Under the Hood of RealtyShares

MichaelEducation, How to, Investment, Misc, Real Estate, Saving Money26 Comments

This post may contain affiliate links. Please read my disclosure for more info.

This is a follow-up post to my previous post, Beginner’s Guide to Real Estate Crowdfunding.  In this post, I will share a lot more details about my experience with RealtyShares.  I’ll give you a sneak peek under the hood of RealtyShares and show you some specific investment examples of how it’s helping me to earn a healthy return on my capital.

It’s been two years since I made my first investment through RealtyShares.  I first learned about RealtyShares on a website forum (SDCIA.com) which is a local real estate investment club I am a part of.  I was looking for alternative ways to invest in real estate since my new daytime activities as a stay-at-home father left me with little time to go out and find deals in person.

Real estate crowdfunding was the best of both worlds it seemed.  I could participate in deals alongside other real estate investors and split my investments across several to limit my risk!  However, I was pretty weary in the beginning.  It sounded a bit too good to be true.

But after I took a few months to review some of the deal flow and details, I felt that it was time to take action.

Investment Dash

At the time RealtyShares and RealtyMogul were the two largest upstarts in the real estate crowdfunding space.  I opened accounts at both companies and reviewed the deals at both.  In the end, RealtyShares seemed to have better deals for me and I’ve stuck with them ever since.  To date, I’ve done a total of 8 deals with them ranging from $5000 to $15,000.

So without disclosing identifiable information, I’ll share with you a couple deals that I did with RealtyShares that have and/or are performing well for me.

Investment #1 – VN

In VN

Deal Type: Debt

Synopsis: A developer needed short-term capital to fund a rebuild of a single family home in an upscale neighborhood of Los Angeles.   Investors will receive an 11% monthly interest payment plus an 8% annualized return upon sale of the home in 8-10 months for a total annualized return of 19%. The developer is an experienced residential real estate investment company focused on value-add properties in Los Angeles County and has completed over 90 successful purchases and 65 dispositions in the last 30 months.

Capital Committed: $10,000

Actual Return: The term of the debt was a little longer than 10 months, but I had my full $10,000 returned within 13 months.  I received $91.67/month for the term of the note and payments were paid through ACH and very consistent.  I also received a kicker at the end of $314.14.

So, I made a total of $1692.24 on $10,000 over 13 months.  This is an annual rate of return of 15.48% which I was very happy to have!

Investment #2 – MN

In MN

Deal Type: Equity

Synopsis:  In this particular deal, a developer was looking to rebuild an existing property in Manhattan Beach.  Since the property was older, the developer was able to get the home at a discount.  After getting permits, the developer was able to begin construction on a two-story residence effectively doubling the square footage of the previous home.  In order to raise capital, the developer offered an equity position to RealtyShares investors with ongoing distributions.

Capital Committed: $15,000

Actual Return: The term of this deal was estimated at 13 months.  To date, I have earned $1,186.67 thus far.  Although I anticipate getting my full capital back upon the sale of the property, there have been some delays.  It’s not a big deal given the current market conditions, but you need to be aware that deals like this are dynamic and may or may not hit the target completion date.  I’m happy to collect interest for a little bit longer as the developer continues to market and sell the property at the best price since as we will all benefit in that scenario.

RealtyShares Dashboard

Dashboard - Summary

The main dashboard when you log into RealtyShares shows you a quick synopsis of your capital committed, active capital, and returned capital.

Here you can also find out specific updates and news about a specific investment.

Miscellaneous Notes

Risk

Overall I am very happy with the performance of my investments through RealtyShares.  However, there is always that possibility that one or more investments could go belly up, so if you’re an accredited investor and looking to get a solid return, you will certainly need to weigh the risk to reward ratio.

Also, if you do invest with them, be prepared to sign a ton of disclosures acknowledging the risks involved.

Due Diligence

Deal flow

Due diligence is simply a part of RealtyShares‘ deal flow.  They scrutinize each developer’s application thoroughly to ensure the best performance for their investors.

HOWEVER, it’s still my responsibility to do additional due diligence on a potential investment.  Performing this step can save you huge money.  If something doesn’t “add up”, then go with your gut and pass it up.  There will always be more deals that come along.

On the flip, don’t get stuck on the other side either!  If you’re on the fence and simply stuck in analysis paralysis, it may behoove you to jump in and get your feet wet.  Take it from me.  It gets much easier after the first one.

Equity vs. Debt

A quick note about equity vs. debt investments.  Typically, equity investments pay distributions on a quarterly basis, while debt investments usually payout on a monthly schedule.  Equity investments typically allow you to pick up additional appreciation when the property is sold, while a debt investment may only involve the specified interest payments and the return of your capital.

Tax Implications

Finally, each investment has its own tax implications.  Interest income is typically taxed as ordinary income, so consider how that will affect your specific tax situation.  At some point, I am considering holding these type of investments in a self-directed IRA so I can benefit from tax deferrals and exemptions.

