Nonaccredited investor options: Part1: Fundrise eReit vs. RealtyMogul.com Reit vs. Rich Uncles
Non-accredited, every-day investors can now join the party for the 1st time. But which offering is worth the cover charge?
January 17, 2017 BY IAN IPPOLITO
(Usual disclaimer: I’m just an investor expressing my own personal opinion and not a financial advisor. Consult your own financial advisor before making any investment decisions).
(Note: non-accredited investor options have changed considerably in the months since this article was posted. For the latest information, see the new reviews of the top nonaccredited investor sites).
Welcome To The Party
For too long, real estate crowdfunding was limited mostly to the wealthiest, high net worth individuals (accredited investors making either $250,000 a year or having at least $1 million in net worth).
Thankfully, the SEC updated their rules in May 2015, which allowed every day investors (non-accredited investors) in every state to invest for the 1st time. Two national portals (Fundrise and RealtyMogul.com) have been quick to jump on the bandwagon and start offerings under the new rules. Additionally, Rich Uncles, has a non-accredited investor offering using SEC rule S – 11.
But all of the offerings are quite different, so it can be confusing to choose between them. I dug through all the details and will go through the major differences to help you pick the fund/funds that are best for you.
No Soup For You?
Before diving in, I need to mention something important to my accredited investor readers. If that's you, then in my opinion these investments are not your best choice. That's because you have access to better alternatives already.
First all 3 of these have extremely low skin in the game (less than 0.4% of their own money in the fund versus 10%+ more typically). This misalignment with investors can lead to overly aggressive risk-taking and/or other problems.
Also, these investments have high off-the-top fees that you normally don’t have to pay. Rich Uncles currently has a 3% off-the-top for organizational expenses and marketing. Fundrise and RealtyMogul.com have organization fees that range from 2 to 3%. Additionally all of them may charge you an additional fee to get your money back at the end. (It depends on how long you hold it for).
On the other hand, if you're a non-accredited investor, it's a different story. You're probably just happy to finally have any options for building a real estate portfolio. If so, the above are probably not deal killers to you, and these investments are legitimate options for you. So if that’s your case, then let's jump right in.
1) Investment Strategy Risk
The biggest issue on every real estate investor’s mind in 2017 is “when is the next downturn coming?” It’s not a matter of if, but when. Most economists and industry observers believe that the real estate cycle is probably in the last innings of the game. When a downturn hits, riskier investment strategies will take the heaviest losses, while most conservative ones will be steadier.
Rich Uncles has the most conservative investment strategy. They invest in triple net lease (NNN) properties. These are long-term leases (averaging 12 years) to credit or credit worthy tenants. Some of them even have corporate guarantees in the unlikely situation the tenant goes out of business. Well-chosen NNN investments are so conservative, that many real estate investment advisors consider them to be closer to a safer bond investment than riskier real estate. Currently Rich Uncles is averaging a 7% return.
RealtyMogul.com and Fundrise portfolios are made up of more traditional real estate investments, so they involve more risk. Both purchase commercial real estate mortgage debt and related instruments. RealtyMogul.com’s PPM has a theoretical edge over Fundrise’s PPM because they limit themselves from investing in riskier ground up development space and hospitality.
RealtyMogul.com is currently averaging 8% return. Fundrise is currently averaging between 8 to 8.25% (West Coast eREIT – approx. 8% annualized, East Coast eREIT – approx. 8.25% annualized, Heartland eREIT – approx. 8.25% annualized)
Eventually you'll need to get your money out. When you do, all of them have a vesting schedule so that the fee gets lower the longer you hold your money with them (until it eventually disappears).
Rich Uncles has the fastest vesting schedule of 3 years. Fundrise and RealtyMogul.com are almost twice as slow and take 5 years to fully vest.
Fundrise’s withdrawal fee falls much faster than RealtyMogul.com, which makes them the 2nd and 3rd best in this category (respectively).
Also, only Fundrise give you a 3 month trial during which you can withdraw your money with no fee.
3% up to one year.
2% from one year to 2 years.
1% from 2 years to 3 years.
0% after 3 years.
0-90 days: 0%
3% from 90 days until 3 years
2% from 3 years to 4 years
1% from 4 years to 5 years
0% at 5 years onwards.
no withdrawals for 1st 6 months.
5% from 6 months to 2 years.
4% from 2 years to 3 years.
3% at 3 years to 4 years.
1% at 4 years to 5 years.
0% at 5 years onwards.
Limits and target slight an investor evaluate whether a fund meets their needs or not.. All 3 sites offer targets on leverage. Fundrise loses points in its PPM for not limiting its investments from high risk areas (versus the other sites which do).
Leverage: 50% limit
Investments: limited to NNN investments. 50% investment grade NNN. 50% below investment grade (using an internal credit score)
Specifies both targets for leverage and limits on high-risk investments.
Leverage is limited to 70% maximum on any one investment in a target limit of 25% overall. Leverage is only used on senior debt.
They target 55% of the portfolio for commercial mortgage related instruments. And additionally they specify that they will not invest in land, ground up development and hospitality, which are higher risk investments.
Fundrise has 3 open funds currently (out of 5 total). Their targeted portfolio wide leverage is 50-85% (of the greater of cost--before deducting depreciation or other non cash reserves-- or fair market value). The target only applies after they have acquired a substantial portfolio.
In part 2 of this article, we look at additional features and draw final conclusions.
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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 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.