Real Estate Crowdfunding: Realtyshares Foreclosure Process Example 2018

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Final update. I’ve invested in multiple real estate crowdfunding websites, including $2,000 into a single debt investment at RealtyShares. Unfortunately, this loan backed by a multifamily unit went into foreclosure and I outline what happened. There are risks in every investment, and my loss is your learning opportunity!

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Initial investment details.

  • Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
  • Interest rate: 9% APR.
  • Amount invested: $2,000.
  • Term: 12 months with 6-month extension option.
  • Total loan amount $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
  • Loan secured by the property in first position. Personal guarantee from borrower.
  • Stated goal to rehab, stabilize, and then either sell or refinance.

Brief recap.

  • January 2016. Funds committed. Loan closed.
  • July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
  • May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
  • June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
  • September 2017. Judgment granted in Wisconsin court. By law, there will be a 3-month redemption period where the borrower can still keep the house if they pay foreclosure judgment plus interest, taxes, and costs.
  • January 2018. The foreclosure sale was held and property ownership was reverted to RealtyShares. A judge still needs to confirm the sale.
  • February 2018. The judge confirmed the foreclosure sale, and RealtyShares is officially the owner of the property. Property can now be assessed and fixed up before sale.
  • April 2018. Property listed for $134,500 as per new BPO (Broker Opinion of Value).
  • June 2018. Property is under contract for sale. Exact price unknown.
  • July 2018. Property sold. Final disbursement of $1,133.73 received.

Final numbers. I invested $2,000 and got paid $210.84 of interest and $1,133.73 of principal for a total of $1,344.57. This means I only got back 67% of my money after more than 2 years. On the other hand, I have made over 50 different real estate-backed loans now, and it was only a matter of time before I got a full default. This was my first investment that finished foreclosure, but it won’t be my last.

The question is how often that happens and the size of those losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections typically only got you pennies on the dollar. In this case, I got back 57 cents on the dollar when you exclude interest.

Beforehand, RealtyShares told me that the foreclosure process in Wisconsin typically took about 12 months. That turned out to be a good estimate, as it was 12 months between foreclosure initiation and the property being under contract for sale.

Lessons. First, don’t put too much weight on a BPO (broker opinions of value). A broker thought this property was worth $238,000 in January 2016. Another broker thought the same property was worth only $134,500 in April 2018. The final sale price was probably closer to $100,000. That is a big gap.

Second, you should consider the local economic situation. This area is hurting, and if you do some digging you’ll see foreclosures all over the place. I didn’t know this at the time, but the low-income rental market in Milwaukee, Wisconsin was profiled in the NYT Bestselling book Evicted: Poverty and Profit in the American City (my review). Many of the properties mentioned in this book were literally down the street from this unit.

Third, you need to diversify. If this was my only investment, I might have an overly negative opinion of the asset class. If my successful Patch of Land loan was my only investment, I might have a overly positive opinion. Instead, this is one of 50+ investments for me (mostly at PeerStreet) and while I maintain a positive return higher than cash across my investments, there is the occasional foreclosure like this. Basically, when you read about my experience or someone else’s, you must take into account sample size.

Finally, I believe that some marketplace/crowdfunding sites may be better at sourcing and underwriting loans than others. As of November 2018, Realtyshares has stopped accepting new investments (they will continue to service existing investments). Even before that, they abruptly stopped doing residential loans to “focus” on commercial properties. I knew their specialty was more commercial real estate, but I didn’t want to commit $25k to a single commercial investment, so I went with this smaller residential loan. Since then, I have shifted my residential debt investing to PeerStreet as they allow me to split my investments into $1,000 minimums and they also have a slightly different model.

Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here are some sample updates:

October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.

September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expires—sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.

September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.

August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.

August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.

June 29, 2017 Due to the borrower’s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.

Bottom line. Investing in real-estate backed loans means that if the borrower doesn’t pay up, you can foreclose and take over the property. But what is that really like? The purpose of this post is to provide real-world dates and numbers for a completed foreclosure on a marketplace real-estate investment site. I haven’t seen any other similar resources.

My current active investments are at PeerStreet ($1,000 minimums, accredited-only, debt-only) and Fundrise eREIT ($500 minimum, open to everyone, equity and debt).

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Infographic: Where Did Housing Prices Crash the Most and the Least?

