Investments

How Does Rich Uncles Work

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 17 minute read

Many people are looking for ways to diversify their portfolios away from the ups and downs of the stock market, and they are finding that alternatives to bonds and other fixed-income investments are becoming attractive.

If you’re looking for an alternative to bonds, real estate has a lot going for it. It can be a fantastic way to earn passive income without having to sell any underlying assets. Rent increases are a natural protection against inflation. 

The stock market is volatile, but real estate markets tend to move on their own, mitigating portfolio risk. You are still backing your money with something tangible in the form of land.

Today’s investors can choose from a dizzying array of indirect real estate investment opportunities that eliminate the need to secure financing, deal with difficult tenants, or take physical possession of the property. 

Traditionally, if an investor wanted to add real estate to their portfolio as a means of diversification, their only options were publicly traded real estate investment trusts (REITs) or mortgage REITs. 

Beginning in the middle of the last decade, however, real estate crowdfunding businesses introduced a novel approach to real estate investment.

What Is the Process of Real Estate Crowdfunding?

Crowdfunding for real estate essentially provides two unique investment options equity in the already-owned property and debt secured against real estate. The former model involves the crowdfunding company raising money to invest in real estate, whereas the latter model features traditional real estate investors. The second option requires additional lending by the crowdfunding company.

There is no intrinsic quality that makes one superior to the other or makes one safer or riskier. Debt crowdfunding is characterized by more frequent and larger distributions of capital, while equity crowdfunding is more commonly associated with investments with a longer time horizon.

This brings up an important issue with the methods used by crowdfunding businesses to distribute profits. Returns on crowdsourcing investments may come in the form of distributions or dividends paid at regular intervals often monthly or quarterly or via the sale of shares.

Conversely, if you choose to finance individual loans, you may get repayment when those loans mature. Some crowdfunding platforms allow investors to choose specific property loans, such as those used for quick home improvements. You will get your principal and interest returned once the borrower has completed the house flip.

Acceptance of Unaccredited Investors

Some crowdfunding platforms do not allow contributions from non-accredited investors. If you have to ask, you probably aren’t an accredited investor. Individuals who qualify as accredited investors have met certain minimum wealth requirements.

Accredited investors are required to have a minimum net worth of $1 million, not counting their primary residence’s equity. As an alternative, you may qualify if you have earned at least $200,000 as a single filer or $300,000 as a married couple filing jointly over the past two years and have a good chance of repeating those amounts this year.

Justify your distinction. Many private equity investments lose value due to the Securities and Exchange Commission’s (SEC) strict protections for retail investors in publicly traded companies. Many businesses that provide them don’t make them widely available to customers in order to maintain a minimal overhead and maximize profits.

Instead, they target affluent individuals who can afford to abandon common investor safeguards in favor of more lax private investments. Your options are limited if you are a middle-class investor. The SEC’s position is that middle-class investors cannot be allowed to forego safeguards because they require protection from making costly mistakes.

Best Investments in Crowdfunding for Unaccredited Investors

The SEC does provide crowdfunding businesses with a compromise alternative, one that is regulated less heavily than publicly traded REITs but more so than private investments restricted to approved investors. 

That means there are platforms out there that go the extra mile to ensure that anyone, not just the wealthy, can invest through their platform.

Even if you don’t meet the requirements to be considered an accredited investor, you can still take part in many of the top real estate crowdfunding platforms out there right now. A lot of them require only a small sum to get started.

Fundrise

Fundrise, which launched in 2010, is the longest-running and most well-known modern real estate crowdfunding website. It has facilitated contributions totaling over $4.9 billion.

  • Minimum Investment: $500
  • Investment Type: Equity and debt
  • Payout Type: Quarterly dividends and share appreciation

Several investment strategies are available on Fundrise. Its basic plan lets you invest as little as $500 across numerous real estate and lending opportunities. With a minimum investment of $1,000, you get access to its more sophisticated plans, such as a guaranteed income-for-life option, a balanced portfolio plan, and a long-term growth option.

Dividend income is highest in the supplemental income plan, but overall returns are lowest. It has historically returned 5.6% to 6.9% annually from dividends and growth combined, for an annual return of 8.7% to 10.3%. The fund is made up of 65% real estate-secured debt and 35% real estate equity, with the equity being distributed across 28 projects.

