Everyday, non-accredited investors can now participate for the first time. Which, however, is a cover charge-worthy offering?
(Disclaimer: I’m an investor, not a financial advisor, and this is just my own view. Before making any investment decisions, speak with your own financial advisor.)
Welcome Aboard!
Real estate crowdfunding was for far too long primarily available to the richest, high net worth individuals: authorized investors making at least $250,000 per year or possessing a net worth of at least $1 million.
Thankfully, the SEC revised its regulations in May 2015, enabling everyday individuals (non-accredited investors) to make investments for the first time across all 50 states. Two major portals (Fundrise and RealtyMogul.com) jumped on board and began making offerings per the new regulations. Rich Uncles is also making a non-accredited investor offering under SEC Rule S-11.
However, due to many options, it can be challenging to decide which one to select. To assist you in choosing the fund or funds that are ideal for you, I looked into all the specifics and will now outline the key distinctions.
Do You Want More?
Before I continue, I must make a crucial point to my readers who are accredited investors. If so, these investments are probably not the greatest decision for you. That’s because you already have access to superior options.
First of all, none of these three have even a tiny amount of skin in the game (less than 0.4 percent versus 10 percent or more usually). This lack of investor alignment might result in reckless risk-taking and other issues.
Additionally, you typically are not required to pay the hefty upfront fees associated with these investments. Currently, Rich Uncles has a 3 percent off-the-top budget set aside for administrative costs and marketing. Organizational prices at Fundrise and RealtyMogul.com are between 2 and 3 percent. Additionally, you can be charged an extra fee if you want your money back in the end. (How long you hold it for varies.)
It’s a different situation if you’re a non-accredited investor, though. Most likely, you’re just relieved to have any options at all for developing a real estate portfolio. If so, the aforementioned factors are probably not deal-breakers for you, making these investments respectable choices for you. In that case, let’s get started right now.
“When is the next slump coming?” is the primary concern on every real estate investor’s mind in 2017. Not whether, but rather when, is the question. The majority of economists and business watchers concur that the real estate cycle is likely in its later innings. Riskier investing methods will suffer the most tremendous losses when a downturn occurs. In contrast, the most cautious ones will be more stable.
1) Investment Strategy Risk
Rich Uncles employs the most cautious approach to investing. In triple net lease (NNN) properties, they make investments. These are lengthy leases (averaging 12 years) with renters that have good credit or are otherwise creditworthy. In the improbable event that the tenant goes out of business, some of them even have corporate guarantees. The conservative nature of well-chosen NNN investments has led many real estate investment consultants to compare them more favorably to safe bond investments than riskier real estate. Currently, Rich Uncles averages a return of 7%.
The portfolios at RealtyMogul.com and Fundrise contain more risky traditional real estate investments. Both companies buy mortgage debt for commercial real estate and related products. Theoretically, RealtyMogul.com’s PPM has an advantage over Fundrise’s PPM because they don’t invest in riskier hotel and ground-up development projects.
Currently, RealtyMogul.com is returning an average of 8%. Currently, Fundrise is averaging between 8 and 8.25 percent (West Coast eREIT: about 8% annualized; East Coast eREIT: approximately 8.25 annualized; Heartland eREIT: approximately 8.25 annualized).
2) Withdrawals
You’ll eventually need to withdraw your funds. When you do, all of them offer a vesting plan so that the fee decreases as you keep your money with them for longer (until it eventually disappears).
Of the three years, Rich Uncles has the quickest vesting schedule. The whole vesting period for Fundrise and RealtyMogul.com is five years, which is nearly twice as long.
The withdrawal charge for Fundrise decreases far more quickly than that of RealtyMogul.com, making them the 2nd and 3rd best in this area (respectively).
Additionally, only Fundrise offers a three-month trial period during which you can withdraw money without paying a fee.
Rich Uncles:
- 3% for the first year.
- 2% between one and two years.
- 1% between two and three years.
- 0% after three years.
Fundrise:
- 0% for the first 90 days
- From 90 days to 3 years, 3 percent.
- 2 percent between 3 and 4 years
- 1 percent between 4 and 5 years
- 0% at 5 years and beyond.
At RealtyMogul.com:
- The first six months are free of withdrawals.
- 5% from six months to two years.
- From 2 to 3 years, there is a 4% increase.
- 3 to 4 years later, 3 percent.
- 1 percent between 4 and 5 years.
- 0% at 5 years and beyond.
3) Targets/Limits
Limits and targets help investors determine whether a fund suits their needs. On leverage, all three websites provide targets. Because it doesn’t restrict its investments from high-risk sectors, Fundrise loses points in its PPM (versus the other sites which do).
Rich Uncles:
- leverage: a maximum of 50%
- NNN investments are the only ones accepted. NNN with an investment grade of 50%. a 50% drop from investment grade (using an internal credit score)
RealtyMogul.com:
Both targets for leverage and restrictions on high-risk investments are listed.
Leverage is restricted to a maximum of 70% on any investment with a target cap of 25% overall. Only senior debt is leveraged.
They aim to have commercial mortgage-related products make up 55% of the portfolio. Additionally, they make it clear that they will not engage in real estate, new construction, or the hospitality industry—all of which carry a higher risk.
Fundrise:
Currently, Fundrise has three open funds (out of 5 total). Their desired portfolio-wide leverage ranges from 50 to 85%. (of the greater cost—before deducting depreciation or other noncash reserves— or fair market value). The target only becomes applicable if they have built up a sizable portfolio.
We examine other elements and reach the final findings in part 2 of this article.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.