Nonaccredited investor options: part 2. Additional features and final conclusions
Comparing skin in the game, organizational expenses, etc. and drawing final conclusions
January 17, 2017 BY IAN IPPOLITO
(Usual disclaimer: I’m an investor expressing my personal opinion, and not a financial advisor. Consult your own financial advisor before making any investment decisions).
(Note: nonaccredited 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).
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?"
In part 1 of this article, we looked at risk, withdrawal fees and limits/targets. In part 2, we will compare skin in the game, minimum investment, organizational expenses, etc. Then we’ll draw final conclusions.
4) Skin in the game:
All 3 sites come up way too short here. Most sponsors of funds will invest 10%+ of their own money (and some even more). This way they will lose money if you do, and is a great way to align their interests with yours. All 3 sites invest significantly less, which raises questions about alignment.
Fundrise is the best and has invested $200,000 in the fund. (But still is only 0.4%). (Note: they have invested a total of $633,050 if you include the “distribution support” as an investment).
Rich Uncles has invested $200,000 in their own fund. This is currently around 0.1%. Further, this percentage will decrease significantly over time if they achieve their goal of raising $1 Billion.
RealtyMogul.com is currently the biggest laggard here. It has invested a shockingly low $2500 in their fund (0.05%).
In my opinion, all are far too low.
5) Minimum investment:
All 3 sites do a great job here. All are significantly lower than the minimums that the $5000- $500,000 minimums that accredited investors are used to seeing on other sites.
Rich Uncles: $500
6) Organizational expenses:
Fundrise has the advantage here and are a full percentage point lower than the other two. They limit their organizational expenses to $1 million. (On a fully funded $50 million fund, that's 2% fee taken off the top of your return).
RealtyMogul.com and Rich Uncle, charge one third more. RealtyMogul.com's prospectus allows it to charge investors up to $1.5.million. (That comes out to an expense of 3% if they fully fund $50 million).
Rich Uncle has a 3% marketing/organizational fee that is deducted when you make your initial investment. (However, they are authorized to raise up to $1 billion. If they are successful, management says they expect the percentage of this fee to begin dropping when they achieve an unspecified “tipping point".
7) Putting money to work right away:
RealtyMogul.com and Rich Uncles will take your investment at any time.
Previously, Fundrise only took money during fairly short and infrequent windows that occur after they acquired a new property. However, the launch of their 3 new REITs now allows them to take investments at any time. So all the sites are now the same on this issue.
8) Increased risk from investor dilution
Fundrise’s two initial funds suffered from investor dilution, which I covered in this article: http://www.therealestatecrowdfundingreview.com/blank. In addition to lowering returns, in my opinion this significantly increased the risk to investors. However, their newest 3 funds (which are the only ones currently open) no longer suffer from this.
Neither RealtyMogul.com nor Rich Uncles ever suffered from this issue. So currently all sites are now the same on this issue.
All 3 sites were given a copy of this article and given an opportunity to respond. Here’s what they said:
“Rich Uncles is the only sponsor with an investment product tailored to the level of risk appropriate for non-accredited investors, most of whom do not have the experience nor investment sophistication to truly understand the high risks associated with the other platforms’ investment strategies.”
"We created our Income REIT, MogulREIT I, to help provide more investors with access to commercial real estate and the potential for consistent, attractive returns. Since the REITs inception in August 2016, we've done our best to deliver on that and have declared an 8% (annualized) distribution every month through year end. One of the reasons we're able to do so is by offering shares directly to investors online without charging them high broker selling commissions. But it doesn't end there. What's unique about our REIT when you compare it to other online REITs is that we offer it through a third-party broker dealer (North Capital). That means we operate in a regulated environment and have controls in place to help ensure investor protection."
“At Fundrise, our mission has always been to provide everyone with a simple, low-cost way to potentially earn better, more stable returns on their investments - we invented the eREIT™ because we believe it is a true innovation and superior to any other publicly available real estate investment today. Seeing others imitate the eREIT™ model we created has served to further validate its benefits and we expect to see many groups follow in our footsteps. We continue to work tirelessly to innovate and create new opportunities for our investors and further our mission.”
No site wins on every issue, so the site that’s best for you depends heavily on your personal situation.
1st, if you’re an unusual investor, the choice is pretty easy:
a) If you only have $500 - $999 to invest, then Rich Uncles is your only option.
b) If you’re very skittish (and have at least $1000), Fundrise is the only site that gives you a 90 day grace period to get your money back. So this might be the most important factor to you.
However, most investors will need to look at all the other factors as well to make their choice. Looking at all of them together:
Rich Uncles came out in the top position in the most comparisons (investment strategy risk, fastest withdrawal vesting schedule, limits/targets).
It didn’t score as well in skin in the game (2nd place) and fees (third-place). However, in my opinion none of the sites have adequate skin in the game, and so this isn’t a useful comparison. Their fees are higher at a current amount of 3% (versus 1.5 to 2% with the others). For many investors, its strengths will probably outweigh its weaknesses.
Fundrise edged out RealtyMogul.com for 2nd place. It has a faster withdrawal vesting schedule and the lowest expense fee at 1.5% (versus 2% and 3% for the others).
RealtyMogul.com ranked a close 3rd place. It’s advantage over Fundrise is setting very specific limitations in its SEC filing.
One final thought: your choice may not be an either/or decision.
If you have at least $2500, and are comfortable with owning any of the 3 funds, then it might make sense for you to invest in all of them. This will give you the maximum diversification of investment strategies and fee structures.
Related news and interviews:
What's your opinion?
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.