RealtyShares has some strong points including adequate capital, support from savvy backers, a user-friendly website and some good press. Investors also like its low minimums ($1,000 for your first deal, generally $5,000 thereafter) and hold periods as short as six months. It is also trying some innovative things such as accepting Bitcoin and providing market-specific products aimed at its core investor base among IT professionals in five cities.
But the platform’s investments are weighted toward single family home flips, a riskier niche in which projects tend to be put together by individuals and smaller operators. The site does have some funds and multi-family/commercial projects, but on the whole its deal flow is lower quality than some of the top names in the RE crowdfunding universe.
Investors who like the deals it offers will find RealtyShares a likeable and easy to navigate platform. But it is only accessible to accredited investors and it’s imperative that you fully grasp the risks involved.
Founded in Q2 2013 by CEO Nav Athwal, RealtyShares has received $11.9 million in three rounds of fundraising from five investors including $10 million in a Series A funding in April 2015. Its backers include well known venture capitalists Menlo Ventures, General Catalyst Partners and 500 Startups.
Menlo Ventures’ Managing Director John Jarve, who sits on the board of hot automated investing service Betterment, is on the RealtyShares board.
RealtyShares has been compared to a Lending Club for real estate, offering a new way for investors to put small amounts into real estate projects. It funds about 10 to 20 projects a month.
The inspiration for Athwal was to disrupt the slow and inefficient process by which developers borrowed money from banks to fund property development. Those loans usually take weeks or months to close – compared to as little as four days for crowdfunded deals on RealtyShares. After the financial crisis of 2007, traditional loans were difficult to impossible for many project sponsors to access.
Assets Under ManagementUnknown
Number of Users
1-2% management fees for investors
- Low minimum of $1,000 for first investment (otherwise usually $5,000), focus on deals with short lifecycles
- Deal quality is not high, weighted to single family home flip market, only for accredited investors, high fees
RealtyShares is a smaller player in the real-estate crowdfunding arena. It has some differentiators that may help it make the cut including deals with short lifecycles and low minimum investments. But its deal flow includes many single family home flips, which are considered riskier and lower quality than typical projects on other platforms. Its fees are considered higher than average too.
RealtyShares’ founder Athwal says that RealtyShares is intended to fill a niche that banks have not adequately served, especially small real estate developers and house flippers. The process of borrowing money from banks is fraught for these operators as banks reined in their lending after the 2007 economic crisis. They often will not lend to individuals without W2 income.
Crowdfunding via an online platform is more streamlined and offers investors a chance to earn better returns. In one case covered by CNBC, Chicago house flipper Ben Walhood said he can get full funding from RealtyShares in as little as an hour. Investors in his deals would earn around 11% vs loans around 4% if backed by Fannie Mae and Freddie Mac in traditional financing.
RealtyShares is “able to provide quicker, more efficient capital that helps meet the needs of these investors who are looking for speed of execution and the ability to be flexible with their terms as well as with the underwriting standards. Banks just aren’t meeting that need,” Athwal said.
TYPICAL PROJECTS AND GEOGRAPHY
At the time of our test, there were five live deals on the site including a fund, two single family flips and two apartment buildings. Three were in California and the others in New York and Florida. RealtyShares has done transactions in 18 states and seems to have a strong representation in past deals from Florida, California, Illinois and Texas.
The deals we saw ranged in size from $160,000 to $1.6 million for the RealtyShares portion and were a mix of debt and equity transactions. Minimum investment ranged from $2,000 to $25,000 and hold terms from eight months to five years.
RealtyShares says it welcomes cash-flowing/value add equity investments in commercial and residential properties such as apartments, retail, office and pools of single family homes; equity investment in fix and flips in high demand/low supply markets and loans secured by residential and commercial real estate.
RealtyShares is only open to accredited investors, meaning those with net worth of $1 million or income of $200,000 a year. The platform says it is aimed at investors interested in sub institutional projects in the $2 million to $30 million range and all types of cash-flowing residential and commercial projects.
RealtyShares says that its investors prefer hold periods ranging from six months to two years.
