I am not a financial planner, nor do I have extensive expertise in the real estate industry. However, I am an avid fan of peer-to-peer (P2P) lending, also called “marketplace lending” or “crowdfunding,” and I have been investing in FinTech (financial technology) companies since 2008. I have my real estate broker’s license, but my primary job for the past 20 years is in the technology industry. My background in both real estate and technology incited me to try out real estate crowdfunding.
I started investing in early 2013 with Realty Mogul and then found other sites that were offering similar investment opportunities. Soon thereafter, I was reviewing and investing in many different crowdfunding sites. For the most part, my experience utilizing the sites specifically for real estate has been positive.
I have invested in a total of 95 individual transactions through various real estate crowdfunding platforms. Almost half of these transactions have been fully completed (principal and interest) with very good monetary gains. Of the 40 or so completed deals, the average return has been 9.75%. The amazing thing is I have yet to lose any principal; I cannot say the same for my consumer lending experience.
Over the past three years I have evaluated more than 30 real estate P2P sites and invested in roughly a dozen of the platforms. Following are the companies I have spent the most time with:
I have invested in at least a half dozen transactions with each of these sites and have gone through the whole lifecycle, from the initial investment to periodic payments and finally closing out of the investment. As a result, I feel I have unique experience on the whole process and how each FinTech company handles the investment from cradle to grave.
However, instead of reviewing each of these sites individually, I decided to compare the sites. In the real estate industry, a broker will prepare a comparative market analysis (CMA), or “comps,” for a homeowner to give them an idea of how much their home is worth. For this review, I wanted to give the investor the feedback they need to determine which real estate crowdfunding site was “worth” investing in. Not all sites are equal, and not all investments on these sites are the same.
Website Features, Menus and Options
This category pertains to how the website is presented and how it flows from page to page. I reviewed the features, drop-down menus and options each site offers and compared and contrasted them. This might not sound like a big deal, but the more information a site provides, the more comfortable an investor feels about the company. The clear leader in this space is Fundrise. Their site was revamped in the past six months and is way ahead of its competitors in look and feel. Fundrise provides a wealth of information, and each page helps investors drill deeper into their holdings. Most of the other websites are working on enhancing their sites but they still have a ways to go.
Website Ease of Use as It Relates to Investing
Of all the sites, I think Patch of Land (PoL) has the smoothest process for signing up, transferring money and executing paperwork. PoL deals only with debt investments and has done a wonderful job streamlining their site so investors can get into investments quickly. The other sites take a little longer and have more paperwork to fill out. There is nothing wrong with this extra paperwork and in some cases it is vital.
Customer Service and Ongoing Communication Regarding Your Investments
Each of these companies has gone through “growing pains” as they ramp up in size, and they’re all working to improve this aspect of their business. The key here is how the sites provide communication on your investments. Most of the sites do a great job of providing timely information, but I have to give the edge to Realty Mogul who I have worked with the longest and believe have done the best job to date. They have very good leadership, which should help them evolve in this category as they continue to grow.
Each one of these early adopters in real estate crowdfunding has had public money backing them, which I think is important to the potential longevity of the business. Although I do not know the private funding that may have been floated to these organizations, the public announcements on sites like Crowdfund Insider and Lend Academy provide valuable insights on who is backing whom in this marketplace. From my research, I believe Realty Mogul has received the most financial backing from the public realm. Since this is a very competitive landscape, it is important to see where the so-called “smart money” is going and who they are backing.
Fees for Investors
These sites all need to make money in order to survive, so fees, expenses, etc., should be expected. Some of them charge you, the investor; others charge the borrowers; and still others have a combination of factors for their fees. In my opinion, Patch of Land provides the best value for investors, since all of their investments are pre-vetted and curated, and there are no fees for the investor. The interest rates that are published at the outset are usually the rates you end up receiving.
