Online real estate investments make up an essential part of the functionality of any real estate vehicle. As the real estate industry undergoes the same technological changes that other industries are facing, more everyday investors are gaining access to pieces of the pie through crowdfunding.
What this involves is a creation of an online firm, such as RealtyShares.com, that underwrites and invests directly in real estate properties. When a deal is closed, the firm markets the deal to members of its site, who can choose to invest in it or wait for the next deal. These deals can include various assets such as residential, commercial, industrial and others.
This is becoming a popular way for accredited investors to invest in real estate without the hassle of owning physical properties. As real estate continues to grow as one of the best assets in building long-term wealth, people are looking to crowdfunding investments as a way to build and diversify their assets.
A crowdfunding platform (CFP), RealtyShares.com is involved in the financing of real estate by pooling together capital from its members and by performing some of the brokerage duties. The company brings together different parties and creates a platform through which the entire transaction can take place.
The Securities Act of 1933 prohibited private real estate investments from being marketed to the public, which meant that normal, everyday investors had little to no access to real estate properties unless they were a part of a large network or team. RealtyShares changes that.
The company not only provides investors with access to preferred equity real estate, it makes it easier for them to invest smaller amounts of capital than other investments that are not crowdfunded. RealtyShares focuses specifically on smaller investments, such as flipping single-family homes, rather than larger investments like apartment buildings or commercial properties.
What sets RealtyShares apart is the ability to invest in groups of properties as well as single properties, and in its types of debt, equity and preferred equity. The company serves two purposes in proliferating the real estate market online. First, it aims to help accredited investors in a wide variety of projects, and second, it helps companies fund their real estate projects in a way that does not require them turning to traditional financing from banks or large lenders.
First, the masterminds behind RealtyShares review and assess each property to make sure it meets the site’s specific criteria for its investors. These requirements are based on the property’s track record, financial strength and expertise. Then, properties must be reviewed for investment strategy, financials, legal standing and property condition and location. Not many make it this far. In fact, of the roughly 2,700 applications received each month, fewer than 5 percent meet the standards and are approved for listing.
Once a property is approved, it is listed on the website with information specific to the property as well as legal details and risk factors, creating an air of transparency between RealtyShares and the investors.
To become an investor, all you have to do is sign up on the website for free. The company touts itself as allowing investors to invest with as little as $5,000. Once enrolled, you can browse the listed real estate investments to find the type of asset, location and targeted return you are looking for.
The platform requires you to first undergo a 30-day cooling-off period before finalizing your investments, but once you do, you wait for the funding period to be completed by your peers. Each investment you make has a holding period that depends on various factors, and that period can be anywhere from less than six months to over five years. Again, it depends on the type of investment and is subject to change.
Pricing and Security
It is important to note that, while there are no fees for creating an account or browsing the listings, RealtyShares does charge a 1 percent annual management fee on equity investments. RealtyShares also charges a service fee, but for investors, it is spread between the interest rate charged to the borrower and the net interest being paid to the investors, so you see little of that effect on individual investments.
In some cases, it also charges an over-raise fee to cover initial legal fees and other related expenses. This can be anywhere from 2.5–3.0 percent and is an origination fee on the debit the company raises for the projects.
RealtyShares provides quarterly updates through email and constantly updates its website for relevant information and communication regarding listed investments, but it also uses safety features to ensure transparency and security among its clients. Its 128-bit encryption SSL is similar to those used by banks in the United States and is regularly assessed by third-party security firms that monitor the safety of investments. As well, RealtyShares does not store any banking information on its servers, which adds a new measure to its safety features in a world of online investments.
Where does your money go? Equity and preferred equity investments are sent to a tri-party escrow account involving the broker, dealer and third-party bank. Debt security investments are sent to an FDIC-insured account with Wells Fargo. The information on the RealtyShares website appears to be up-to-date and in-depth and includes links to provide peace of mind to potential investors looking to investigate the company and process.