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The Washington Post had an article looking back 10 years later: How the housing market has changed since the crash. Inside was an interesting map of where the home prices crashed the most and the least (click to enlarge):

I wish they had a similar map that shows how much each individual state has also rebounded from the bottoms. According to this NYT article, the national median price is up 44% over the last 6 years:

When the housing bubble burst a decade ago, property values dropped by as much as 60 percent in some areas. Millions of Americans lost their homes to foreclosure. Nationally, the median price of existing homes today is $269,600 — up 44 percent in the past six years.

There are so many local variations. The house that we bought in 2007 was supposedly near the market top, but today the market value is still probably worth 50% higher. That’s far behind stock market returns, but you also have to consider that we could have bought that house with a tiny downpayment. If you put $40,000 down on a $400,000 house and it goes up to $600,000, then you roughly quadrupled your money (after fees). This goes right along into the conclusion of the WaPo article:

Among the lasting fundamental changes brought about by housing crisis, says Sharga, is that people today look at a home as place to live, not as an investment.

“It’s important to realize that homeownership is something to aspire to, but it’s also important to be ready for it,” he says. “It can be a wealth builder, but, as we saw, it can also be the quickest path to financial devastation if you’re not prepared.”

You can still buy a house with zero to 3.5% down payment these days, and that’s big leverage. Leverage goes both ways. It can make you rich much more quickly, but it can also make you broke much more quickly.

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US Housing Market Breakdown Chart

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I don’t have any clever observations to share along with it, but the WSJ Daily Shot shared an interesting breakdown of the US housing market. Occupied or Vacant, Owned or Rented, Mortgage or Not, Negative Equity or Not, Foreclosure or Not, and so on.

There was also a chart of the historical rate of mortgage foreclosures.

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LendingTree Chart: Mortgage Rates vs. Credit Score 2018

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Mortgage rates are rising. Home prices are still at recent highs. Yet, mortgage applications are also up, which suggests that people are worried about not being able to afford a house if they wait. Online mortgage comparison site LendingTree publishes a monthly update (March 2018) of what their real customers are getting approved for on their mortgages. Credit score, average APR, down payment, loan-to-value ratio, etc. Here is a chart of mortgage rates vs. credit score.

lendingtree_1803

Clean up your credit score. The survey suggests that the rate difference between the top credit scores and lower scores are widening:

Consumers with the highest credit scores (760+) saw offered APRs of 4.72% in March, vs 4.99% for consumers with scores of 680-719. The APR spread of 27 bps between these score ranges was unchanged from February and still near the widest since this data series began in April 2016. The spread represents over $14,000 in additional costs for borrowers with lower credit scores over 30 years for the average purchase loan amount of $238,593.

I recently paid my income taxes with a credit card, netting some profit but also using up over 50% of the total credit limit. My credit score monitoring services told me this increased debt utilization lowered my credit score by 40 points! This is exactly the type of thing you shouldn’t do if you are in the market for a new mortgage or refinance. If anything, I should have paid off the balance immediately before it was reported to the credit bureaus.

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50 State Infographic: How Much Income Do You Need to Afford the Average Home?

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HowMuch.net compiled an infographic about the income you need to afford the average home in every US state. The key is that “afford” means that the total cost of housing take up no more than 30% of gross income. The highest income required is in Hawaii ($153,520 for a house worth $610,000) and the lowest is in West Virginia (West Virginia: $38,320 for a house worth $149,500).

I suppose the next level analysis would be to divide by the actual median income in each state to measure relative affordability. The same job can pay different salaries in different areas, so it can still make sense to move to a place with higher incomes and high real estate prices.

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The Real Estate Crowdfunding Capital Stack: Equity vs. Debt

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Before I share more about my real-estate crowdfunding experiments, I wanted to take a quick step back in order to provide better context. Just as ETFs and mutual funds are separated into stocks and bonds, real estate can be separated into two general types of investments:

  • Equity = an ownership interest in the asset.
  • Debt = a loan, typically collateralized by the asset itself or other assets of the equity owner.

In the business world, I could buy a piece of Amazon or Apple and participate in the ups and down of the business value, or I could invest in bonds issued by Amazon or Apple and get a fixed return as long as Amazon and Google keep making their interest payments within the stated period of time.

