Here’s a one-year update on my $2,000 investment through RealtyShares, a partial interest in a loan backed by a 6-unit apartment complex in Milwaukee, Wisconsin. RealtyShares is restricted to accredited investors only. Here are the highlights:
- Property: 6-unit, 6,490 sf multifamily in Milwaukee, WI.
- Interest rate: 9% APR, paid monthly.
- Amount invested: $2,000.
- Term: 12 months, with 6-month extension option.
- Total loan amount is $168,000. Purchase price is $220,000 (LTC 76%). Estimated after-repair value is $260,000. Broker Opinion of Value is $238,000.
- Loan is secured by the property, in the first position. Also have personal guarantee from borrower.
- Stated goal is to rehab, stabilize, and then either sell or refinance.
Property details. I chose this property because it is different from my other past “experiments”. I have never lived in or visited Milwaukee, Wisconsin. I have never invested in an apartment complex. Where I live, parking spaces have sold for more than $200,000. All units are 2 bed/1 bath, currently fully rented for ~$600 a month each. I don’t know all the numbers, but this place earns roughly $43,000 in gross annual rents with a purchase price of $220,000. Annual property taxes are $3,000 a year. Even if half of the rent is spent on expenses, that is still a cap rate of 10%. To be honest, I have had some second thoughts about this borrower (after a few late payments) that s/he is juggling too many investment properties using crowdfunding websites.
Initial experience. This specific investment was not “pre-funded” by RealtyShares. That meant that I had to wait until they secured enough committed money before the deal can go forward. I committed to this loan on 12/21/15 and $2,000 was debited from my Ally bank account on 12/29/15. However, the funding goal was not reached until 1/13/16 (before which I earned no interest) and I didn’t receive my first interest payment until 3/4/16 (for interest accrued 1/13-2/10). There was essentially a 3 month period between the time where they first took my money and I received my first interest check. I did receive my second month of interest shortly thereafter on 3/17/16.
Since my initial investment, RealtyShares has started offering investments on a pre-funded basis. You should also know that you don’t have to deposit any money into your account first before investing in any deal. You should link an account, but you can sign the papers and they will debit the funds when the investment closes.
What if RealtyShares goes bankrupt? RealtyShares investments have a bankruptcy-remote design. RealtyShares, Inc. is the platform. Your investment is held within a separate special-purpose LLC with a designated trustee which would continue to operate even if RealtyShares, Inc. goes bankrupt.
Payment history. I’ve been earning my 9% APR interest on my $2,000 initial investment, which works out to $15 a month. Below is a screenshot of my interest payments, which I have elected to by deposited directly into my bank account. You can see that I have received 12 payments over the last 12 months (March 2016 to March 2017). The borrower has had a few late payments, but always seems to catch up eventually. There was a mention of late charges potentially being charged, but none appear to have been paid out to my account. I need to follow-up on that (I assume it was within the allowed grace period).
Recap and next steps? My real-estate-backed loan through RealtyShares is now a year old, designated my Real Estate Crowdfunding Experiment #3. I have received my 9% interest as promised, and the loan is current although some past payments have been late before becoming current again. The borrower has exercised the 6-month extension option and the loan now has an expected maturity of 5/20/17, so it remains a continuing experiment to see how/if/when the borrower pays off the loan in full. I definitely like that my loans are backed by hard assets, and a small part of me is still curious as to what would happen if the borrower just walked away.
Please don’t take any of my experiments as recommendations as the entire point is that I don’t know all the angles. I am sharing and learning. Also, I don’t know your situation. If you are interested and are an accredited investor, you can sign-up for free and browse investments at RealtyShares before depositing any funds or making any investments.
Experiment #1 was with Patch of Land and single-family residential property in California, which was paid back in full with a 12.5% annualized return. Experiment #2 is ongoing with the Fundrise Income eREIT, which holds a basket of commercial property investments and has been paying quarterly distributions on a timely basis.
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What kind of tax forms did they send you at the end of the year? We’re they complete and accurate?
I received a single 1099-INT from RS Lending Inc. Only Box 1 (Interest Income) had an entry with interest earned. Yes, it was complete and accurate. Filing taxes was as simple as reporting interest from a bank account.
Hi Jonathan, just wondering what does an accredited investor mean? Do they have certain criteria? Thx!
Here’s the SEC on how to qualify as an accredited investor:
https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-accredited-investors
In general, the requirements are individual income that exceeds $200,000 or joint $300,000 together with a spouse in each of the prior two years, and reasonably expects the same for the current year.
Or you have a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
I want to sell my Lending Club notes and get out of that due to the tax headaches. How does this compare to Fundrise Income eREIT?
The Fundrise Income eREIT has a mix of both preferred equity and debt investments, and is also meant to be held for a longer time period of at least roughly 5 years. LendingClub is only 3 and 5-year consumer loans. The Fundrise eREIT reports on a simple 1099-DIV form.
https://www.mymoneyblog.com/fundrise-income-ereit-review-update-2017.html
Thanks for the reply. I am trying to get out of LendingClub for sure. I was actually trying to compare this RealtyShares to Fundrise.
I think there are a few typos with the dates – I figure from the context that some of the 2015 dates should be 2016, I think, otherwise they started paying out to you before you paid in.
An interesting investment, to say the least. Thanks for reporting on these kind of things. I would be interested in trying some of this, but I’m afraid my wife would be too worried about default. Maybe just dip our toes in like you have done.
Thanks, fixed the date typos.
Greatly appreciate you sharing your experiences on crowdfunding. I’ve also made investments across PatchofLand, Fundrise and RealtyShares. Overall, do you think you’ll continue to invest in any of these platforms? What do you see as the pros/cons of each?
Hello “Crowdfunding”
I know you wrote this over 1 month ago, but FWIW, I can weigh in to say that I have invested with Patch of Land and with Realty Shares and am very satisfied with both. I never bothered to venture over to Fundrise since I don’t get what the added-value is.
I’ve earned fantastic returns and feel good knowing that the investments are relatively short-term (not locked in for 3-5 years or more like at Lending Club) and fully-secured by the underlying properties at, presumably, low LTVs. I also like Patch of Land’s “Bankruptcy Remote Indentured Trustee” model which protects investors in the event of bankruptcy of the company (The trustee will ensure that you continue to get paid on your investments)
Overall, I think Real-Estate Crowdfunding (via fixed-income debt-investments or loans) is a particularly smart – if not prudent – way to invest with relative safety of principal, yet with really high returns.
Patch of Land and also even RealtyShares are good bets imho.
Good Luck.
Great info, thanks. What other investment experiments you have tried or wish to try that are available only to accredited investors?
Would you also need to file state taxes in Wisconsin?
No.
Have you tried or heard anything about Groundfloor ??
I’ve invested in Fundrise already and looking into groundfloor as my next move (I like they have low minimums and not restricted to accredited investors only)
What has been the issue with LendingClub? I only ask because I recently opened an account there… I have yet to deal with taxes, but they made it sound like it could import into Turbotax no problem.
Jonathan,
Curious, how come not to purchase a property and lease it out through a property management company? Usual fee is 10%
Owning real estate is different from being a hard-money lender. Running a rental can be quite profitable, but I view it as more of a risky but high-paying job than a passive investment. I’d rather not deal with the high transaction costs, maintenance, and other potential headaches like extended vacancies or squatting tenants.