Dividends in the range of 2.5% to 2.8% and average appreciation growth of 6.2% to 7.5% add up to a total return of 8.8% to 10.3% for the balanced portfolio plan. There are now 40 projects under construction, with 54% loan and 46% property equity.

53% of the total equity in the expansion strategy is invested in real estate. Due to this, it has a lower dividend yield (1.5–1.7%) but higher total returns (7.6–8.5%) from the past stock price increases.

Two alternatives are available to investors for realizing that gain in value. To begin, they have the option of waiting for Fundrise to sell individual properties and distribute the earnings. 

Second, Fundrise permits quarterly sales of shares, however, there is a fee for investors who have held their shares for less than five years. Investors who cash out before the three-year mark are subject to a 3% penalty, after the initial 90-day money-back guarantee period. 

If an investor sells after three to four years, they will be subject to a two percent penalty, while those who sell after four to five years will be subject to a one percent penalty.

Fundrise is a platform that may be invested in for the long haul. Investors can earn high returns, but they should not count on being able to cash out quickly.

Last but not least, Fundrise’s straightforward pricing is an attractive feature. There is a 1% administration fee, but no other costs. For a field with a reputation for being murky and unreliable, that’s a welcome change.

RealtyMogul

RealtyMogul was founded in 2013, making it an “old” company in the crowdfunding space.

  • Minimum Investment: $5,000
  • Investment Type: Equity and debt, or equity alone
  • Payout Type: Monthly or quarterly dividends and share appreciation

Compared to other firms that accept non-accredited investors, the minimum investment amount is large. However, it provides these investors with a choice between two investment opportunities.

Its MogulREIT I is an income-focused investment vehicle with a 7.7 percent average annual distribution. It has a total asset value of $272 million, which is distributed among 15 investments and distributes that money monthly in the form of dividends (a blend of equity and debt). In addition, stock prices tend to climb with time.

MogulREIT II, another product from RealtyMogul, is a growth-focused alternative. Dividends are distributed every three months rather than monthly, and the yearly rate is 4.5 percent. 

Rising share prices and substantial payouts from RealtyMogul’s property sales contribute to a positive return on investment. This portfolio is smaller than most, with only seven investments totaling $128 million, but it is 100% equity and has no debt.

RealtyMogul’s REIT shares, like Fundrise’s, are long-term investments with limited liquidity. In the first year of ownership, investors are prohibited from selling at all, and only after paying a 2% penalty in the second year of ownership are they allowed to sell. 

After three years, you’ll be able to sell at market price (less a 1% penalty assessed by RealtyMogul in year 3).

The fees for RealtyMogul’s property management services are 1.25 percent per year and two percent of the sale price of any property managed by the company. 

In addition, it levies a very nebulous fee of up to 3% for “Organization, Offering and Other Operating Expenditures including, but not limited to, actually incurred third party legal, accounting, and marketing expenses.”

Private placements in individual properties, which may yield larger profits, are an alternative investment option on RealtyMogul for accredited investors.

GroundFloor

GroundFloor is another firm that has been around since 2013, and it has a lot going for it, starting with the fact that the bare minimum to start investing is simply $10.

  • Minimum Investment: $10
  • Investment Type: Debt
  • Payout Type: Monthly or end-of-loan interest and repayment

GroundFloor allows you to select individual property loans, which is not the case with many crowdfunding sites. Functioning as a financial institution, it partners with property flippers in need of quick financing for acquisition and renovation. Each loan on GroundFloor is given a risk score and priced accordingly.

Loan interest rates range from 6% to 15%, with higher-risk loans paying higher rates. You can invest as much as you desire in each loan, based on your comfort level with that lender.

Loans from GroundFloor are always short-term, with terms of one year or less. Most borrowers will pay off their loan in full when they sell or refinance the home after the renovations are finished, while a small percentage will choose to make monthly payments (which you will receive). 

For example, if you lend $1,000 at 9% interest, and the borrower pays you back $1,090, you will have made a total of $1,090. (typically in six to 12 months).

As a result, while investment in GroundFloor is not liquid, it is a considerably shorter-term commitment than many crowdfunding REITs.

Currently, I have funds invested with GroundFloor. Most loans are paid back on schedule and in full, and even when they aren’t, GroundFloor is able to recoup most of the money for its investors.