Also if you take an equity position, you will become a partner in an LLC held by RealtyShares for that specific investment.  So, you will likely get a K1 at the end of the tax year as a member.  This can be helpful as you can possibly deduct net real estate losses that are subject to passive activity loss rules.  This, of course, will depend on the situation, and everyone’s tax situation is different.  Consult with a CPA to determine how it could affect you.

Conclusion

As I’m finishing up this post, I realize that there is A LOT of “jargon” involved here.  If you’re lost, don’t worry.  There was a time in the not so distant past I was in your same spot.  But, guess how I came to understand these concepts over time?

Yup, you guessed it.  By reading of course!  I’m still learning a lot too.

Take the time to read things that you don’t understand and you will eventually begin to absorb new ideas and concepts “automagically”.

Remember, preparation is the mother of luck.  Don’t wait for things to fall into your lap, or you may waiting your whole life.

Readers, was it helpful to see further details of a crowd funded real estate investment?  Do you believe there should be restrictions on these types of investments (i.e. only available to accredited investors, or open to all?)

*Please note that I am an affiliate partner for RealtyShares.  As always, I will ONLY recommend services or products that I use or believe in personally.    

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Michael

Hi, I have been blessed to take an early retirement in my mid-30's so I can focus on becoming a better father, blogger, and investor.

My goal is to help you find your personal path to financial freedom, and to enjoy the entire journey.

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26 Comments on “Under the Hood of RealtyShares”

  1. Great write-up, Michael! It sounds interesting to me. Out of curiosity, what was the reason for the 15.48% annualized return on the LA property instead of the expected 19%? It’s a great rate of return either way. Just wondering if the difference was fees, or something else.

    I’ll have to read more about RealtyShares. I’m curious about why the developers are interested in the loans (lower rates than market?), how RealtyShares gets paid, and how collection works if the developer defaults. It might be something I’d try investing in. Thanks again!

    1. Yetisaurus, excellent question. The reasons that the annualized return was lower was due to the extended time frame (i.e. extra debt payments lowered the average) and the final sale price of the property.

      For the developers, RealtyShares give them a lower cost alternative to traditional hard money lenders. And for fees, RealtyShares takes a small cut from the developer and a 1% per year for managing a deal (typically).

      Finally, if they developer defaults, I believe it would depend on the structure of the investment. However, if the entity holds the first lien on the property, the holding LLC, should in theory, take control of the assets and liquidate what it can to get back whatever capital it can.

  2. I can definitely see why this is available only to accredited investors – it could save someone from investing too much without enough knowledge. At the same time, the qualifications for accreditation are pretty high. I understand you have to draw the line somewhere, but I feel like an individual with a six figure income and say, a $500,000 net worth should be able to manage a 10 or 15k investment. What are your thoughts on it?

    Being able to hold these investments in a self-directed IRA would be the icing on the cake! I wasn’t familiar with the concept of a self-directed IRA before reading this post, but now, looking into it – very cool!

    1. Yeah, I agree with you Pia. I think the accredited investor requirements are a bit stringent and could have some exceptions (like extra disclosures of acknowledgement from the investors wanting to invest).

      Self-directed IRAs can be pretty powerful, but also a hassle at times. I haven’t done any for myself yet, but a lot of my family uses them.

  3. Thanks for the inside look, Michael! I’m still a little weary of this type of investment. To get comfortable I feel I would need some very detailed diligence on each property, but that maybe just the banker in me. Obviously these borrowers wouldn’t be coming to a crowdfunding source if they had alternatives given the high interest, which may just be a bit too risky for me.

    I understand mitigating it by diversification though, but in a down market I’m not sure many investments will avoid feeling the pain.

    1. GS, I totally understand your aversion. I definitely don’t like taking undue risk either. 🙂 However, I think good developers get a bad rap when seeking out additional capital. Their balance sheets appear out of whack even though their deals may be fantastic, and conventional financiers won’t want to touch it after they have 4 loans.

      You’re right about down markets though, I would likely alter my strategy. Instead of crowdfunded real estate, I would potentially invest in the debt directly (i.e. take the entire debt myself). That way if the loan defaulted, I could foreclose myself and potentially walk away with a good cash flowing property.

  4. Very interesting! I haven’t heard of RealtyShares, but I have written about FundRise before. It will be interesting to see how these investments play out over the years.

    1. Hi Holly, yes Fundrise is a direct competitor of RealtyShares. I’m interested to check them out further as their platform has likely improved over the past years also.

    1. Mr. Tako, when you fund the investment you just setup ACH with your bank. So, any monthly interest or distributions are added back into your account automatically as is your principal and any kickers upon the exit. To date, I’ve gotten my money back on 4/8 investments made.

  5. Interesting article Michael and solid returns on your investments.
    If you had to choose, would you invest in Realtyshares or Lendingclub?
    The returns seem similar, the tax implications too, but I’d guess that due to the nature of RealtyShares, it might be more difficult to withdraw your investment.
    What are you thoughts on that?

    1. Hey MM, great question. I actually have both accounts, but currently allocate more money into RealtyShares at the moment. Having said that, I think the return potential is greater in RealtyShares (I try to target 10% to 18%) vs. LendingClub where I’m happy with 8%. So, it really boils down to net worth allocation and your goals for each area you’re invested in.

