1031 Crowdfunding: Comprehensive
Review and Ranking
#4 (out of 100+) Last year ranking: #10
#1 due-diligence documentation, A top site for core plus investments. #1 for 1031 exchange investments. #2 Shooting Star 2018 award (rising from #10 to #4).
What is 1031 Crowdfunding?
IMPORTANT COVID-19 UPDATE: this info was posted before anyone knew we would be facing a global pandemic in the spring of 2020. So it may be missing crucial information necessary to making an effective investment today. Some of the information in it may be dated, no longer accurate and/or irrelevant. For information on analyzing investments in this new era, see: "How will Covid-19 / Coronavirus Affect my Alternative Investment Portfolio?"
1031 Crowdfunding, specializes in commercial real estate (CRE) equity investments which qualify for 1031 exchanges. These exchanges are for people who own existing real estate, and want to sell them without being taxed. It offers single property investments and multi-property funds. The volume is excellent and almost tripled in size since last year. (More on these in the "pros and cons" section).
How Does 1031 Crowdfunding Work?
1031 crowdfunding sources deals from third party sponsors, and then posts them on its site. So it doesn't originate its own deals and is more like a crowdfunding Craigslist. They make their money by taking 5 to 7% fee, which is typical for this type of tax-deferred investing (but will seem un-competitive for the typical non tax-deferred investor used to paying no or very little fee).
The majority of the deals are in a Delaware Statutory Trust (DST) which is one of the legal structures that allows deferring of taxes after the sale of real estate property. (For more on DST's and tax-deferred alternatives, see this article on tax-deferred investing).
Many of the deals have an attorney legal opinion on the legality of the 1031 exchange, which is a very nice feature for reassuring the investor that everything is kosher.
What Are the1031 Crowdfunding Pros and Cons?
This platform really exploded in size since our last review. (They went from under 8 investments to 23 during the sampling period). Their huge size alone makes them a must-visit site for DST investors.
They are designed for conservative "buy and hold" investors wanting to produce income over long time frames (such as 7-10 years or more). These are very difficult to find on many other sites. Investments based on income (core strategies) are generally safer and less risky than investments hoping for price appreciation.,
Due diligence documentation is generally excellent and usually far superior to any other equity crowdfunding site in the industry. For example, the sample project discussed below contains an audit report of the company, financial forecast and pro forma including all major assumptions, audited track record of the sponsor, and an attorney legal opinion on the legality of the 1031 exchange. These are all things that an investor usually has to pull teeth to slowly obtain on virtually every other site.
On the downside: they are not cheap. Like virtually all DST-based 1031 exchange investments, there are lots of upfront and hidden fees. (Some of these are necessitated by the structure of DSTs, which is discussed in the below section: "Is 1031 Crowdfunding Legal?").
Despite these, a DST deal may still make sense for some tax-deferred investors. If you do invest, I believe it's very important that you understand all of the fees, and make sure that the tax savings will compensate for them. Non tax-deferred investors will probably prefer a much cheaper core/core plus alternative.
The minimums are also very high at $25,000 - $100,00 (versus $5000 average). The site claims that the average 1031 exchange they do is $600,000, because people are cashing out after a lifetime of wealth accumulation. If this is your case, then the minimums will be fine.
For more raw data on the site (including investor and sponsor fees, legal structure etc.), or to easily compare it with the data of competitors, see the feature by feature comparison matrix.
1031 Crowdfunding Quick Pro and Con Summary
Advantages: Has core and core plus investments, tax advantages for existing landlords looking for a 1031 exchange, low volatility/high safety income producing investments for buy-and-hold investor (7-10 years), growing in volume substantially. Due diligence documentation is excellent.
Disadvantages: Up front fees are very high (5 - 9%+) versus 1% average, and embedded fees are very high as well compared to non-1031 investments. $25,000-$100,000 minimum is very high (versus $5000 average)
Accolades: #1 due-diligence documentation. A top site for core plus investments. #1 for 1031 exchange investments. #2 Shooting Star 2018 award (rising from #10 to #4).
Is investing in 1031 Crowdfunding Legal?
1031 Crowdfunding markets to investors under 506C and 506b, meaning that it's only available to accredited investors.
On 506B,deals, new investors cannot view investments immediately until the site verifies their financial status and sophistication, to comply with 506B rules.
506c deals are visible immediately but require investors to prove their accredited status to invest (and update it periodically to look at new deals).
The IRS has approved the use of many Delaware Statutory Trusts (DST's) for tax-deferred real estate investing. (For more on tax free investing see this guide). And as mentioned above many of the deals here have a legal opinion from attorney attesting to their proper set up.