Many of its users are technology professionals who are natural early adopters of the online crowdfunding model. RealtyShares said in 2014 that 10 to 15% of its investors are abroad but its website currently states that foreign investors cannot participate.
INTEREST IN INNOVATION
Athwal says most investors who have joined the platform so far have been technology professionals looking for new investment opportunities. Unique among real estate crowdfunding platforms, the company has identified five markets with rising tech and real estate sectors where it sees attractive opportunities. It is creating market-specific products to enable developers in Seattle, Dallas, Austin, Miami and Chicago to raise funding from local investors.
RealtyShares’ interest in innovation led it in 2014 to become the first crowdfunding platform to accept the digital currency bitcoin as a form of payment. The platform says this is a more cost-effective and streamlined way for investors to send money, especially if they are abroad, because it involves lower transaction fees and faster transfers.
As of June 2015, RealtyShares has an estimated 90,000 monthly unique visitors via desktop who spend an average of about 4 minute on the site with 4.04 page views. About 92% of the traffic is from the United States. As of mid-May 2015, RealtyShares ranked sixth among real estate crowdfunding sites in the United States.
RealtyShares’ founder Athwal trained as an electrical engineer and lawyer. He worked as a developer and broker for his own real estate company and then as a real estate and land use attorney representing California and national developers and REITs in the San Francisco Bay area. He doesn’t have the star power of some other crowdfunding entrepreneurs but his credentials are solid.
The management team is rounded out by eight specialists with hands-on experience in operations, transactions, engineering and other disciplines. Again, they have strong resumes but not high name recognition. RealtyShares’ leadership earned a B grade in one review.
WHAT DO THE EXPERTS THINK?
RealtyShares has received funding from some investors with track records for betting on successful ventures such as 500 Startups, so that represents a vote of confidence in the platform. But it has gotten fewer accolades than some other sites, and media coverage has tended to focus on its potential for financing single family home flip projects or more novel features such as acceptance of bitcoin.
Blogger Mark Robertson wrote about his experience with five investments on RealtyShares. While he describes several of the projects as having some unanticipated occurrences such as higher than budgeted taxes or permitting delays, he said they have met or beat expectations.
RealtyShares looks like a solid platform with long-term potential. While its low minimum investments are attractive, it loses points for its lower quality deal flow and higher than average fees. It is open exclusively to accredited investors and focuses on shorter hold deals, especially fix and flip single family home projects. It’s not a good starting point for novices and may not even be a good first choice for more seasoned investors.
Investors can access both debt investments in the form of first or second-position loans usually yielding a fixed interest rate of 8-12% annually as well as equity investments in residential and commercial properties offering cash flows during the hold period and/or a portion of the profits upon a sale of the property.
HOW DOES REALTYSHARES SCREEN INVESTMENTS?
RealtyShares reviews the sponsors first, looking for companies with experience. It says it runs background and credit checks. Then it reviews proposed transactions including financials, geography, property type and quality, and investment structure.
“While each investment includes risk and RealtyShares cannot guarantee results, our vetting process seeks to ensure that only quality investment properties are listed on the platform,” it says. “Once an investment opportunity is listed on the platform, investors have full discretion as to whether to personally invest in the opportunity, and if so, how much.”
So, like other crowdfunded real estate sites, it’s up to you to do your due diligence.
CEO Athwal said that as of spring 2015 RealtyShares had no defaults or major issues with any of its projects and only lists about 1 in 10 properties that are offered to it. “I think that really goes to our underwriting criteria and the strictness with which we adhere to when we are looking at a property,” he said.
However, the site more than other real estate crowdfunding platforms focuses on single family home flips. These are often sponsored by solo or smaller operators, and experts consider them generally to be riskier and lower-quality deals than bigger budget projects.
RealtyShares says it charges a fee when you invest in a specific offering to cover investor reporting and communications. But the site is quite opaque on the details and directs you to the deal operating agreement. The ones we viewed were 40-plus page legal agreements similar to a prospectus that are not for the novice to decipher.
As best we could tell, the ongoing fees to RealtyShares as manager of the transaction LLC amounted to 1% a year. RealtyShares could do a whole lot better explaining the costs and ongoing fees in its deals.