This is called the “capital stack”. In residential real estate, the stack can be quite simple. There is one homeowner and one mortgage-holder (debt). If they ever sell the house, any proceeds must first go towards the mortgage-holder. Anything left over goes to the homeowners. If the house gets sold for $400,000 and had a $300,000 mortgage, the homeowner would get $100,000. When you see the image below (source), imagine water filling up a container. The bottom layer gets paid first. If there isn’t enough “water”, the next layer doesn’t get paid. If there is excess “water”, that goes to the equity owner. (image source)

recapitalstack1

In commercial real estate, here are the four most common layers of the capital stack: common equity, preferred equity, mezzanine debt, and senior debt. Preferred equity, as its location suggests, is in between common equity and debt in terms of cashflow priority and return upside potential. It has a more senior position to cashflow than common equity, but it still junior to mezzanine and senior debt. Mezzanine debt can be explained as similar to when a homeowner might also take out a “home equity loan” that junior to the first mortgage (and thus usually at a higher interest rate). Both of these intermediate stacks are more complex in terms of how much extra return are you getting for how much extra risk, and thus I tend to avoid them. (image source)

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The expected return of each layer is then adjusted based on its position in the stack. Keep in mind that as your expected return increases, so does the possibility that your actual return is zero or negative. (image source)

recapitalstack4

My equity investments. My initial feeling was that publicly-traded REITs do a pretty good job on the equity side. The big REITs hold big apartment complexes, hundreds of public storage facilities, etc. Is there an opportunity for higher returns from smaller properties? Perhaps, but the problem is that it takes years for equity investments to pan out. My plan is to invest another $1,000 into Fundrise eREITs and hold on to them for 5 years as a long-term experiment. As the dividends are paid and the net asset value is updated, I can compare side-by-side with the dividends and net asset value of the low-cost Vanguard REIT ETF (VNQ).

My debt investments. I prefer the idea of providing short-term, 7%-9% loans backed by a hard asset like real estate. This is an area traditional referred to as “hard money loans”. I can’t replicate this type of deal with an ETF or mutual fund. I plan to increase my investment in PeerStreet to roughly $25,000 total as they focus 100% on the debt side and I like their platform so far. I invest only in notes with a term under 12 months, and in the first position (most senior). This remains under my “5% Speculative Portfolio” and will track my returns regularly.

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Housing Has Higher Long-Term Returns Than Stocks?

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housemoneyI finally got around to reading an academic paper that looked a bit dry but had a great title: The Rate of Return on Everything, 1870–2015 [pdf] by Jorda, Knoll, Kuvshinov, Schularick, and Taylor. I wonder which of the authors came up with that.

One of the major findings that was residential housing – when you add up the returns from both price change and imputed rent – had a higher overall average return than stocks (equities). Not only did housing have higher returns, but it also had lower volatility (standard deviation). Here’s a chart that compares housing and equities:

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When the paper was released, places like the Financial Times discussed the paper’s conclusions but none of them addressed my two immediate questions.

Did they account for the maintenance and management costs of rental real estate? If you own a rental property, you may still have to pay for lawn maintenance, replacing roofs, HVAC units, interior and exterior painting, replacing carpets, and various other issues. To be fairly compared with equities, you should also account for property management costs. Here’s are excerpts that deal with maintenance and repairs:

To the best of the authors’ knowledge, this study is the first to present long-run returns on residential real estate. We combine the long-run house price series presented by Knoll, Schularick, and Steger (2016) with a novel dataset on rents from Knoll (2016). For most countries, the rent series rely on the rent components of the cost of living of consumer price indices as constructed by national statistical offices and combines them with information from other sources to create long-run series reaching back to the late 19th century.

A number of additional issues have to be considered when constructing returns on housing. First, any homeowner incurs costs for maintenance and repairs which lower the rental yield and thus the effective return on housing. We deal with this issue by the choice of the benchmark rent-price ratios. Specifically, in the Investment Property Database (IPD) the rental yields reflect net income (i.e., net of property management costs, ground rent, and other irrecoverable expenditure) received for residential real estate as percentage of the capital employed.