When choosing to invest in real estate, it is important to understand the types of returns you may see. The founder of RealtyShares, Nav Athwal, was quoted as saying that the crowdfunding platform was initially intended to fill a niche that the banks cannot serve, especially after the 2008 economic crisis.
After the process of borrowing money from banks changed, he created a more streamlined way of investing in real estate that benefited both the borrower and the lender. He was quoted as saying that, compared to the other CFPs in real estate, RealtyShares is different in that it offers lower fees, complete transparency, a seamless investment process and access to a wider range of investment opportunities.
In one study reported by CNBC, a Chicago man stated that he got full funding from RealtyShares in an hour and that investors in his properties would earn around 11 percent compared to 4 percent if backed by traditional financing like Fannie Mae or Freddie Mac. These numbers are for both the residential and commercial properties available through RealtyShares.
Furthermore, one blog noted that of the three types of investment categories available, each target about a minimum of 9–16 percent annual return.
The investor noted that single-family residential property targeted 9–11 percent return for investments that usually last 6–24 months and are paid out monthly. This seems to be the least risky option because you are the senior debt holder.
Preferred Equity/Mezzanine Debt
The preferred equity or mezzanine debt category targets 12–14 percent annual return on investments that last about 2–3 years. These tend to be investments made into commercial properties and are on a lower-priority list because you are providing capital as a bridge loan for other sponsors.
Joint Venture Equity
The blogger noted that this targets 10–16 percent in annual return in investments that last as long as 3–5 years. In this type of investment, you are an equity owner with a sponsor and are allowed to start receiving income once preferred returns are met. This income is paid quarterly after RealtyShares closes the deal.
RealtyShares offers diversification, cash flow and transparency. You can invest in debt or equity and commercial or residential investments nationwide while increasing your cash flow through the monthly or quarterly distributions.
You will find transparency not only through the listing process but through the transactional process as well, as there are no hidden fees. On the website, investment returns are always shown net of fees, so you do not have to guess the amount you will receive in returns. You can also choose from a variety of deals and your position in them, whether it be by funding loans or participating in private equity investments.
Where RealtyShares really shines is that, as your source for crowdfunding real estate investment, it allows you to create a diverse portfolio with multiple, varied assets rather than having all of your capital tied up in one larger investment. As well, the platform offers you the ability to diversify geographically because it has investments available in over 35 states.
The Final Review: Pros and Cons
With just a $5,000 minimum, RealtyShares makes it easy to start out small with each investment, and some only require a $1,000 minimum. This is one of the highlights of RealtyShares, along with the ability to diversify across different types of properties around the country.
RealtyShares requires users to be accredited investors or be part of an institution, and membership is currently only available to residents of the United States due to tax and legal reasons. In reviewing, it was found that it does not offer direct IRA provision, but this is not seen as a con due to the fact that RealtyShares encourages investors to contact it directly if they are interested in investing in the platform through another account.
Like other crowdfunding realty investment platforms, it is important to keep in mind that investments made across multiple states will result in multistate tax liabilities and that investments are illiquid. These seem to be minor fallbacks to an overall well-organized and functional platform.
However, unlike other crowdfunding real estate programs, you are not forced to focus solely on large commercial properties or big investments, which allows you to diversify your portfolio while managing risk and keeping it at a minimum.
Crowdfunding real estate platforms have opened wide the door to the real estate industry for potential increases in investment capital for independent investors. Compared to real estate investment trusts (REITs), CFPs are providing investors with a level of autonomy never before seen in this industry, and RealtyShares even more so, with the transparency and diversity of assets available.
Being able to diversify real estate investments through small, geographically varying transactions is what makes RealtyShares worth looking into. The fees are low, which seems to yield greater returns for its users, and the website is easy to navigate. The level of analysis and risk evaluation put into the RealtyShares listings, both financially and legally, leave little to do for investors aside from choosing which properties to put their money into.
If you are looking to participate in an online capital platform with other accredited U.S. investors that offers you the ability to focus on subinstitutional real estate projects with minimal fees and accurately assessed risks, RealtyShares is the platform for you.