This article says RealtyShares takes an administrative fee on funds raised through the website of 2 percent to 3 percent. It also takes the annual fee in order to service the investment (including providing investors with tax documents and distributions) through the platform. A RealtyShares presentation for a funding round in February 2014 showed it earning fees of 3-5%.
That is comparatively high among RE crowdfunding platforms and reduces the earning potential of your investment.
EASE OF USE
RealtyShares has a more involved sign-up process than other platforms we have test driven. While some sites initially ask only for an email address and password, RealtyShares seeks your phone number, address, employer, amount you want to invest and type of deal that interests you.
If you are just wanting to explore the site without making a commitment, that might make you leery. But it also suggests RealtyShares wants to offer an experience tailored to your interests, so it could be a plus for some. It offers a chance to check boxes signaling interest in such things as residential flips with 11-14% return, 6-9 month hold, unsecured to cash flow retail and long hold apartment deals.
After signing up, you see a countdown clock on the 30-day cooling off period. You are also directed to a helpful eight-minute webinar introducing the site and how to navigate it. We liked this feature a lot.
The page for individual offerings is nicely laid out and easy to follow. There’s a deal dashboard, and tabs allow you to view an overview, financials, documents, photos, background on management and FAQs. One closed deal we looked at had an audio recording of a webinar the sponsor gave discussing the project, which provided a wealth of information.
WHAT AM I BUYING ON REALTYSHARES?
RealtyShares explains what you are actually buying this way: RealtyShares sets up a separate Limited Liability Company (LLC), for each investment opportunity that is listed on the platform. That LLC in turn will make a loan on a real estate property (in the case of a debt investment) or hold equity in an LLC or LP that in turn owns real estate property (in the case of an equity investment). When you invest through RealtyShares, you own shares in that LLC. Using this structure, you will have the benefit of limited financial exposure while also avoiding taxes at the entity level.
If you invest in a debt deal, the fund you invest in will be secured by a residential or commercial property and will receive monthly interest payments. A share of those payments will be deposited directly into your bank account. If you invest in an equity investment opportunity (usually in a residential or commercial property or group of properties), the fund you invest in will receive periodic payments of cash flow from rents and/or a share of the proceeds when the property is eventually sold. As with debt investments, a share of those payments will be deposited directly into your bank account.
HOW SAFE IS MY MONEY?
As we’ve said before, real estate crowdfunding is not for investing novices, and that holds even truer for RealtyShares. Experts point out the niche is in its infancy and there has not yet been a chance to watch a complete life cycle of many deals. Real estate by its nature can be a risky investment, and RealtyShares is weighted toward single family home flips which have more inherent risks than other types of deals.
While offering documents list risk factors ad nauseum, RealtyShares could do a much better job of making its site transparent. It says it is currently affiliated with WealthForge, a registered broker-dealer with FINRA and member of SIPC (both of which are securities industry bodies aimed at protecting investors), and that WealthForge provides compliance and regulatory oversight to RealtyShares.
But it’s unclear if SIPC protections apply to RealtyShares investments. Even if they do, they do not protect against loss in value, liquidity issues or financial problems with sponsors. They would only protect the custody function of the broker dealer.
In truth, it is up to you to research carefully and understand fully the risks of any deal you enter, and that is a big reason why only accredited investors are allowed to participate.
There are various pluses and minuses with the service, but RealtyShares would work better if it didn’t have the requirement for accredited investors. Crowdfunding generally democratizes investing, making it available to even the smallest investors. The accredited investor requirement limits the platform to use by high income and high net worth individuals. We’ll give RealtyShares a rating of 4.0 out of 5.0 stars, with the accredited investor requirement being the biggest negative.
We have singled out RealtyShares for the purpose of our first Real Estate Crowdfunding Site review due to a few recent stories that caught our eye. Not the least of which is their forward-thinking leadership giving potential investors the ability to invest using BitCoin. We love the idea of taking a “virtual currency” and turning it in to the most tangible of investments. This move has the potential of bringing a new crowd to real estate investing, the Tech Crowd.