- Written by Candice Elliott
Companies like Betterment and Wealth Front broke down the wall between investing and the general public through their easy to use on-line platforms. RealtyShares wants to do the same with real estate investing.
What is RealtyShares?
RealtyShares is an on-line investing platform that allows you to make real estate investments and a virtual space for companies who need financing for their real estate projects to find investors who will buy shares in that project. The first makes them like Betterment. The second makes them like Indiegogo.
The company started in 2013 so is a relative newcomer to on-line investing. They offer different types of properties to choose from including commercial, retail, residential, and mixed use.
How it Works
To invest with RealtyShares, you must be qualified as an Accredited Investor. That means you must have a net worth or joint net worth with your spouse over at least $1 million not including your primary residence and/or a yearly income of at least $200,000 in both of the previous two years or a joint income with your spouse of more than $300,000 for those years and have a reasonable expectation of the same income during the current year.
The minimum investment is $5000, but there are some projects you can invest in for as little as $1000.
There are just a few simple steps to get started.
Once you’re registered, you can browse the investments available. There is an SEC suggested 30 day cooling off period that is meant to allow you to research the company before you start investing with them. It’s not mandatory, but RealtyShares has implemented it. It allows investors to think through an investment carefully and not make an impulsive investment that they may regret (kind of like the 30-day list).
Your investment can be in anything from a small bit of a larger investment to an entire investment.
When you find an investment you’re interested in, you can access a page with information on that property; information about the property itself, the financials, the property management, and the financial and legal documents. All of the due diligence you would normally have to do yourself, RealtyShares has already done. They even perform background checks on the key executives involved in the company handling each project.
The next step is finalizing the investment. Every property has to meet a funding goal before you can buy shares. You can sign and send all documents electronically and can transfer money electronically via the bank account you linked to your account.
That money is held in an escrow account. If the funding goal isn’t met, 100% of your money is returned.
You will have a custom dashboard where you can track your investments and earnings and manage documents. You will receive updates on your projects quarterly and tax documents each year.
It’s free to open a RealtyShares account and to browse the available properties. Once you’ve made an equity or preferred equity investment, you’re usually charged an annual fee of 1% of the aggregate amount invested.
For equity investments, RealtyShares take a cost reimbursement and a 1-2% management fee. That’s much lower than what a property management company would charge you on a residential rental property; that is typically 8-12% of one month’s rent plus expenses.
On debt investments, RealtyShares charges a servicing fee based on the spread between the interest rate the borrower is paying and the rate being paid to investors. On projects that it raises funding for, RealtyShares takes a 2.5-3% origination fee on the money it raises for its projects.
How Projects are Selected
The investments offered through RealtyShares are thoroughly vetted. Just 5% of all applications get approval for financing.
This is the selection process:
An application is submitted.
Applicants are prequalified based on their past track record, financial strength, and expertise.
RealtyShares does their due diligence, reviewing the investment strategy, financial, legal standing and the location and condition of the property.
Projects that are given approval for funding are listed on RealtyShare’s platform for users to browse.
Once you qualify as an investor, you have two choices; debt investment and equity investment.
Debt investment means your money is used as a loan to the company handling the project. You earn money on the interest charged. The investor is like a bank, indirectly loaning money to a real estate company. Often, this money is used to fix up and sell (flip) a residential property.
The loan usually has a 12-month term and is typically secured by a mortgage or deed of trust. These kinds of investments generally offer low risk (although no investment is zero risk), have a shorter term and generate smaller returns.
The investors receive a percentage return on the money they invest (you can see a projected return on the spec page of each project) and if things go as expected, the principal investment is returned after the pre-stated period (typically 12 months).
Equity investments give investors indirect ownership so they are participating in the project’s excess cash flow and any appreciation realized at the time of sale.
These are usually longer investments (3-5 years) because the projects often require extensive renovations by the sponsor. They usually involve quarterly cash flow distributions.
Common equity investors take on first loss position so of the types of investment RealyShares offers, this is the one with the highest risk. If the value of the property doesn’t appreciate or generate enough cash flow to cover its debt, the common equity investor may have a negative return.
If the property does make money, the common equity investor is usually in line for a preferred return (often 7-10% that is payable quarterly.) Investors also share in any appreciation when the property is sold. Of RealtyShares various types of investments, this one has the highest potential returns.
Preferred equity deals have similarities with both debt deals and common equity deals. The investor has an indirect owner stake in the project but is more protected in the event the project goes under and declares bankruptcy.
These deals usually pay out regular monthly payments and the payments are considered debt for tax purposes. Of the three types of investments you can make with RealtyShares, this one is somewhere in the middle regarding risk. The payback terms are usually between 2-3 years, longer than most debt deals but shorter than many equity deals.
One thing all three types of investments have in common is that they each have a hold period, the expected amount of time that has to pass before investors recoup their investments after a project is paid off or has been sold.
The period for each project is listed on its spec sheet. The ranges are from six months to over five years.
We went over investment types above; these are the different categories of investments.
Single Family Rental Property
Investing in single family homes gives you have first position on the lien. The target return is 9-11% annually. The term of the investment is typically between 6-24 months and paid out monthly. This is the least risky of the investments offered and the majority of customers, 40-45% of the overall investments fall into this category.
Preferred Equity/Mezzanine Debt
This category of investments provides a bridge loan for sponsors. The investment period is between 2-3 years and is mostly in commercial property. The target rate of return is 12-14%. About a quarter of RealtyShares investors invests in this category.
Joint Venture Equity
These investments make you equity owners along with the sponsor, and you share in the profits once the preferred returns are reached. The target return is 10-16% annually. The duration is usually five years can be as few as three. Once the deal is closed, the payments are made quarterly. This category is 25-30% of RealtyShares investments.
A REIT by Any Other Name
This all may sound suspiciously like a REIT to you, and there are some similarities, but the key differences are that RealtyShares allow investors to choose the type of property of groups of properties they want to invest in.
REITs just allow you to choose a specific asset class or project based on location. RealtyShares also has lower fees than REITs. You can also choose single properties or groups of properties.
Pros of RealtyShares
Maybe the biggest benefit to investing with RealtyShares is that it still allows you to draw passive income and reap many of the benefits of owning real estate without the hassle of managing real estate (although with the right turnkey management property, your hassle is kept to a minimum).
It also gives you more choices than some of us probably even realized were available in terms of types of real estate investments. Not only can you invest in residential and commercial properties (the two types many of us are familiar with) but you can also choose debt and equity investments. Some RealtyShares investments will have tax advantages, taxable income on real estate investments can be lowered through depreciation and mortgage interest.
All of the due diligence and calculations if you were investing on your own, RealtyShares has done for you.
Cons of RealtyShares
This may not be such a drawback depending on your situation but investing in real estate, whether through a company like RealtyShares or on your own, means the money you invest is not liquid. If you needed cash quickly, you would have to find it elsewhere because, with RealtyShares, the hold time for your investment is between six months and five years, sometimes longer.
The other downside is that the entry bar to get involved is pretty high. Granted, you can invest as little as $1000, but you still have to be an Accredited Investor which means RealtyShares is only available to high net worth investors.
Investing via RealtyShares can complicate your taxes. You may have to file a tax return in each state where you have an investment.
Is it Right for You?
If you have the money to be considered an accredited investor and want to add some real estate to your portfolio without the usual hassles of finding an investment and being a landlord in the traditional sense, RealtyShares offers a great opportunity to do so.