If you have been investing for a while, you probably keep hearing that one should be diversifying their investment portfolio. One good way to diversify is to start investing in real estate with little money. With some recent legislation making it easier to offer to the masses what was previous
The world of Real Estate investing varies so vastly, you can go buy commercial properties, or use techniques that require you to pay thousands of dollars to be ‘trained to do it on their investment own’. But the real fact of the matter is most of those ‘programs’ are just selling you education, they aren’t actually helping you invest in real estate.
I’m looking to discuss passive income investments that don’t require you to be an accredited investor (earn an income over $200k/year or net worth of over $1 million), since the fact of the matter is most people getting into Real Estate investing don’t have a lot of funds to start with, so where to begin.
When you are investing with a company they typically work in a pooled environment. So say 1000 people get together and each bring in $500 for a total of $500,000. Now that’s not a lot of money but you could purchase a few rental properties, or a property and then help fund a renovation and flip for another real estate property.
Now that is with a few thousand people, but if you multiply that and if some individuals bring in thousands then you could have millions on their investment hands and the company is investing in multiple projects and helping diversify their investment positions.
These are primarily structured in Real Estate Investment Trusts (REIT), where they payout 90% of their earnings back as dividends, however not all REITs are equal and fees vary, so do their investment research.
One of the most well-known adopters is Fundrise. Fundrise has a minimum investment requirement of $500 to invest in their starter program which is a blend of a debt (income) portfolio and appreciation growth (equity) portfolio. This portfolio is currently spread across 124 active projects so there is great peace of mind with such diversity.
They provide quarterly dividends and then readjust their NAV (stock share price) with appreciation. Annual returns range 8-13%, in 2018 the blended portfolio received a 11.2% gain between dividends and appreciation price adjustment.
One of the newest additions companies that allow you to start investing in real estate with little money is a new start-up by the name of Rich Uncles. Rich Uncles offers two separate programs. The main program they offer is a pool into their Triple Lease (Tenant pays taxes, insurance and maintenance) program where they have 22 properties spread across retail, office space and industrial buildings and only a $500 minimum investment. These are great stability income properties but typically have a lower return, typically closer to 5.5 – 9%.
The newest offering from Rich Uncles is what they call the BRIX REIT which invests in student housing near major universities. Though still relatively new they are spreading quickly to allow an entry for new investors and with a minimum of only $5 to start it is an excellent way to begin investing in Real Estate, though with the lower return of a steady 6%, it is an excellent conservative investment option but with limited upside there are better alternatives.
One of the differences with both of these programs is the monthly dividend distribution which can help speed up their investment return as their investment reinvest their investment dividends.
Crowdfunding – Direct projects
Similarly with the popularity of peer to peer lending (Prosper, Lending Club, Sofi) and their recent decline due to excessive charge-offs; one company has taken that model and applied it into Real Estate investing, that company is Groundfloor. While Groundfloor was exclusively only available to Georgia residents for years (prior 2017) they are now available to all residents within the US.
Real Estate Developers are vetted and graded with Groundfloor providing the hard money loans available for investors to invest in. These investments are crowdfunded to thousands of investors with the minimum investment only being $10. (Currently they are offering free $10 to each new account.) This is important for those who are just starting out and don’t have large amounts of capital to begin with. Also, it helps diversify across multiple projects to spread out the risk in the event that something should happen on the project things don’t turn out as expected.
One of the main differences is being able to pick and choose the amount and the projects to directly invest in. You can choose a lower rate and more secure or higher rates with more risk, or create their investment own blend. These hard money loans are short-term loans between 6-12 months with rates from 5.5% – 26%, with most offerings are between 11%-13%.
Holding Periods and Fees
As you review and research these options you will begin to see they are not their investment typically stock market investment. They are hyper focused and offer a variety of investments. However due to the fact these investments are in Real Estate, which is an illiquid asset, there are time commitments involved.
Fundrise states that the investment is long-term but make mention that every quarter they will asses withdrawal requests and if there is available liquid funds they will honor the withdrawal requests. This doesn’t give a guarantee that you will get a withdrawal anytime soon.
Rich Uncles doesn’t give an exact time frame but does mention a freeze period for the first year with a diminishing exit fee (i.e. after year one 3% fee, after year two 2% fee, after year three 1% fee, and no fee after year four). This is more on par with some more expensive investment programs.
Groundfloor is different in that you own the note directly and are tied into the investment until the borrower pays off the loan. Typically, the term is a year, sometimes it is much sooner, and other times there are project delays and it may get dragged out a year or beyond. Groundfloor can look into using Folio as a 3rd party notes market (other peer lending companies heavily relied on), which makes buying and selling positions of their investment notes much easier to manage.
You’ll also come to see that one of the bigger selling points these private REITs emphasize is that because these are private companies – and they are offering the investment directly to the public – they can cutout any commissions that would have gone to brokers and salespersons. Though there may be some benefit, they sure seem to exaggerate it, we’d rather see higher returns.
Given how much the online investing world has shifted it’s amazing you can start investing in Real Estate with little money. Hard money lenders typically had to provide 5-6 figures to help fund a real Estate renovation project and now you can invest in a small percentage of the project with as little as $10. Pooled investments for larger rental projects which would previously only be handled by large institutional sized investors can now be bought in at $5. It’s becoming so much easier to start investing and slowly build up a broad real estate portfolio where you can be investing across dozens of projects with under $100.
We haven’t seen the last of these types of investments popping up. Given time I’d like to see better streamlining of the fees, past performance and total returns to provide a comparison as to which ones continue to promise solid and consistent returns. While we recommend a diverse portfolio, we believe the emergence of simple straight forward investing in real estate will continue to expand and become an attractive alternative investment and a larger share for everyday investor’s portfolio.