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Ask HN: Your experience with realty investment startups like RealtyShares?

62 points by gk1 ↗ HN
Startups like RealtyShares and Fundrise have been popping up, all promoting great returns and diversification... If you considered or invested with these platforms, how was your experience?

60 comments

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scardine
The problem with all speculative investments is that you eat like a bird but shit like an elephant: earnings tend to be additive and losses exponential.

Some gambling is fun as long as you don't bet the family savings.

srehnborg
I invest with Groundfloor.us. So far it's been a great experience and have had ~10% returns. They are for residential only and have varying levels of risk based on previous success of those looking for the money. I'd recommend looking into them as well. They only are able to collect money from certain states.
thisisit
Realty, investment and a startup - all rolled into one? No thanks.

I see these guys have been in business since 2012/13. The shoeshiner is one of the oft used analogy on HN. Using the same bar if these guys are getting enough traction now it means every one wants in on the sky rocketing realty prices. Though it is difficult to predict when the issues, if any, might happen.

The best and easiest thing to do is to invest in index funds.

If you really want, invest what you can afford to lose.

ceejayoz
I'd need someone to explain why they'd be better than a REIT from an organization like Vanguard or TIAA-CREF.
baccredited
I would not say they are better, but they are different. REITs are stocks, so they tend to rise and fall with the overall stock market. Take a look at what happened to VGSIX in 2008 (when the SP500 was down over 36%). VGSIX got crushed as well.

Would that have happened to individual investments at Realtyshares/Fundrise/Realtymogul had they been around at the time? Doubtful.

surfearth
It is true that the Realtyshares/Fundrise/Realtymogul holdings may not be marked to market, and therefore have less apparent volatility. However, it is highly likely that if you tried to sell your holding during a market downturn you would need to take a significant discount to the face value to liquidate your position. The discount would probably be in a very similar range as the REITs at the same time. Private investments may have low apparent volatility, but more often than not, their economic volatility is actually greater than their liquid, publicly traded counterparts.
baccredited
>if you tried to sell your holding during a market downturn

This is not possible with Realtyshares at least. You have no way to sell your holding. You just have to wait it out.

conductr
So.. what about liquidity? Are the liquidity options for the funding shares similar to that of VGSIX? Doubtful.

In no way could I imagine you would have had the option to liquidated those shares for pre-recession prices. Without that option, you were probably stuck holding the shares or selling for a similar loss. So what's the advantage again?

baccredited
>So what's the advantage again?

I didn't say there was one. I invest in real estate because it has historically strong returns and is not 100% correlated with the stock market. That is very different from an 'advantage'.

ceejayoz
> Would that have happened to individual investments at Realtyshares/Fundrise/Realtymogul had they been around at the time? Doubtful.

Hang on. Are you claiming the real estate market's collapse wouldn't have affected stuff like Realtyshares? How so?

REITs got crushed because the underlying real estate got crushed. As did the rest of the economy.

baccredited
>Hang on. Are you claiming the real estate market's collapse wouldn't have affected stuff like Realtyshares? How so?

Some impact sure, but let's take an average Fundrise investment. They buy an apartment complex for $20 million and it is at 90% occupancy. They plan to sell it after holding for 10 yrs. If the market was terrible at that time they could hold it a bit longer, and in the interim it is still at 90% occupancy and generating income.

ceejayoz
You don't think occupancy rates and per-tenant income levels go down during a massive recession? You can hold onto the REIT just like you can hold onto the apartment building.
astura
Hold on, how is that at all different from an REIT? Equity REITs also generate income from rents/occupancy and are required to distribute at least 90% of that income in the form of dividends to shareholders.

The big difference is you get to choose to sell or not with a REIT but not with Fundrise.

(not to mention occupancy and rental rates are affected during a housing crash)

jklein11
I'm not following how Realtyshares/Fundrise/Realtymogul would have faired better in 2008 than traditional REITs.

Yes, VGSIX dropped to a third of its original value in six months in 2008. But, those same shares have increased 40% in the past 10 years.

If you had used a vehicle like Realtyshares/Fundrise/Realtymogul there is a good chance that the specific property you invested in would have gone belly up. Your investment today would be zero.