Diversification or Types of Real Estate Opportunities
This category is actually broken down into three subdivisions:
- Debt vs. Equity
- Property Types
There are normally two main options for investors when they participate in a deal: debt or equity. Investment options are further delineated by the location of the property, which may be anywhere in the United States. An investor can get their money into hot markets from Southern California to the beaches of Miami and just about everything in between. I think investors need to diversify, not only by crowdfunding site but also by location, in order to get a well-rounded P2P portfolio.
There is also a plethora of property types to invest in across this great country of ours, including retail, commercial, multi-family, hotel, self-storage, industrial and mobile homes.
Based on these factors, I think there are two distinct leaders in this category, RealtyShares and Realty Mogul, with the latter given the slight edge.
Due Diligence and Vetting Process
Investors are hoping the companies have done their homework and the information that is provided is enough to make an educated decision. Not all of the investments go as planned, but as long as the investor is informed of the potential risks, then this will go a long way to building trust. Most of the sites I have used provide a bevy of background information on each investment opportunity. Additionally, many of them allow potential investors to ask questions regarding the investment prior to committing any funds.
Based on these criteria, Realty Mogul gets the slight nod over their competitors. Realty Mogul turns away more deals than they put on their website, because they want to be conservative with their offerings.
Average Investment Returns
Investors want to know how much interest and principal is required and how long their money will be tied up. Many of these sites have a minimum of $5,000 to participate. The interest rate or internal rate of return is a major factor in determining where an investor will get the most “bang for his buck.” RealtyShares provides a sample investor return, which is extremely helpful for novice crowdfunding investors. Although receiving a higher return is a very important aspect of crowdfunding, the higher return also increases the potential risk, so investors need to factor that in when contemplating each investment offering.
Out of all my investment platforms, I have made the highest percentage returns on iFunding. This site has some high return/high risk offerings that have luckily paid off for me thus far. However, tread lightly and figure out how much risk is acceptable to you.
Inventory or Opportunities to Invest
I usually scan each of these sites daily to see when new opportunities are available. Some of them have a predictable schedule, while others are kind of erratic as to when they release inventory. Recently, Fundrise started utilizing their site to pool the available opportunities into a crowdfunding real estate investment trust (eREIT), so there has been a reduced inventory to choose from on their site.
Without a doubt, RealtyShares has had the largest inventory available on a weekly or monthly basis over the past year and a half. As an investor, it is comforting that a company is diligently putting opportunities in front of you so you can decide how and when to allocate funds for your next investment.
Performance — Estimated vs. Actual Returns
Each investment site provides the investor an estimated return on their money, with some variances depending on whether the deal is a debt or equity transaction. Some of the investments achieve higher returns than estimated and some perform worse. I reviewed the 40 or so of my completed investments to see which companies were on target with their estimates, and Fundrise and Patch of Land have been closest, with Fundrise predicting slightly more accurately.
Average Score Compared to Its Peers
In the table below are the 10 performance indicators scored from 1 to 5, with 5 being best. The last column is the average of the 10 categories.
|Crowdfunding Site||Website Features, Menus & Options||Website Ease of Use for Investing or Paperwork||Customer Service & Communication of Ongoing Updates||Transparency of Process & Performance||Fees for Investors||Diversification or Types of Real Estate Opportunities||Due Diligence & Vetting Process||Average Investment Returns||Inventory or Opportunities to Invest||Performance: Estimated vs. Actual Returns||Average Score Compared to Peers||Crowdfunding Site|
|Realty Mogul||3||1||4||4||3||5||5||1||3||2||3.1||Realty Mogul|
|Patch of Land||2||5||2||2||5||3||2||4||4||4||3.3||Patch of Land|
Not all real estate P2P sites are the same. This review is a snapshot in time, and each investor may have a different experience with each of these companies. I suspect the industry will continue to evolve as it matures, and there will be plenty more real estate crowdfunding sites for investors to review. All in all, my experience has been positive, and I will continue to invest in this platform.
This guest article was written by Jack Reidy. Jack is a 20-year veteran working for a Technology Value Added Reseller (VAR), a part-time real estate broker and an avid alternative lender in the P2P marketplace. He live in the suburbs of Chicago with his wife and two teenage daughters and can be followed on Twitter at @jackreidy83.