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As a physician, podcasts have been an absolutely critical component in my journey in learning about alternative assets, with BiggerPockets leading the way when it comes to real estate. I had the honor to be a guest on episode 219 where Brandon, Josh, and I focused on some of the more passive investing strategies suitable for time-constrained busy professionals like me, including things like turnkey rentals, private mortgage lending, and real estate crowdfunding.
I was an early adopter in the crowdfunding arena, having invested since late 2013, and many of you have reached out to me on the heels of the podcast interview wanting to know a few more details regarding which platforms I use and what my results have been, so I thought I would write this blog post to address these points.
Out of the nine different sites I am currently on, I am going to highlight three platforms that have distinct profiles in terms of the types of deals they offer. Each meets the following criteria:
- The platform has been in existence for a minimum of three years.
- I have been investing on it for at least two years.
- I have had at least one successful exit on a deal.
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3 Crowdfunding Platforms I’d Recommend Based on 3 Years of Investing
So let’s start with RealtyShares (click here to learn more about RealtyShares), which I would consider a sort of jack-of-all-trades in that they offer a wide variety of deals, including multifamily residential and commercial projects.
They offer first and second position debt, including fixed-rate and floating rate bridge loans, small balance permanent loans, and triple-net construction loans as well as plenty of equity opportunities (common and preferred equity). Depending on the type of project and deal size, their investment minimums vary greatly, and while their website banner says the minimum is $5,000, in actuality, they have projects you can participate in for as little as $2,000, ranging up to $30,000. This is been my number one site by volume, and they have an ample diversity of offerings that can suit a number of investing styles.
2. Patch of Land
Accordingly, these are all short 6-to-18 month duration loans with typical interest rates in the 9 to 12% range. The minimum investment is $5,000. Patch of Land is a particular favorite of mine because when it comes to crowdfunding, I only do first position loans.
For now, both RealtyShares and Patch of Land are limited to accredited investors. According to the SEC, that means you either earn more than $200,000 annually as an individual, $300,000 as a married couple, or have a net worth of $1 million minus the value of your primary home. With only 4% of the population meeting these criteria, it obviously limits the number of people who can participate, as the vast majority of platforms have this restriction. There is one platform I know of that doesn’t have this restriction, and it is called Groundfloor.com.
Their mission has always been to cater to the non-accredited investor with residential fix and flip projects using both first and second position debt with an investment minimum at an unbelievable $10 to participate! They advertise average returns of 10% since their founding in 2013. A BIG non-financial restriction for GroundFloor, however, is that you must be a resident of one these eight states to invest.
It is a long and complicated regulatory issue as to why this is the case, but I know they are working to get a 50-state exemption, so check back for updates.
So, when I’m going on a site looking for a debt deal, there are some pretty standard elements presented to you in the user interface. Besides the standard array of pictures, you will see the overall loan size, which in this case is $147,000 with an interest rate of 10.25% and a 12-month term. You will also be presented with the after repair value (ARV) percentage, which ideally should be below 65% to 70%. There’s a graph indicating what percentage of the loan has been funded, and from my experience, most projects will fund anywhere from a few days to a week from the time they are listed.
The platforms also provide an abundance of electronic documentation, allowing investors to perform a thorough “digital due diligence” prior to committing any money. Items typically included are the developer’s track record of past projects, renovation scope of work, and some form of price analysis, such as an appraisal or market comparable. On the more long-term equity projects, the capital structures can be more complex and may include components like preferred equity and mezzanine debt.
I have certainly seen many projects get funded in a matter of hours, particularly if they’re in favorable geographic locations or the interest rate offered is very attractive. Of course, this sometimes makes it impossible to go through all of the due diligence documents and highlights one of the fundamental limitations about real estate crowdfunding: You have to trust the platforms underwriting processes. When it’s all said and done, you must have confidence that all of the deals listed have been scrutinized thoroughly. The platforms certainly have the incentive to do this because if too many deals fail to perform, investor confidence and capital would be quickly lost with very little chance of earning it back.
Thus far, I think my experience validates solid underwriting. Out of the 35 projects I participated in, I’ve had 17 successful exits, 15 are current and performing as expected, while 3 are in some various stage of the foreclosure process. My overall returns have averaged a very satisfactory 11% annually for 3 years. With the foreclosures, I’m getting regular email updates from the platforms, and in all cases, they are confident that my original capital will be returned after taking possession and a subsequent liquidation sale. These relatively few negative experiences reinforce my original decision to stick with first position debt, as ultimately this is the safest place to be in the capital stack when inevitably some deals don’t perform as expected.
In summary, real estate crowdfunding represents an exciting and emerging asset class that is bringing an unprecedented level of access to the retail investor by leveraging the power of the internet. It represents a welcome way for me to diversify my lending portfolio and deserves a serious look for the studios investor willing to learn about the industry.
Have you tried out any crowdfunding platforms? Any recommendations you’d add to this list?
Leave your comments below!