halt this month. I received a message that the borrower paid off their loan early, approximately 3.5 months in.
I guess I can’t blame them since their interest rate was around 12%. So instead of collecting the ~$1,200 in interest I had estimated on my $10K trial investment, I ended up with $362.27.
I guess I shouldn’t complain since it’s better than a default. It does however highlight one of the downsides of real estate crowdfunding with respect to passive income expectations. The distributions can be unreliable.
Since my experiment ended prematurely, I decided to reinvest my $10K into another opportunity. This time I wanted to get more aggressive, so I opted for an equity deal instead of a debt deal. I also selected a multi-family investment. The expected IRR is around 16% or so, which is a reflection of the risk.
The biggest downside is the holding period which goes well beyond my experiment limit of 12-18 months. Most commercial real estate and multi-family investments require a holding period greater than 3 years. Of course this could also be an advantage, since it means the investment can work for you over multiple years without the need to reinvest.
Since this is an experiment, I figured I would go all-in and see how an equity deal such as this one plays out.
What I like about it is that it pays a quarterly cash disbursement equal to about half of the IRR rate, with the remaining amount paid off at the end of the holding period as a lump sum.
This particular investment is much riskier than my other crowdfunding investments since it has no real collateral behind it. As an equity investor, I’m essentially at the back of the line should a default occur. Another good example of why these investments should be treated carefully. I don’t intend on investing more than 10% of my net worth in alternatives.
This latest investment will now be a long term one, we’ll see if it performs as expected.
What I like about RealtyShares so far is the wide variety of available real estate offerings, and the fact they operate in multiple states more actively. I also like the fact that I can choose from more conservative senior debt offerings or riskier preferred equity offerings.
This investment approach may be a practical way to accomplish those goals.
So far, RealtyShares still gets a Thumbs Up!
I’ll update this post occasionally as things develop, in the meantime you can check out some of RealtyShares’ current offerings by registering on their site.
Readers, anyone else use RealtyShares? How’s your experience been, and what’s your strategy? Would you consider Equity Crowdfunding as part of your strategy? Would a multi-year holding opportunity turn you away? Share your thoughts and comments below!