Did they account for the annual property taxes required on residential real estate? In many US states, the annual property tax bill can exceed 1% of the value of the house. Some are closer to 2% annually, and these are owner-occupied numbers. Rental properties may be higher. That’s on top of any potential capital gains you’d owe upon sale of the house, and any taxes you’d owe on rent received. Here’s are excerpts that deal with taxes:

Although the extent of real estate taxation varies widely across countries, real estate is taxed nearly everywhere in the developed world. International comparisons of housing taxation levels are, however, difficult since tax laws, tax rates, assessment rules vary over time and within countries. Typically, real estate is subject to four different kinds of taxes. First, in most countries, transfer taxes or stamp duties are levied when real estate is purchased. Second, in some cases capital gains from property sales are taxed. Often, the tax rates depend on the holding period. Third, income taxes typically also apply to rental income. Fourth, owners’ of real estate may be subject to property taxes and/or wealth taxes where the tax is based upon the (assessed) value of the property.
This section briefly describes the current property tax regimes by country and provides estimates of the tax impact on real estate returns.

With few exceptions, the tax impact on real estate returns can be considered to be less than 1 percentage point per annum.

This is an interesting paper that tries to cover a huge amount of stuff. Estimating the return of all businesses from all countries for the last 150 years? Estimating the return of all residential real estate from all countries for the last 150 years? They mix together a bunch of different datasets, so it’s hard to know exactly the quality level of each and how well they accounted for things like taxes and maintenance.

I’m not sure why they prefer to use arithmetic averages instead of geometric averages, but even if you shave off 1% for additional property taxes and another 1% because you don’t think they account for maintenance costs adequately, housing returns are still at least comparable to equity returns.

Here is the most recent update of the Case/Shiller home price index from Multpl, which tracks US housing prices on an inflation-adjusted basis:

shiller1890

Some people use this to argue that housing returns only keep up with inflation, but home prices ignore the value of rent. The fact that most housing purchases involve a mortgage loan does complicate things a bit.

Bottom line. An interesting paper that compares the long-term returns (last 150 years!) of residential housing and equities. In the long run, some may be surprised that residential housing returns at least matched equity returns, and housing returns had lower volatility. This is a reminder that you can also build wealth via residential real estate, taking into account that rent makes up half of the total return. Stocks are not the only game in town. (Just like with stocks, can is not the same as will.) New services like AirBNB provide an alternate path to monetize residential real estate.

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Coffin Homes: Living in Tiny Spaces As a Last Resort

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The Atlantic has a photojournalism article The ‘Coffin Homes’ of Hong Kong which startled me and challenged my idea of a “tiny” living spaces. The size reminded me of capsule hotels in Japan, except these are in much worse condition and are permanent residences. A sad and extreme example of high population density and lack of affordable housing.

Cheung reports that there is a “dark side to the property boom in wealthy Hong Kong, where hundreds of thousands of people priced out of the market must live in partitioned apartments, ‘coffin homes’ and other inadequate housing.” These residents are among an estimated 200,000 people in Hong Kong living in such tiny subdivided units, some so small that a person cannot even fully stretch out their legs.

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RealtyShares Review 2017: Wisconsin Apartment Loan One-Year Update

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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.

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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).

Screen Shot 2017-03-16 at 3.53.47 PM

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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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Fundrise Income eREIT Review 2017: One Year Update

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Here’s an update on my $2,000 investment into the Fundrise Income eREIT. Fundrise is taking advantage of recent legislation allowing certain crowdfunding investments to be offered to the general public (they were previously limited only to accredited investors). REIT = Real Estate Investment Trust. This specific eREIT initially sold out of its $50 million offering, but Fundrise has since opened regional eREITs called the West Coast, Heartland, and East Coast eREITs. The highlights:

  • $1,000 investment minimum.
  • Quarterly cash distributions.
  • Quarterly liquidity window. You can request to sell shares quarterly, but liquidity is not always guaranteed.
  • Fees are claimed to be roughly 1/10th the fees of similar non-traded REITs. Until Dec 31, 2017, you pay $0 in asset management fees unless you earn a 15% annualized return.
  • Transparency. They give you the details on the properties held, along with updates whenever a new property is added or sold.

Why not just invest in a low-cost REIT index fund? I happen to think most everyone should invest in a low-cost REIT index fund like the Vanguard REIT ETF (VNQ) if they want commercial real estate exposure. I have many times more money in VNQ than I have in Fundrise. VNQ invests in publicly-traded REITs, huge companies worth up to tens of billions of dollars. VNQ also has wide diversification and daily liquidity. But as publicly-traded REITs have grown in popularity (and price), their income yields have gone down.