The diversification that a product like VGSIX provides insulates you from the specific risk of an individual investment.

sharemywin
someone mentioned selling and forclosure. so if they get the property and/or it sells for 80%at foreclosure and the group only paid 75% then you probably break even assuming fees.
pdog
Two reasons: leverage and taxes.

With REITs, there is typically no leverage and the dividends are taxed as ordinary income. If you invest in real estate directly, you can borrow at low rates and the tax treatment is better through deductions, depreciation, 1031 exchange, etc.

porter
Spot on. Taxes have been missing from this entire HN discussion. A primary reason for investing directly in real estate (even in a syndication as a passive investor) is to get the tax benefits. For example, with the "eREITS" from fundrise mentioned above, these are just like public non-traded REITS (ie no depreciation, interest deduction, or 1031 exchange).

Often with a strong commercial real estate project you can show taxable losses but still get positive cash flow. Why? Because of generous IRS depreciation treatment of the improvements. Then, when you get to the end of the investment and you can sell it, you can just defer the capital gains taxes indefinitely by using a 1031 exchange. This can be done until you die, when your heirs will get your property with a "Stepped up basis", effectively eliminating the capital gains tax altogether.

You can't get this with REITS. Doesn't matter if they are publicly traded, non-traded, private, or the new fad eREITS.

astura
This is true, however, it has been missing from this discussion because its not on topic.

The question wasn't "why is investing directly in real estate better than REITs?" it was not "why are eREITs better than a diversified REIT mutual fund or ETF?"

porter
There have been many questions about how these crowdfunding sites compare to a vanguard REIT index. Taxes haven't been mentioned. Don't be so pedantic.
buxtehude
The REIT, though it may not have the tax advantages you mention it is diversified.

However, the tax angle is interesting.

How easy is it to diversify with real estate syndication? Or so called real estate crowdfunding - which I assume are more or less the same thing?

baccredited
I invested over 40K with RealtyShares and made over 7K. I will NOT be investing with them any further. Problem is that there is no transparency on the old deals, so you can't see which ones failed or (more likely) locked up your capital many months after they were predicted to end.

I have over 50K with both fundrise.com and realtymogul.com and would consider investing more with both of them.

I also like peerstreet.com as an alternative to lendingclub. I have been slowly draining all my money from lendingclub over the last few years. Returns are simply too low for the risk you take on. Also, with peerstreet your P2P loans are backed by real assets which can be seized and sold to recover your principal if the borrower defaults.

Better than all of these are stock market index funds, which are over 50% of my portfolio.

Any questions? Ask me anything.

koolba
Any thoughts on REIT ETFs like VNQ?
baccredited
I'm not opposed to them but I don't think of them as real estate investments. REITs are stocks, so they tend to rise and fall with the overall stock market. Take a look at what happened to VNQ in 2008 (when the SP500 was down over 36%). VNQ got crushed as well.
buxtehude
And real estate prices didn't get crushed in 2008?
baccredited
Tell you what. Next time the market is down over 20% I'll tweet how much my fundrise and realtymogul quarterly distributions have gone down. @baccredited
gk1
That's helpful, thanks. Could you explain why you prefer fundrise.com and realtymogul? I gave RealtyShares as an example but had Fundrise in mind as well.
baccredited
With fundrise and realtymogul I feel more like a partner in the investment. I'll talk about the fundrise Income eREIT for a second. The returns are solid with better transparency and diversity. With a single 50K investment I'm exposed to many properties. If some of those properties had poor returns fund performance would suffer and so would Fundrise's reputation. And part of it is deal size too. You think RealtyShares is gonna pursue that default on a 500K borrower the same way Fundrise is going to think about their $30 million investment in an apartment complex?
astura
Which ones do you have to be an accredited investor to invest in?
mywittyname
> Also, with peerstreet your P2P loans are backed by real assets which can be seized and sold to recover your principal if the borrower defaults.

