REtipster provides real estate guidance — not tax or investment advice.
This article should not be interpreted as financial advice. Always seek the help of a licensed financial professional before taking action.
Almost every day, I get emails from people who are VERY interested in real estate investing, but they have no idea where to start.
To a lot of folks, owning real estate as an investment sounds really cool… but the idea of buying a book, investing in a home study course or hiring a mentor to “learn the ropes” is WAY more work than they want to deal with – because let's be honest, it's not easy to learn a new business from square one.
When I hear from these people, they almost always fall into one (or more) of the following camps:
- They're looking for a way to diversify their retirement savings and/or passive income WITHOUT over-complicating their lives or building a new business.
- They have thousands (or maybe even millions) available to invest in something, and they're looking for a better place to park their cash than a boring, slow-growing mutual fund.
- They're smart enough to recognize the fact that it takes a significant amount of time, education and endurance to find great real estate deals.
Some people have been blessed with abundant cash reserves and rather than going through the pains of learning a new business, they'd rather just cut-to-the-chase and start investing their money NOW – without having to become an expert at yet another thing.
When you have plenty of funds in the bank, this can be a viable option – but only if you partner with experienced investors who know how to analyze deals properly, make wise investment decisions, use the appropriate financing options when necessary and sell at the right time – and finding these kinds of brilliant minds is easier said than done.
If you've been fortunate enough to find yourself in a position where you have plenty of cash to invest, but you're not entirely sure how to get started, there's an interesting website you need to know about.
RealtyShares is a company I've heard about from various sources over the past couple of years, but it wasn't until a few months ago when someone from the company reached out to me to explain what the company has to offer and how their site works.
When I saw what RealtyShares was all about, I was really impressed. These guys are bringing a very innovative value proposition to the market and I think it's something more people need to know about.
I'll show you how it works in the video below…
Disclaimer: I was impressed with the RealtyShares website, but your experience may vary. The links throughout this article are affiliate links and at no additional cost to you, I will earn a commission if you click and sign up for an account. I am reviewing this website because I feel it presents a great opportunity for some investors, not because of the small commissions I will earn if you decide to join. Please do not sign up unless you feel this service will help you achieve your goals.
As you can see from the video above, you can get started in just a few minutes.
Step 1: Enter your email address and password, click “Sign Up”.
Step 2: Indicate whether you'd like to enter the system as an investor or a borrower (in the video above, I chose investor).
Step 3: Enter your first name, last name, and phone number.
Step 4: Choose your accreditation, based on your individual income, net worth, joint income, or business.
Step 5: Sync up a checking account of your choice (or you can skip this step and come back to it later).
Step 6: Verify your email address.
Step 7: Once you've completed these steps, you'll enter the “Cooling Off” period. What is this? The SEC suggests that investors wait for a period of 30 days to get to know the company before you start investing (but keep in mind, it's not a requirement, just a recommendation). You can bypass this step by completing the suitability questionnaire, as I explain in the video above. Shortly after completing it, a representative from RealtyShares will call you to make sure you're fully acquainted with the company before you move forward.
Three Basic Investment Opportunities
There are a few different ways to invest in the properties you'll see on this website. Once your account is approved, the investor dashboard will offer you access to Debt Deals, Preferred Equity Deals, and Joint Venture Equity deals.
1. Debt Deals
With debt investments, investors essentially act like a bank, indirectly lending to active real estate companies that are (typically) fixing and flipping a house. The underlying loan typically has a 12-month term and is usually secured by a first mortgage or deed of trust.
In terms of risk – debt deals are typically on the lower end of the scale, with a shorter term and smaller expected return. The investor gets a percentage return on the money invested (the projected return is listed with each new investment opportunity) and if all goes as planned, the principal investment is returned after a pre-defined period of time (usually 12 months). Essentially, the investors are collectively funding a short-term commercial or residential real estate loan.
2. Common Equity Deals
Equity investments put investors in an indirect ownership position so that they participate in the property’s excess cash flow as well as any appreciation realized upon its sale. The investments are usually for longer periods (3-5 year targets), since the project typically involves extensive renovations or other “value-add” efforts by the sponsor. These investments typically involve quarterly cash flow distributions and have certain tax advantages.
In terms of risk – common equity investors are in the “first loss” position, which makes this the riskiest investment among the product types. If the property’s value fails to appreciate or generate sufficient cash flow to cover the debt and preferred equity hurdle rates, the common equity investors get hit first and could experience a negative return. On the same coin, common equity deals typically involve a “preferred return” (often 7-10%) that is payable to investors on a quarterly basis. Investors also share in any appreciation (or depreciation) upon the sale of the property – which generally causes equity investments to have the highest potential return among the various investment types.
3. Preferred Equity Deals
Preferred equity deals share some similarities with both debt deals and common equity deals. With this type of investment, the investor has an indirect ownership stake in the property, but since it's preferred equity – these investors will also be in a better position in any bankruptcy scenario. Similar to debt deals, preferred equity involves fixed terms and regular payments (typically monthly) and it is treated as debt for tax purposes.
In terms of risk – preferred equity deals are somewhere in the middle between debt deals and common equity deals. In the event of default, preferred equity holders get paid before the equity owners, but after the debt holders. Preferred equity projects typically have a payback term of around 2 – 3 years, which is longer than most debt deals, but shorter than most equity deals.