Fundrise makes direct investments into smaller properties with the goal of obtaining higher risk-adjusted returns. They do a mix of equity, preferred equity, and debt. Examples of real-life holdings are a luxury rental townhome complex and a $2 million boutique hotel. From their FAQ:

Specifically, we believe the market for smaller real estate transactions (“small balance commercial market or SBC”) is underserved by conventional capital sources and that lending in the market is fragmented, reducing the availability and overall efficiency for real estate owners raising funds. This inefficiency and fragmentation of the SBC market has resulted in a relatively favorable pricing dynamic which the eREIT intends to capitalize on using efficiencies created through our technology platform.

Here’s a comparison chart taken from the Fundrise site:

fundrise_ereit1

Quarterly liquidity. As noted, the investment offers the ability to request liquidity on a quarterly basis, but it is not guaranteed that you can withdraw all that you request. In addition, you may not receive back your full initial investment based on the current calculation of the net asset value (NAV).

Update: I tested out the quarterly liquidity window and was able to withdraw my funds in a simple process and without issue.

Dividend reinvestment. I chose to have my dividends paid directly into my checking account. However, you can now choose to have your dividend automatically reinvested across currently available offerings.

Tax time paperwork? All you get at tax time is a single 1099-DIV form with your ordinary dividends listed in Box 1a. That’s it. Every other box is empty. This is much easier than dealing with the 10-page list of tax lots from LendingClub or Prosper.

Dividend income updates.

  • Q1 2016. 4.5% annualized dividend was announced. This was the first complete quarter of activity, so the dividend was not as large as when funds became fully invested. The portfolio had 13 commercial real estate assets from 8 different metropolitan areas, with approximately $31.5 million committed.
  • Q2 2016. 10% annualized dividend announced, paid mid-July. Portfolio now includes 15 assets totaling roughly $47.25M in committed capital.
  • Q3 2016. 11% annualized dividend announced, paid mid-October.
  • Q4 2016. 11.25% annualized dividend announced, paid mid-January. Portfolio now includes 17 assets and all of the $50 million has been invested.

Screenshot from my account:

fundrise1701

Recap and next steps? It has now been over a year since my initial investment in the Fundrise Income eREIT, designated my Real Estate Crowdfunding Experiment #2. I’ve earned $183.01 in dividends on my initial $2,000 investment. The quarterly dividends have arrived on time, I get regular e-mail updates, and it has been nearly zero-maintenance. I still accept the possibility of wide price fluctuations, as with any real estate investment.

Update: I tested out the quarterly liquidity window and was able to withdraw my funds in a simple process and without issue. Fundrise is still accepting direct investments into some of their eREITs, but I am now looking to re-invest into their new Fundrise 2.0 system, which has a new $500 minimum and allocates across multiple eREITs. You can sign-up and browse investments at Fundrise for free before depositing any funds or making any investments.

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MogulREIT: CrowdFunded Real Estate for Non-Accredited Investors

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rmlogo200While the number of real estate crowdfunding sites keeps growing, most marketplaces still require you to be an accredited investor with high income and/or net worth requirements. However, options for non-accredited investors should improve shortly due to the expanded Regulation A+ per the JOBS Act, which allows the general public to invest in private companies under certain circumstances.

RealtyMogul.com just announced their offering called the MogulREIT I. Instead of being able to buy part of a specific shopping center or providing a loan against a specific apartment complex, these REITs take your money and the sponsors get to pick out a diversified pool of commercial estate. The investor has much less control, but easier diversification. Instead of putting $2,500 into one building, you can spread $2,500 across 20 or 30 properties. Here are more details from their website:

  • Fund intends to be diversified across property types, investment types, and geographies.
  • The Fund expects to pay quarterly distributions starting the second full quarter of operation.
  • The Fund will provide certain redemption opportunities, quarterly.
  • MogulREIT I is audited by Cohn Reznick and administered by Opus Fund Services.
  • $2,500 Minimum Investment.

Here’s what they have to say regarding expenses:

Investors in MogulREIT I will not be charged any sales commissions and the organization and offering expenses are anticipated to be approximately 3% of the target total raise of amount. Traditional non-traded REITs typically charge an average sales commission of 7% and organization and offering expenses of up to 15%**.