Who handles this, and who is responsible for the legal bills?

brettpeerstreet
PeerStreet handles the workout situation. Foreclosure fees are applied against gain on sale, which is why PeerStreet has kept LTV (loan to value) under 75%.
johnthomas00
I have not looked at and do not know these companies and have no comment on these companies. I have been involved in real estate for a long time and these thoughts only relate to commercial real estate generally, not these companies.

Where to start? I'll just fire off some thoughts as they come to mind. Real estate is a long term asset. It is complicated and everyone is different, like your apps, but long term. For example, you could make returns look better by using short term loans (where interest rates could rise). A rise in rates would expose this term structure imbalance/risk. On the other hand, single family production compared to population growth looks good (opposite of when real estate crashed in 2007 or so), so housing looks good generally (every market is different). Retail is getting crushed by Amazon, etc. Office is hard to analyze as it is expensive to replace tenants. Industrial can be made to look good by building more office space in it, but then getting crushed if that tenant leaves. Oh, and winning buyers of commercial real estate have to make the most aggressive assumptions in their models. Every buyer has basically the same information.

Good luck out there people!

pdog
Here are a couple of financial blogs that have reviewed RealtyShares. (Note: they may be compensated by companies mentioned through advertising, affiliate programs, or otherwise.)

https://www.financialsamurai.com/realtyshares-review-real-es...

http://nomadcapitalist.com/2015/11/04/my-review-of-realtysha...

gk1
I did see those but chose to ignore them because of the affiliation partnerships. FinancialSamurai.com in particular turns me off because they're constantly pushing affiliate products, so I can't trust them.
conductr
I always compare these offerings to what I could do on my own in traditional ways. Leverage at low rates is a powerful thing and I'm not convinced this is better. Granted, it's not as passive but it doesn't take me away from my day job either.
sharemywin
it's also about spreading risk. you buy a single family home and rent it out and you can't find a renter you default on the loan or what ever your screwed.

you split it up over 10 loans and as long as there isn't a systematic problem like 2008-2009 just have a lower return.

if you have enough to do 10 rentals on your own well good for you. most people don't.

conductr
I get that. But my opinion is if you only have 500-5k you shouldn’t be investing it at all. Ok maybe in liquid low risk ways. But because of other life risks if that’s all you can afford, you need to just continue saving it until you have a cushion and can real estate. It’s actually a pretty low barrier of entry
sharemywin
I don't see a problem if you have 50k total in investing 5k in a high risk thing. as long as 45k of it's in a more secure situation.
reverend_gonzo
I put 50k into Patch of Land, 5k into 10 loans. If everything works out, I'll make about 5k. However, one loan never made a payment and is going to court, and one other is in default.

Once my money is paid back, or whatever, I will not put any money into them again, or for that matter, any other realty fund either.

Like baccredited said about RealtyShares, there is a big problem of total lack of transparency. Another problem is that the majority of loans get extended. So, in my case, where I put in 50k, thinking the loan matures in 12 months, so I should get it back then. Well, after those 12 months pass, suddenly the loan was extended for another 12 months.

Furthermore, I actually talked to them about borrowing money for property I wanted to buy. The interest rates they wanted were ridiculous and I'm not really sure how anyone can make a profit borrowing through them.

If I wanted to put it into real estate, and couldn't buy my own, I would put money into the Vanguard REIT funds, because, while there are issues there too, at least your money is liquid, and it's Vanguard. (or Fidelity or Schwab would be fine too).

Lastly, the real place to put funds is into balanced index funds. That's where most of my savings are anyways. This was a trial that I personally wasn't very happy with.