This diagram from RealtyShares gives a good visual portrayal of the risk and reward outlook from each type of investment product…
Regardless of which investment type you choose, they all have a couple of goals in common – a healthy return on the invested capital and a stream of passive income until the deal matures.
At the time of this writing (September 2016), RealtyShares has funded well over 330 deals (note: some deals include multiple properties, so this actually consists of more than 1,600 properties within these deals). To date, there have been no defaults on the projects associated with RealtyShares.
Keep in mind, the company has been operating since August 2013 – so much of their activity has been during a major upswing of the real estate market – so while this certainly isn’t a “guarantee” of future success, it's still worth noting that successful investments don't happen UNLESS the decision makers know how to carefully evaluate the right information before pulling the trigger. If anything, I'd say their records show that these guys aren't amateurs and they know what they're doing.
When I talked with the folks at RealtyShares, I was told that they get thousands of applications from “sponsors” (i.e. – prospective investment opportunities) each month and they only accept about 5% of the submissions they receive.
Another thing to remember is that RealtyShares isn't just for investors, it's also an alternative source of capital for borrowers too. RealtyShares seems to be one of the few lenders in the market that knows how to look outside the “conventional credit box” and evaluate more aspects of a deal than simply looking at the borrower's historical W-2 income (as a self-employed person myself, I thought this was great to know).
In this video, we can see an enlightening look at the company from the borrower's perspective…
Similar to a bank's underwriting department, the underwriters at RealtyShares ask questions like:
- Does the sponsor have a track record?
- What do their past deals look like?
- What is their credit score?
- Is this a good location where RealtyShares wants to participate?
- Does the sponsor meet the standards they have?
In the same way that any successful real estate lender knows how to steer away from defaulting borrowers and focus on the most promising opportunities, the underwriting department evidently knows how to uncover the right information that leads to a successful outcome.
Here are just a few examples of deals funded by RealtyShares:
As I was learning more about the company, I learned some other interesting facts as well.
- More than $150 million have been invested through the RealtyShares platform since its inception. (Apr 2016)
- More than 330 investments have been funded on the RealtyShares platform since its inception. (Apr 2016)
- The company has received more than 1,200 Sponsor applications through their site, with about 30 deals set to be listed for the month. (Apr 2016)
- RealtyShares has over 20,000 accredited investors that can evaluate projects. (Apr 2016)
- RealtyShares has helped fund more than $40 million and over 170 Fix and Flip deals nationally (Single Family Bridge Debt), averaging $230,000 per deal. (May 2016)
- RealtyShares averages around 55 investors per deal. (May 2016)
- The average investment size is $12,000 per investor. (May 2016)
- Active investors reinvest on the platform 7.7 times a year. (May 2016)
- RealtyShares has returned $27,580,500 to investors across 117 investments, with zero investor losses so far, thanks to the strict vetting of deals. (May 2016)
- RealtyShares has processed over 2,000 properties in 30 states. (May 2016)
- For Sponsors, the process takes as little as 10-14 days from start to finish, provided the necessary due diligence & docs are turned around quickly.
My Biggest Concerns
When I first saw this system – there were a few big questions that popped into my head. Things like…
“How long will my money be tied up?
“Can I withdraw my funds whenever I want or do I have to wait for a certain period of time?”
“What kind of return will I get from these investments? Will I actually get my money back in the end?”
“What if a borrower or investment property defaults or fails? What happens to my money?”
“Where are these investment properties located? Are they all concentrated in one city, or are they more geographically diversified?”
When I emailed these questions to RealtyShares, these were the answers I got back…
Regarding your first question, these real estate investments are illiquid and there is no secondary market to sell or transfer your shares. In other words, once you make an investment, your money will be tied up until the property sells or the borrower pays back which can sometimes go beyond the original projected term.
In the worst case scenario where the investment fails, RealtyShares would foreclose. If we have a lien on the property or take over the management property from the general partner (if it's an equity investment), all proceeds from a foreclosure or liquidation would be returned to investors after legal expenses incurred are recovered. The maximum loss an investor would incur is their original capital invested. The proceeds would be returned to investors proportionately to their share in the investment.
As with any real estate investment, there is always the possibility that a property won't perform as expected. In this scenario, RealtyShares would go through the standard foreclosure and/or liquidation process (just like a bank) and ultimately, the investors would receive back their share of the liquidated funds in proportion to the percentage of their investment in the overall project.
With regard to my question about where these investment properties were concentrated (geographically speaking), the company seems to have done a good job of evaluating deals from all over the U.S. – as shown in this map from the company's home page:
There isn't an unreasonably strong concentration in any one region of the country, which means there are plenty of markets and cities to choose from.
Is RealtyShares Right for You?
Every real estate investment requires some fairly complex analysis (some more than others) before coming to an informed decision.
Some investors are very good at vetting deals and finding great opportunities, but not everyone is cut out for this kind of work (not to mention, all the hands-on labor involved AFTER the acquisition is complete). If you've always wanted to invest in real estate but you're not excited about doing all the complex analysis and heavy lifting, RealtyShares could be EXACTLY the solution you've been waiting for.
And don't forget – if you decide to use RealtyShares and you have a good experience with it, you can refer others to the service and get paid for it too.
Be sure to check out this affiliate sign up page to learn more about how it works.