There are more details in the full SEC offering circular. Please do your own due diligence.

As I’ve said before, I would tell my family to invest in a low-cost, diversified, publicly-traded REIT fund before investing in any of these non-traded REITs with limited liquidity. For example, buying shares of the Vanguard REIT Index ETF (VNQ) will give you commercial real estate exposure with rock-bottom expenses and daily liquidity. VNQ and its mutual fund equivalents are where the vast majority of my commercial real estate exposure remains.

That said, I find this area of investing to be interesting. I like the idea of focused real estate but don’t enjoy being a landlord. I have invested $2,000 of “experimental money” into the similar Fundrise Income eREIT, as I prefer high-interest loans backed by real estate as collateral. Fundrise also has a Growth REIT which focuses more on real estate equity. The MogulREIT I is supposed to target both income and growth. I currently have no plans to invest in either the Fundrise Growth REIT or the MogulREIT.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Housing Investment Returns = Price Appreciation + Rental Dividends

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Professer Robert Shiller has a new NY Times article entitled Why Land and Homes Actually Tend to Be Disappointing Investments. He computes the historical, long-term inflation-adjusted returns for both farmland and housing:

Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged.

According to my own data (relying on the S&P/Case-Shiller U.S. National Home Price Index, which I helped create), real home prices rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6 percent a year.

Over the same time period (1915 to 2015), the total inflation-adjsuted return of the S&P 500 index including dividends is roughly 6.7% annualized. Here is a recent version of his famous Home Price chart:

shilller2016

Shiller is a smart guy and so I’m sure he knows this, but he always seems to leave out the fact that most people don’t just buy a chunk of land and let it sit there idle until they are ready to sell it again.

  • People use farmland to grow stuff. You know, things like apples and corn and cows. Or you could charge rent to farmers.
  • People either charge rent to others or avoid paying rent themselves on residential housing.

These are all additional sources of investment return beyond just price. Therefore, even if you assume your home’s price will only rise between 0% and 1% above inflation over time, you are still getting more “return” from it in the form of either rent or imputed rent.

Rent will rise roughly with inflation. Indeed, the biggest portion of the Consumer Price Index is housing as shown in the graphic below (source). The great majority of the Housing component is “rent of primary residence” and “Owners’ equivalent rent of primary residence”.

cpi_pie_chart

From FRED, here’s the rent part of CPI divided by overall CPI for as far back as the data series goes (1947). Sometimes rent grows faster than CPI, sometimes rent grows more slowly than CPI. Mostly, it evens out, as one might expect.

cpirent1

For most of the last 20 years, rent has increased faster than CPI inflation:

cpirent2

Estimating your “rental dividend” return. If you have a house that costs $200,000 that would otherwise be rented for $1,000 a month, that is a price-to-annual-rent ratio of 16.7. The inverse of that number is a rough idea of the annual “rental dividend” you could get from the house. That is, $12,000 divided by $200,000 is 6%. Now, a proper real estate investor would take out things like property taxes, insurance, repairs and maintenance. Let’s continue to be very rough and call that 3%. Now, if you assume both rent and expenses will rise roughly in step with inflation, that is an additional 3% real return.

Adding the two parts together, and you’re getting a very rough 3% to 4% real (inflation-adjusted) return. Now, most people acknowledge that housing is local and your specific return can vary widely. Your housing price return if you bought a house in Detroit in 1985 and a house in Mountain View, California is quite different. At the same time, your current housing rental dividend return is going to be a lot higher in Detroit than in Mountain View, California.

(I’m not nearly as familiar with farmland, but I do know people who rent out their property to farmers and ranchers. They seem satisfied with the arrangement. I’m also not including all the psychic rewards of owning your home like being able to remodel and customize things as you wish, nor am I including the costs of doing that remodel.)

If you look at various broad estimates of future stock and bond returns, they are not forecasting much more than 3% to 4% real returns on a diversified and balanced 60/40 stock/bond portfolio. Do housing prices only go up? No. Is every house a good investment? No. However, I also don’t agree with the broad statement that land and homes are disappointing investments.

I’ve explored my own situation and income tax effects more in the previous post Mortgages, Imputed Rent, and Early Retirement.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.