      I would agree that it is harder to pull your money from RealtyShares than LendingClub so that’s a consideration too.

    2. I am investing with both LendingClub and RealtyShares. I think the differences are stark. If a LendingClub borrower defaults, there is no recourse other than a collection agency. You’re likely not going to see your money again. If a RealtyShares borrower defaults, RealtyShares can foreclose on the property. You have a higher chance of seeing your money again.
      For debt deals, both would generate a 1099-INT. For equity deals on RealtyShares, be prepared to receive a K-1 for tax preparation.
      LendingClub borrowers are evaluated based on stated income? I would hope RealtyShares requirements are higher. However, I recently reviewed a RealtyShares deal where two of the sponsor managers have filed for bankruptcy within the past 15 years and RealtyShares apparently had no issue with approving this deal.
      I invest in private deals also. I believe our deals are screened more carefully, but I have a lot more visibility into the process than with RealtyShares.

      1. Joe, thanks for sharing your experiences on both ends. I definitely understand your thoughts here. So far I’ve been lucky with both platforms, but it’s a numbers game ultimately. I’m looking for long term blended rates. Time will tell!

  6. This is fascinating. I’m definitely not an accredited investor, but don’t know if I would put down on this format if I was able. The developers in my area and the market are not terribly trustworthy.

    1. I’m sure you’re not the only one who feels this way, ZJ! I do believe that not all developers are created equally. Some are definitely more trustworthy than others, so due diligence is the key. 🙂

  7. RealtyShares says they’re prohibited from releasing their due diligence on the sponsor/project due to privacy regulation. If that’s the case how does one go about doing their own due diligence on these projects given that there is not much public info on these sponsors and each project has a new LLC with no history? While it’s in RealtyShares interest to perform proper diligence, as an investor I would have to put all my faith in their process.

    1. Will, once a deal is presented live on their system, there is a section which gives further details about the developer. RS and the developer can put documents or media here which can be used for your own due diligence. For example, the developer that I found most promising posted a spreadsheet with all of their past deals and outcomes. They also had a webinar recorded sharing details on the individuals involved and the details of the property to be invested in. There are also pro formas for the investment that you can view. Of course, you can do you own research to see if you agree with their findings, but it’s a least a baseline to see if it’s of interest. I usually make sure the developer is purchasing a significant discount from the retail “value” of the property. Once I’m comfortable, I’ll do an “investment” which is typically into the LLC as you had mentioned which holds either debt or equity.

  8. I see the documents on each project, however they’re pretty much just projections and spreadsheet of past projects. What I’d like to see posted would be sponsor credit score, past project financial statements, RealtyShare analyses, etc., things that are verifiable. Also once invested in a project, if investors could get audited statements etc. (to make sure the sponsor is actually doing what he claims to be doing). Otherwise, we’re putting a lot of faith that RealtyShares is doing proper diligence and actually tracking sponsor activity. I guess the cynic in me has a hard time investing money in sponsors without more visibility. Just curious if that has been your concern and how you got comfortable with it. Glad your investments have been profitable thus far. Thanks for the info!

    1. Yes, I understand what you are saying. The truth is that as nice as it’d be to get all that information, you may need to dig on your own to get this extra layer of due diligence. For example, some developers will disclose personal credit scores, but others will not. Some have linkedin profiles, others do not. If their rehab numbers seem realistic, it tells me a lot about their mindset. I like conservative numbers over optimism. Once invested, the developers will post updates occasionally which RS will notify you of when you login. These may be simply pictures, or notes saying that permitting is completed or delayed. Unfortunately, I’ve never seen audited financial statements, so there is a good deal that is based on faith as you’ve suggested. Honestly, I was pretty wary the first investment I did, but I got progressively more comfortable as I went along… especially with the developer that got me decent returns.

  9. Ah, very cool! I had lunch w/ the guys and will be deploying $10,000 in a couple investments soon and will do a write up. I’ve noticed not everything is available, and I’m focused on the midwest and south.

    Did you ever get shut out of an investment you wanted to make?

    S

    1. Cool Sam, good luck with your first couple investments! I’ve definitely been shutout before. I think most of the savvy RS investors realize who the best developers are, so it can be a bit of a feeding frenzy at times. Having said that, the market seems to be shifting a bit and I’m not seeing the same types of flips available like before. It’ll be interesting to see how the deal flow continues to evolve from here.

  10. HI Michael,

    Great website and info!

    I’m in the early phases of 2 deals with RealtyShares and also with Patch of land. In order to take advantage of compound interest accumulation, do you have a SEPARATE checking account that you are using that the interest payments are being deposited to or what would you recommend?

    1. Hi Jeff,

      I like your idea, but because interest rates are so low now, compound interest accumulation won’t be a huge factor in a savings/interest bearing checking account. So, for now, I have one separate checking account for all of our real estate investments, and it’s also where the RealtyShare interest payments are deposited. Once you’ve earned enough interest, you can simply re-deploy that additional capital into another deal, or even diversify across an investment like peer to peer sharing (i.e. lending club, prosper, etc.) which will take smaller dollar amounts.

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