Since these loans are collateralized by real estate, GroundFloor pays close attention to the loan-to-value levels.

Diversyfund

As a startup that only began operations in 2016, Diversyfund is focused solely on growth.

  • Minimum Investment: $500
  • Investment Type: Equity
  • Payout Type: Upon the sale of the properties (five-plus-year time horizon)

The crowdfunding firm does not use any loan capital and makes direct property purchases through its private REIT. All profits are reinvested in the company’s portfolio of rental properties rather than distributed as dividends. 

When compared to publicly traded REITs, which are required by law to distribute at least 90% of their income to investors in the form of dividends, the former model is clearly superior. For that reason, development is really difficult for them.

Diversyfund’s long-term, growth-focused investments are the pinnacle of illiquidity. There should be a minimum investment horizon of five years. Investors’ confidence is rewarded with superior returns. Since its debut, Diversyfund has gained 18%, and future return projections sit between 15% and 21% per year.

Among the more accessible platforms for non-accredited investors, it allows participation with as little as $500. Don’t invest the money you’ll need soon, as investors get paid back only when a property in Diversyfund’s portfolio is sold.

To find out more, see our analysis of Diversyfund.

Streitwise

Streitwise has created a name for itself in a short amount of time since it debuted in 2017 because of its reliable income.

  • Minimum Investment: $1,000
  • Investment Type: Equity
  • Payout Type: Quarterly dividend plus the appreciation of shares

Streitwise has distributed quarterly dividends at a rate of 10% per year. And if that weren’t enough to entice you, there’s also the possibility of making money through share appreciation.

Its sole fund, 1st Streit Office, invests in commercial real estate as the name implies. In particular, non-gateway markets are targeted by Streetwise for its office and mixed-use projects. That means less important cities that aren’t gateways into the United States. 

Some of the greatest places in the United States to invest in real estate may be found in these types of markets, which often provide the real estate with lower costs and higher returns.

This fund makes solely equity investments in real estate, rather than holding any debt. In this sense, it is yet another investment with a long return. Shareholders are subject to a 10% penalty in the second year, 5% in the third, 2% in the fourth, and 0% in the fifth year if they sell their shares early. 

Investors can cash out their shares at market value after five years. Reiterating don’t put anything away that you might need in the next five years! Streetwise’s prices may seem exorbitant at first glance. Streitwise charges a 3% acquisition fee in addition to a 2% monthly administration cost.

Rich Uncles

Rich Uncles stands out from the competition not just because its name is the most creative in the business but also because it requires such a small initial commitment to begin benefiting from its StudentREIT.

  • Minimum Investment: $5
  • Investment Type: Equity
  • Payout Type: Quarterly dividend plus the appreciation of shares

The fund invests in, you guessed it, student housing. More precisely, it targets properties with at least 150 bedrooms and an occupancy rate of 90% or above.

Besides the International REIT, Rich Uncles also provides access to a second commercial real estate investment vehicle, the National REIT. Investments are made in commercial, retail, and industrial properties with a greater minimum investment of $500.

Rich Uncles, like many of the other private REITs here, will charge you a graduating fee if you cash out before the REIT’s scheduled maturity date. When compared to its rivals, however, Rich Uncles does not impose any fees on the selling of shares during the first three years of ownership. 

A 3% fee is charged to investors who sell their shares in the first year, a 2% fee in the second year, and a 1% fee in the third year. The management fees in Rich Uncles are also different from what you’d find elsewhere. 

Investors receive 6.5% annually, while the company retains 40% of all profits over this amount. In addition to being a breath of fresh air, this level of openness helps the company continue to have its interests closely parallel to those of its shareholders.

Accredited Investors’ Best Crowdfunding Investments

Accredited investors make up less than 10% of U.S. households. The regulatory barrier to open crowdsourcing investments to everyone is substantially higher, and thus the bulk of real estate crowdfunding companies currently only allow accredited investors to participate.

There are other crowdfunding investments available to the underrepresented minority that may offer higher returns due to their greater adaptability.

EquityMultiple

When it comes to real estate investing, EquityMultiple’s online platform has a lot going for it. Mission Capital, a seasoned real estate equity and debt investment business, is supporting it. Mission Capital was established in 2002, and its members have decades of expertise between them.

