Most personal finance sites these days focus on investing mainly in stocks, bonds, and index funds. But what about the hidden gems of the investment world? I’m here to spill the beans on my experience with real estate crowdfunding platforms. Get ready for some juicy secrets!
Diving into the World of Real Estate Crowdfunding
When I decided to diversify my investment portfolio, I came across the concept of real estate crowdfunding platforms. Intrigued, I began exploring my options: purchasing local properties to rent or investing in real estate through these so-called crowdfunding sites.
Due Diligence: The Key to Success
Being a detail-oriented person, I followed Dave Ramsey’s advice: “NEVER invest in something you don’t understand.” So, I embarked on a journey of due diligence. I sought advice from my real estate buddies, who had extensive knowledge and experience in the field. By learning from both full-time real estate professionals and those who invested on the side, I gained valuable insights and multiple perspectives.
The Pros and Cons of Real Estate Investment
Here’s a sneak peek into what I discovered from my friends:
Easy to Understand
Investing in real estate is much easier to understand because most of us are familiar with the concept of purchasing property. It’s a tangible asset that you can physically own.
Real Estate Can Be Improved
When you own physical property, you have control over it. By providing excellent service to tenants and maintaining the property’s condition, you can tangibly improve its value and build wealth.
Real Estate Must Be Managed
On the flip side, managing property takes time away from your primary job or can be costly if you hire someone else to do it. Additionally, if your property is unoccupied, costs can quickly add up, including finance payments, taxes, insurance, management fees, and maintenance costs.
Higher Transaction Costs
Compared to investing in index funds, purchasing real estate involves considerably higher transaction costs. These costs can affect the value of the investment and make it more challenging to turn a profit.
Real Estate Creates Liabilities
Real estate investing comes with financial and legal liability. Even if you hold your investment properties in a corporation, personal guarantees and the risk of losing income and profits are still factors to consider.
Leveraging Other People’s Money
One significant advantage of real estate investment is the ability to leverage debt. If your tenant’s rent covers all expenses, they are essentially buying the property for you. This allows you to use other people’s money (OPM) to build wealth.
Making the Decision
Once I had achieved financial stability, fully funded my retirement accounts, and wanted to diversify my investments, I turned my focus to passive income. My goal was to replace my current income and spend more time doing the things I love.
Before venturing into real estate crowdfunding, my investment portfolio mainly consisted of Vanguard index funds. After weighing the pros and cons, I decided to invest in two popular online real estate crowdfunding platforms: Patch of Land and RealtyShares.
The Exciting World of Real Estate Crowdfunding
Thanks to the passage of the 2012 JOBS Act, real estate crowdfunding has opened up to retail investors. It’s no longer limited to institutions and the wealthy. This exciting space seemed like the perfect opportunity for me to venture into real estate investing and create streams of passive income.
If you’re not an accredited investor yet, don’t worry; more crowdfunding sites are starting to allow non-accredited investors access to their deals.
Pros and Cons of Real Estate Crowdfunding
Let’s dive into the pros and cons of investing in real estate crowdfunding:
Pros
- Little to no management required: Once you make an investment, your involvement ends, similar to investing in index funds.
- Low minimum investments: Some platforms allow investments as low as $2,000.
- High projected returns: Yields can range from 8-20%, surpassing the current CD rates.
- Mailbox money: Passive income flowing directly into your bank account.
- Ability to choose your own investments: You have control over where your money goes.
- Minus the hassles of owning physical property: No more dealing with maintenance issues or midnight calls.
Cons
- Occasionally pay extra fees compared to going directly to syndicators.
- Less diversification compared to investing in a REIT.
- Accredited investor requirement.
- Tracking different investments and payments can be challenging.
- Difficulty in making 1031 exchanges.
Two Main Types of Investments
Most crowdfunding sites offer two types of investments: debt and equity. Let’s take a closer look at both:
Debt Investments
In debt investments, you act as a lender to the property owner or deal sponsor. The loan is secured by the property, and you receive a fixed rate of return based on the interest rate and your investment amount.
Pros
- Shorter hold time: Debt investments associated with development projects typically have a shorter holding period compared to equity investments.
- Lower risk: The loan is secured by the property, providing insurance against repayment default.
- Steady income: Debt investments offer predictable returns paid monthly or quarterly.
Cons
- Capped returns: Returns are limited by the interest rate on the loan.
- Higher fees: Some fees are involved to participate in a deal, reducing potential returns.
Equity Investments
Equity investments involve becoming a shareholder in a specific property. Returns come from a share of rental income and potential appreciation value upon property sale.
Pros
- No cap on returns: The earning potential with equity investments is vast, with annualized returns ranging from 18% to 25%.
- Tax benefits: Investors can deduct expenses associated with property ownership, even without directly owning the property.
- Lower fees: Annual fees are generally lower for equity investments.
Cons
- More risk: Investors are second in line to receive a payback, and poor property performance can lead to losses.
- Longer hold period: Equity investments typically have longer hold times compared to debt investments.
My First Investments
After extensive research and due diligence, I decided to invest in two debt deals using RealtyShares and Patch of Land. These investments are ongoing, and as of now, neither of them has closed.
RealtyShares
RealtyShares offered a “Nationwide SFR Package” where I invested the minimum of $10,000. The package involved lending $2.625 million to Ingersoll Financial, secured by 125 properties across multiple states. Ingersoll Financial intended to refurbish the properties and market them to local investors interested in purchasing individual or smaller groups of homes.
Patch of Land
Patch of Land presented a unique opportunity to invest in a single-family residential rehab property. Although the specific details are confidential, I invested a minimum of $10,000 to support the project.
Apartment Syndication Deals
After gaining experience from my initial investments, I decided to explore larger opportunities that would allow me to continue adding to my passive investments. This led me to apartment syndication deals.
What is Apartment Syndication?
Apartment syndication involves a temporary professional financial services alliance to handle a large apartment transaction. It allows companies to pool resources, share risks and returns, and gain access to properties that would be otherwise challenging to manage individually.
My First Apartment Syndication Investment
For my first apartment syndication deal, I invested in two projects: The Avery and 98Fifty.
The Avery
The Avery is an apartment complex in Denton County, TX. The purchase price was $40.8 million for 350 units, with a minimum investment of $50,000. The projected annual cash-on-cash returns were 9%, and the internal rate of return was 18.6% over a five-year hold period.
98Fifty
98Fifty was another enticing opportunity, but specific details cannot be disclosed. With a minimum investment of $50,000, the projected returns were attractive.
Remember, the key to success in real estate crowdfunding is thorough research, due diligence, and spreading your investments across different projects.
Investment is a journey, and it’s essential to stay informed, remain flexible, and adapt your strategies as needed. As I continue my adventures in real estate crowdfunding, I invite you to join the Passive Investors Circle and embark on this exciting path alongside me.