One of the limitations of DSTs are that they cannot call additional capital if the investment needs it to stay afloat in the future. More money might be necessary if there is an unexpected problem or a severe downturn, and might be necessary to keep the investment from going bust. So typically DST's will also deduct money from the investor to hold in a reserve to give the fund more wiggle room. Generally, the investor gets this money back at the end if it's not used.
In case this isn't enough, some DSTs will have a "springing LLC" that allows the management to convert it to a normal/non-DST if some emergency requires it. If triggered, the investor will lose the benefits of the DST and will be subject to taxes on exit, but presumably it's better than losing all the money, or taking a huge hit.
Another limitation of DSTs is that the sponsor is prohibited from refinancing. So the interest rate and terms you get today is what you're going to be stuck with for the lifetime of the investment. Right now we have historically low rates, so the chances of getting a better interest rate in the future is probably pretty low. So today, this may not be a worry for many investors. But if rates go up as some expect, then maybe it will become a little bit more of a concern for investors entering deals in the next couple of years.
There are several structural things about every DST that will cause the fees to be higher than a non-DST deal.
First, the legal fees of creating one are higher. Each DST has to create five or more entities, and can cost about $150,000. In contrast, a non-DST may cost about $35,000. So the sponsor will typically pass this on to the investor.
Also, the rules prevent the sponsor from participating in the upside of the deal (via a split or waterfall which is standard on typical deals). So this is why virtually every DST is very heavy on front-end fees.
Also, the 1031 exchange rules say the exchanged property must be identified in 45 days, and closed-on within 180 days total. If the DST doesn't, all the investors will suddenly have to pay the taxes they were trying to defer. So to avoid this problem, a good DST will purchase the property in advance (usually using a bridge loan that at today's rate is about 9%+ interest rate). So the sponsor usually charges a fee for this (which may or may not be the case on a non-DST deal, depending on if the sponsor has already seeded the property or not).
What does a 1031 Crowdfunding deal look like?
Here is my step-by-step due-diligence on a random 1031 Crowdfunding investment. So it may or may not be a typical investment. Also I'm a very conservative investor, so something that's way too risky for me might be the perfect fit for someone else who is more aggressive. Finally, I'm not a financial advisor, attorney or accountant. So this is just my personal opinion and always consult your own financial professionals before making any financial decisions.
This investment is to invest in an existing Class A apartment called Montecito Pointe located in Las Vegas, Nevada. There appears to be some value-added improvement of the property planned, but the details are vague. The projected hold period is 8 to 10 years. The minimum investment is $100,000 and the projected yield is 4.5%.
The first step is to make sure that the asset class and strategy even make sense for my portfolio. (If you don't know how to do this, please see The Conservative Investor's Guide to Due Diligence). Let's say that it does and dive in.
Since I believe we are getting near the end of the cycle, I don't want to mess around with an inexperienced sponsor. In the mainstream asset class like multifamily, I limit myself to sponsors that have only full real estate cycle experience in the strategy (in this case value-added multifamily) and did not lose money in the last downturn.
According to the pitch, "Over the past 38 years, RK Properties has syndicated 156 properties and had 139 properties go full cycle, a track record of success that simply does not exist with any other firms." "Full cycle" probably means just full deal cycle rather than full real estate cycle, so is not that helpful. But 38 years would indicate experience over multiple real estate cycles, and that might be in value-added multifamily. If I were interested in this deal, I would ask and find out. If they do indeed have that experience then to me that would be a big plus.
At this late stage of the cycle, I only want conservative leverage and no more than 65% LTV (loan-to-value). This deal is 46.72% which is extremely conservative and a huge plus in my opinion.
I personally feel that medium-term debt of 3 to 5 years has too much refinancing risk, if we have a severe downturn. So I like to see debt that is a minimum of 7+ years. The debt on this deal is 10 years, which is excellent in my opinion. Additionally it is interest only, which tend to be more difficult to qualify for. This increases the yield as well, although at the expense of not paying off as much principal at the end (so perhaps not making as much on the sale and a bit of a wash).
Skin in the game:
A conservative investor wants to see this to offset the fact that the compensation structure incentivizes the sponsor to take extra risk. Unfortunately, I couldn't find this easily in the deal, so if I were interested in this deal I would find out more. The average is 5 to 10% and if it were in this range then I would consider it to be a positive.
As mentioned above, there are a lot of fees. Some of them are quite reasonable or high such as:
3.5% acquisition fee (higher than 1 to 2% average).