  • Minimum Investment: $10,000
  • Investment Type: Equity or debt
  • Payout Type: Varies, with options for both ongoing income and profit payout upon sale

Accredited investors can choose from three investment options, with a minimum investment of $10,000 required for each.

  • Equity. Purchasing a piece of commercial real estate is an outright financial commitment. By investing in a huge real estate deal structured as syndication, you can have access to a piece of the property’s equity with minimal effort on your part. Although your earnings potential as an owner is theoretically infinite, it will really be tied directly to the company’s profitability. You will receive payment after all other creditors and preferred shareholders have been satisfied. Two to five years is a common length of ownership.
  • A form of equity with preferential treatment. Priority is given to preferred equity holders when disbursing funds to shareholders. However, the increased safety comes at the expense of future earnings. They receive a regular payment every month or quarter, as well as a share of any gains above a predetermined threshold upon selling. The average time spent in possession is between one and three years.
  • Debt that has been syndicated. You provide financing for a particular construction endeavor. No ownership or appreciation is possible, but interest payments are made on a monthly basis provided the borrower keeps their end of the bargain. Loan terms from EquityMultiple typically range from six to twenty-four months, and the company aims to charge interest rates between seven and twelve percent.

Investors in the company’s equity pay a 1% yearly asset management charge, on top of the 10% of sale proceeds that are retained by EquityMultiple. You should do your homework before investing in either preferred equity or syndicated debt because the structure of these arrangements varies widely.

Sharestates

Sharestates, a crowdfunding platform focused on real estate, primarily helps developers get loans. It carefully screens deals, funds them with its own resources, and then returns that money to investors like you.

  • Minimum Investment: $5,000
  • Investment Type: Debt
  • Payout Type: Monthly income

Your rewards will be based on the riskiness of the loans you choose to fund. Like GroundFloor, it helps you find a place to live, but its projects are often much bigger and include a greater number of institutional and commercial structures.

As of this writing, Sharestates has funded a total of $2.37 billion, earning investors an average return of 10.19 percent. There hasn’t been a single investor who lost their initial investment, as stated by the company’s assertion of a loss rate of zero percent.

The entry point is not small, at $5,000 for U.S. citizens and $10,000 for international investors, but it is comparable to many crowdfunding sites that handle accredited investors.
Sharestates provides investors with the opportunity to liquidate their loan shares before the end of the loan period, albeit doing so may incur a penalty. 

For the first 90 days, investors can expect a return of 94%, the second 95%, and the third 96%. In any case, this makes Sharestates a more adaptable crowdfunding investment option than many others.

RealCrowd

RealCrowd, which was founded in 2013, is a real estate crowdfunding platform with a novel business concept.

  • Minimum Investment: $5,000
  • Investment Type: Equity
  • Payout Type: Varies

While most crowdfunding platforms charge investors some sort of fee, RealCrowd takes a different approach by waiving those fees entirely. Period.

Instead, it is a marketplace that brings together commercial real estate sponsors and accredited investors. There is a cost for the contract to be advertised on RealCrowd, which is paid by the syndicator who put the arrangement up.

Unfortunately, this implies that RealCrowd is beholden to the syndicator, whose fees fund the platform. While it does perform some limited due diligence on potential syndicators, it does not actively participate in the transactions themselves, leaving you with full responsibility for doing so on your own.

Your investment in a share of the equity in a property entitles you to participate in any appreciation in the value of the property and, in some cases, periodic dividends. Most syndication agreements require a minimum commitment of three to five years.

The platform provides few safeguards, but it does allow you to peruse a vast selection of real estate syndications. Commercial property investors with experience reviewing syndication deals will have the most success with this strategy.

AcreTrader

AcreTrader is an alternative investment platform that gives you the chance to put your money into operational farms.

  • Minimum Investment: Varies, typically $5,000 to $15,000
  • Investment Type: Equity
  • Payout Type: Both ongoing dividends and profits upon sale

AcreTrader exclusively acquires farms from separate corporations. Everything related to the farms is managed by it. If you invest in corporations that own farms, you can collect dividends every year. 

Although the shares are intended as long-term investments in real estate and do have a terminal date at which the farm is expected to be sold and investors paid out, they can be traded through online marketplaces nonetheless.

AcreTrader gives you an estimate of annual yield in addition to the estimated value increase of individual farm projects as you browse them. It also includes the purchase price, principal crops, location, and financials of the farm. A risk assessment is used to assign a score to each investment property.

