Crowdfunding is popping up all over the web. And now with sites like RealtyShares, crowdfunding has come to real estate investing. In fact, RealtyShares has been referred to as the “Lending Club of real estate”.
What is RealtyShares?
Unlike larger online real estate investment platforms, RealtyShares focuses on business smaller investments, including single-family house flips, rather than exclusively on large apartment buildings and commercial investments.
In 2014 RealtyShares investments covered $300 million in real estate property value via more than 200 properties across dozens of cities in 17 different states.
One of the characteristics that makes RealtyShares different from real estate investment trusts (REITs) and other real estate investments is that you have a choice to invest in groups of properties, or to invest in a single very specific property.
How Does RealtyShares Work?
RealtyShares reviews investment opportunities to make sure they meet the threshold criteria for the platform. If it does, the investment is listed on the site and will include everything from general information about the deal to legal documents that specify risk factors connected with the transaction.
Investors can purchase anything from a small piece of a larger investment, to an entire investment. The site dashboard tracks the earnings history of the investment, and also provides year-end investor tax information.
Investors can choose to fund either equity investments or real estate loans. Investments can be in commercial property. The platform will even allow you to introduce an investment of your choice, to be funded through the website.
There is a simple five-step process in order to invest on RealtyShares:
- Sign up for the platform
- Browse real estate investments (you must wait first a 30 day SEC “cooling off” period)
- View and finalize your investments
- Wait for the funding goal to be met for the investment (100% funding)
- Manage your real estate investments online
Certain preferred equity investments invest in debt obligations of RealtyShares subsidiaries, known as payment dependent notes. These notes are tied to the performance of the underlying loans. In order to limit counter-party risk to investors, RealtyShares maintains a third-party trustee in these transactions.
Return on investment. Equity investors typically receive distributions on a quarterly basis, while debt investments payout monthly. Distributions are transferred directly into your linked bank account, and with equity investments, investors will also participate in any net appreciation upon the sale of property.
Benefits of Investing Through RealtyShares
RealtyShares offers real estate investors an opportunity to create a portfolio of real estate investments, rather than to have all of their capital tied up in a very small number of investments. Investors can choose from a variety of deals to participate in, either by funding loans or private equity positions. This gives investors an opportunity to participate in larger investments that may have only been available to very large investors.
Investors can choose to diversify their holdings on the platform in different types of properties and investment positions, as well as to diversify geographically.
The investments are also passive in nature, very similar to financial assets, in that the investor does not have to get involved in the day-to-day management of property.
The service is proving to be a benefit to both investors and real estate concerns that need capital.
“This gap has been left by banks that now crowdfunding platforms, like RealtyShares, are able to fill,” said Nav Athwal, CEO of RealtyShares. “They are able to provide quicker, more efficient capital that helps meet the needs of these investors who are looking for speed of execution and the ability to be flexible with their terms as well as with the underwriting standards. Banks just aren’t meeting that need.”
Features and Pricing
|Fees||10% of interest fee|
|Offering Types||Debt, Equity, Preferred Equity|
|Property Types||Residential and Commercial|
RealtyShares does the investigative legwork. The site reviews each opportunity and then does a background check on the principal executives of the sponsoring real estate company or borrower. They also review proforma financial statements, title reports and property inspections, as well as comparable sales data and other necessary information.
The results of their investigation are available to you on the platform or can be sent via by email. In this way, risk factors about the each investment are known up front. RealtyShares does all of the investigative work for you.
If for any reason the investment does not go to closing, any funds that you’ve invested in the transaction will be fully returned to.
Pricing. There are no fees for registering on RealtyShares, and once registered you may browse investment listings freely. For equity investments, RealtyShares charges a 1% annual fee to manage the investment. They may also charge an “over-raise” fee to cover initial legal fees related to the investment and other specific expenses.
For debt investments RealtyShares is compensated by taking a servicing fee that is represented by the spread between the interest rate charged to the borrower and the net interest being paid to the investors.
Security. RealtyShares uses SSL with 128-bit encryption, comparable to that used by banks. The platform is also regularly reviewed the by third-party security firms to ensure that security standards are being maintained. In addition, the platform does not store your banking information on their servers, and you will be automatically logged out after 15 minutes of inactivity.
If you are investing in debt securities, funds will be deposited into an FDIC insured account (up to $250,000) with Wells Fargo, N.A. Equity and preferred equity investments are deposited in a tri-party escrow account involving both the broker-dealer partner and a third-party bank.
Clearing agency. RealtyShares uses North Capital Private Securities Corporation to provide execution services in connection with equity and preferred equity investments. North Capital also provides compliance and regulatory oversight for RealtyShares. North Capital is a registered broker dealer and a member of both FINRA and SIPC.
Keeping you informed. RealtyShares provides periodic updates on equity and preferred equity investments, typically on a quarterly basis. However, additional updates will be issued when significant information becomes available. Information is available online and by email sent directly to you.
Tax reporting. The platform will also provide you with the necessary tax documents (IRS Scehdule K-1 and/or 1099-INT) related your investments, prior to April 15th.
Holding period. Each investment you make through RealtyShares has a holding period that can be anywhere from under six months to more than five years, though it is entirely possible that they will extend beyond the original production.
Minimum initial investment. The general minimum for any single investment is $5,000, but there are some investments that may be available for as little as $1,000.
- $5,000 Minimum — You can start out small per investment with RealtyShares. Some offerings only require a minimum $1,000 investment.
- Varity of Real Estate Offerings — Other real estate crowd investing services focus only on large commercial properties. With RealtyShares you can invest in single family homes to large commercial properties.
- Diversify into Real Estate with Small Investments — Unlike traditional real estate you need large amounts of money to start investing in real estate.
- Investments Might Have Tax Advantages —For example, taxable income on real estate investments can be reduced by depreciation, mortgage interest expense, and other expenses related to the property.
- Choice of Investment Types — You can pick from three types of investment types: debt, equity and preferred equity. RealtyShares is one of the few real estate crowd investing services to offer all three.
- Accredited Investors Only — You must be either an institution or an accredited investor.
- No Direct IRA Provision — RealtyShares has no IRA accounts at this time, though the company does invite you to contact them if you want to invest in the platform through an account with another custodian.
- US Residents Only — The service is currently not available to non-US investors, due to tax and legal issues.
- Capital Calls — If an investment turns out to require more capital than has been committed to upfront, the manager of the project company can request additional capital contributions from investors. There are some limiting factors in this regard, but it is a potential outcome to be aware of.
- Investments Are Illiquid — There is no secondary market to sell your positions and must hold to maturity.
- Multi-State Income Tax Consequences — You may be required to file an income tax return in each state in which you have a real estate investment through RealtyShares
Being able to diversify into real estate for a crowdfunding platform — particularly one that permits small real estate investments – is an excellent reason to use the services of a site like RealtyShares. Fees are low, and the site provides all of the technical information you need.
There are various pluses and minuses with the service, but RealtyShares would work better if it didn’t have the requirement for accredited investors. Crowdfunding generally democratizes investing, making it available to even the smallest investors. The accredited investor requirement limits the platform to use by high income and high net worth individuals.
We’ll give RealtyShares a rating of 4.0 out of 5.0 stars, with the accredited investor requirement being the biggest negative.