3.5% disposition fee (about average).
1% financing fee (typical).
Property management 4% of gross rent (4-5% is average).
1% refinancing fee (average).
Others are fees will look very high and unreasonable to someone not used to looking at DST deals (but unfortunately are typical for this genre):
Selling commissions: $2.19 million (6% of equity).
Marketing expenses: $1.0 million organizational costs (3% of equity). However, buried in the footnote #8 on page 37 is that there are additional costs here that are not being taken into account that total 9%.
Organizational costs: $457,500 or 1.5% of equity.
Total is: 16.5% of equity.
So how does this compare to a typical non-DST structured deal on other crowdfunding sites? Those sites have higher yearly asset management fees, but don't have any upfront fees. On yearly fees this deal saves 6.75% over the lifetime of the fund (yearly fees are 0.75% lower, over 9 years...the average of the projected holding period). However, it also charges an extra 16.5% of upfront fees. The net result is 7.5% extra fees.for this deal.
Is this worth it on such a low yielding investment at 4.5%? It probably depends on how much the investors saving on taxes from the DST, versus biting the bullet by paying the taxes and putting it into a more typical deal with cheaper fees.
This is a typical Delaware statutory trust. Unlike TIC 1.0, it's not limited to 35 purchasers, and the borrowers do not have to take out a loan themselves. On the other hand, the managers are prevented from making certain decisions (such as calling for more capital if the investment needs it). If a severe recession hits, sometimes a capital call can be the only thing that prevents a deal from going bust. So this particular sponsor has set up a "Springing LLC", which the manager could invoke which would allow them to do a prohibited transaction (although losing the ability to do a 1031 exchange out of the investment).
This projects 4.6% rent growth in first year. Typical projections are 2 to 3% so this seems a high. However, there is a vague reference to a value-added project, so perhaps this can be justified. If I were interested in this deal I would dig further.
There seem to be many above average projections through the lifetime of this deal: 4.1% in year two. 3.5% in year three. 3.2% in year five. 3.2% in year 9. So again I would want to dig in further, and also compare with the historical averages of this area of Las Vegas to see if it's reasonable or not.
If I were interested in this deal, I would now go much deeper. I would check on the property, the market, do a recession stress test, do a background check on the principals, dig further into the pro forma, analyze the PPM, etc.. For information on how to do this, please see the guide to picking deals.
Where can I discuss other 1031 Crowdfunding deals?
You can do this with thousands of other investors in the private investor club. While the club is free, membership is restricted to investors who have no business connections to sponsors or platforms. Also, all members must agree to keep all club info confidential by signing a nondisclosure agreement. Click here to join or get more info.
Who are 1031 Crowdfunding Competitors?
Here are the reviews and rankings for other similar sites.
How do I invest in equity and/or debt?
Looking to learn more about real-estate investing?
How to pick? Check out our step-by-step guide.
Code of Ethics: To maintain objectivity, I do not accept any money from any sponsor or platform for anything (including affiliate ads, advertising etc.). See code of ethics for more.
Personal opinion only: All info is my personal opinion only as an investor. I am not a registered financial advisor, attorney or accountant. Always do your own due diligence and consult with your own licensed professionals before making any investment decision. Information is believed to be correct but may have errors, so use at your own risk. If you find an error, please let me know.
Rankings/rating are general: In my opinion, every investor comes from a different risk tolerance and financial situation, so there's no such thing as a single investment or platform that's great for everyone. There are many deals that aggressive investors love, which I won't touch, and vice versa. And every investor has their own way of doing due diligence. I believe there's no one right way to do it.
So, the site rankings/ratings are based on criteria which I feel are important to the broadest range of investors (transparency, volume, bankruptcy protection, etc). And even though I have my own personal, conservative, due diligence method (and talk about how the site's deals measure up in the "deep dive section"), I don't use my personal criteria as a factor in the rankings. So for example, a high ranking/rating doesn't mean that I would personally invest in a site (and vice versa). Click here to see what's in my own portfolio.
About Ian Ippolito
Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News, USA Today, Bloomberg News, Realtor.com, CoStar News, Curbed and more.
Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.
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This site has been ranked and reviewed as part of our in-depth, 100+ site industry review. All data is believed to be correct, but may have mistakes. Please contact us if you notice one. All non-data (including rankings, investor comment summaries, etc.) are my opinion only. I'm just an investor and not an attorney, accountant, or certified financial advisor. To maintain neutrality: I do not own a portion of any of the companies reviewed.