AcreTrader has a few quirks when it comes to stocks. Each share is equivalent to 0.1 acres of land under the acreage-based division system. Therefore, the required minimum investment varies from property to property.

AlphaFlow

AlphaFlow, a real estate investment management firm, uses a novel form of crowdfunding to finance property purchases. Investments are selected on your behalf rather than you doing it manually by selecting properties against which to lend. This is done taking into account your age, financial goals, and comfort level with risk.

You may think of it as a Robo-advisor for real estate loans, although one with a financial stake in the loans it finances.

  • Minimum Investment: $10,000
  • Investment Type: Debt
  • Payout Type: Monthly interest

AlphaFlow finances local hard-money lenders around the United States who make loans secured by single-family houses and apartment buildings. These loans are for house flippers and are intended for the brief period of time (often six months to a year) that it takes to complete the purchase and renovations. 

The loans you fund contain your investment capital. The fact that AlphaFlow is open and easy to understand is a huge plus. Loans that are 60, 90, or 120 days past due can be seen in a pie chart at any one time. 

As of now, out of a total of 978 loans made in 42 states, 803 have been redeemed and closed, leaving 175 loans outstanding. Their average rate is 8.19 percent, and only 1.18 percent of their loans have gone into default.

LendingHome

To those who invest in residential real estate with the intention of selling it quickly, the company provides a hard-money loan service. LendingHome uses its own money to fund loans and then solicits outside investors like yourself for more capital.

  • Minimum Investment: $50,000
  • Investment Type: Debt
  • Payout Type: Monthly interest

LendingHome’s high entry price of $50,000 is its biggest drawback. That’s a lot to keep in one location, even for authorized investors.

Nonetheless, financiers have numerous financing options to choose from. Loans are funded on an individual basis, similar to GroundFloor. LendingHome, like GroundFloor, assigns risk ratings and interest rates to every loan. It stands to reason that the interest rate on a high-risk loan would be much higher.

Hard-money loans have a very short repayment period, typically between nine and twelve months, but can go as high as twenty-four. Long-term rental property mortgages, which offer more consistent interest payments, have recently been made available by LendingHome.

CrowdStreet

CrowdStreet, having launched in 2014, is one of the longer-running crowdfunding platforms now active online.

  • Minimum Investment: $10,000
  • Investment Type: Equity
  • Payout Type: Profit from appreciation

There are three different ways to put money into it. One is to put money into a fund that already owns 30–50 buildings. It has the lowest initial commitment requirement ($10,000) of the three investment choices. 

The investment horizon for CrowdStreet’s fund is five to ten years, which is comparable to the duration of many crowdfunding investments. The fund promises a whopping 16% return on investment.

Investors have another option in the form of the CrowdStreet Marketplace, where they can join specific real estate syndications. It functions in a manner analogous to that of RealCrowd, in which syndicators post details of their transactions in exchange for investors’ participation as equal partners. 

Each syndication has its own minimum investment requirements, however, it’s usually between $25,000 and $50,000.

Finally, CrowdStreet also provides a managed investment advisory service as its third alternative. Comparable to AlphaFlow in that it automatically selects profitable real estate deals for a minimum of $250,000 in the capital, this service is not without its own set of strict requirements. Expenses are different for each kind of investment.

Bottom Line

Compared to bonds, real estate investment returns are far higher, making it an attractive alternative retirement income option. Although real estate is less liquid and often more risky than bonds, it is much more stable than the stock market. The lack of volatility can be traced back to the high entry hurdles and the little liquidity the market has always had.

I put money into equities and real estate for the potential for long-term growth and passive income, respectively. To some extent, real estate can be used as a hedge against a sequence of returns risk because it can provide stable income and because real estate markets tend to move in ways that are uncorrelated with stock markets. 

The safe withdrawal rate is not an issue with real estate investments because you do not have to liquidate the underlying assets to produce income. You may relax and let the money keep coming in.

Despite the benefits, investing in property is not without its own dangers. If you’re just getting started in the real estate investment world, crowdfunding platforms are a great place to learn the ropes. I’ve put as little as $100 into a 9% interest loan on GroundFloor.

Due diligence is always in order, but crowdfunding makes adding real estate to your portfolio a breeze. First and foremost, you should never put the money you can’t afford to lose into the stock market.

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