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baccredited
Hi - heard your boss on Meb's podcast. It was a good show! Any plans to allow an investor to hit a bucket of, say, 10 or more properties at once? At present I am not able to buy enough different houses on your platform to hit an acceptable amount of diversification.
Mc_Big_G
I'm not sure what you mean exactly by "hit a bucket of 10 properties". We sell portfolios of properties and you can buy any number of properties all at the same time on the site. Our fees are WAY lower than buying through a traditional realtor. Can you elaborate on what investment structure you're thinking about?
baccredited
I'd love to invest $10,000 and have $500 automatically invested in a bucket of 20 properties all at one time. Doesn't seem possible today but if you offered, I would invest today.
Mc_Big_G
We explored funds like this in the past and discontinued them for now. The other real estate startups in this thread match what you're looking for closer than Roofstock.
astura
So you're just a marketplace to buy properties, correct? So after I buy the property I'm pretty much on my own?
Mc_Big_G
We're launching a separate app to help you manage your properties. Also, we have partnerships with property managers so you can get a good deal on management if you need it. We're highly involved through the closing process. What services would you be interested in after the sale?
Mc_Big_G
I talked to one of our customer service reps and they echoed what I said. "We have certified property managers in each market that will be there to manage the property and tenant post closing. But if there are any issues outside of that they can also reach out to Roofstock support for assistance."
astura
Yeah, I understand that, but property managers can really only do so much, right? They can take care of handling tenant inquiries, handling some repairs, probably collect rent.

But they can't handle stuff like evictions and lawsuits, right?

The other question I have about property managers is do they usually handle routine stuff? Stuff like landscaping, making sure snow is removed each time it snowed, scheduling chimney cleaning, boiler servicing, gutter cleaning? What about routine deck maintenance? Fence maintenance? Making sure the window trim paint isn't peeling? How involved would an investor have to be to keep up with that sort of routine stuff that the tenant doesn't necessarily tell you to do? I mean, tenants might not even know some of that sort of stuff needs to be taken care of. Is your tenant going to let you know your driveway needs to be sealed?

What happens if you need a major repair, say, like new siding? Do you find contractors, get quotes, etc.

Mc_Big_G
Most if not all of these services are provided by property management companies. When you view a property on Roofstock, you can see the PMs that we have partnerships with and you can then go to their site and see what services they provide. Here's an example of one of our partner's services: http://pragerpm.com/management/property-management/ With that said, I don't think you'll find any realtor or company that will sell you a house for a 0.5% fee and will then handle every issue you have with that house. What you want is a high service level property management company. We try to provide good ones at a discounted rate.
drsnyder
Most (all?) of these companies have not been through a complete credit cycle since they were founded after 2008. I would be cautious about putting money into them that you cannot afford to lose.

Only after they go through a full credit cycle from boom to bust will you know how well they have managed risk and leverage. If they are transparent enough for you to be able to do the due diligence on their assets and leverage (and you have the expertise) you should probably wait and see how they do during the next recession.

I would also suggest you ask the question why would you would invest in them as opposed to using more traditional REIT or investing in real estate yourself if you are so inclined. Is it because you are expecting a greater long term return and you think they might be able to provide it? Again, I would wait and see how they do in the next recession (or credit crisis) to get more realistic view of their long term return profile.

stevenmays
Why not just buy a reit and be done with it?
baccredited
Better returns. VGSIX is yielding 3.8% for example. At that level of return I'm better off paying off my mortgage.
mars4rp
because US government at pays 1/3 of your interest cost back to you! so in reality you only get 2.5% !
feifan
I discovered Fundrise last year and started investing a small amount. Currently have a bit over $7k invested in Fundrise, ramping up with roughly $1k per quarter since early 2016. Earnings to date a bit over $500 without reinvestment. I've been happy with the performance so far, and like the direct-investment model. That being said, I haven't invested more because of the liquidity lockup and, as others have said, these investments haven't gone through a down-cycle yet.

Agree with @baccredited re LendingClub — returns have shriveled to nothing for me; I've also been draining funds from them. FWIW got lucky this year with great YTD returns on emerging markets and international mutual funds.

anorborg
Regardless of the platform, if you are considering direct real estate investment (versus a REIT), the most important thing you can do is educate yourself. Direct real estate investing can get very complicated very quickly: You have to potentially evaluate the sponsor/real estate company, the surrounding market, the assumptions being made that lead to the target returns, etc. Unfortunately, most "educational" material you find is really focused on the idea of "getting rich quick" versus real education. I'll shamelessly plug our podcast (https://www.realcrowd.com/blog/tags/podcast/). While we are a direct marketplace, we strive to make our educational material, including our podcast unbiased education and not a commercial for our platform. We have received a lot of great feedback.