Which real estate crowdfunding fund should I pick?
Updated: Apr 22, 2020
A step-by-step guide for the every-day, non-accredited investor.
(Usual disclaimer: I'm an investor and not a registered financial advisor or attorney. Consult your own financial professional before making any financial decisions. Everything on this site is my personal opinion only. Code of Ethics: We do not receive any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves above what we negotiate for the benefit of members.) 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?"
It can be confusing for a new investor to figure out what real estate crowdfunding investment is best for them. With 14 different funds listed in the 2017-2018 Fund Awards and Reviews, there's an awful lot to process and choose from. So I wrote this newbie guide to show you my way of sorting through the noise and coming up with a good investment strategy. (If you're an accredited investor, you have access to many more and better options than the vast majority of these funds. Check out the accredited investor guide to picking deals.)
No cash, no play.
First, let's take a step back. Do you have 3 months worth of salary stashed away in cash equivalents for emergencies? If you don't, then please STOP and don't even think about investing in real estate until you do. I don't want to be responsible for you not having money to eat, when the next big downturn comes! Okay, you do have a cash reserve? Great, let's look at the next thing.
Take a look at everything else you have to invest. That's your portfolio. So how much to put in real estate? Traditional advice says that only 10 to 25% should be in real estate (maximum). That's what virtually every older study concludes and what virtually all institutional investors (like Yale and Harvard endowments) do. But recently, a bombshell study came out that suggests this might be too low. The study went all the way back to 1870, and found something shocking: real-estate has had a higher risk-adjusted return than even the stock market! So the 10-25% may have been way too conservative. But before you deploy your entire portfolio into real estate, do realize that the study only looked at un-leveraged residential real estate. So while a 100% allocation to this no longer seems completely crazy, most non-accredited offerings aren't like this. Adding leverage and/or going with commercial real estate will both probably increase the risk. They haven't done a follow-up study on those, so no one knows exactly how much. But a prudent idea is to allocate less if you are tilting your portfolio to something riskier. And the amount that's best for one person is going to be completely different than someone else because it also depends on your tolerance for risk. And that depends on your personal financial situation (are you retired, working, etc.). So it's best to consult with a financial advisor familiar with alternative investments to find out the best percentage for you. I've bumped my own allocation up to 20-45%. (I'm extremely conservative but I also own a good number of un-leveraged residential properties.)
All right, already! How do I choose?
Okay, let's get down to business. If I only had the money to invest in one fund, I would hire the most experienced manager I could find, and the most conservative strategy I could find. There's one fund that stands head and shoulders above the rest on those 2 things, in my opinion. The 1000 pound elephant in the room is Blackstone Real Estate Income Trust (BREIT). ($2500 minimum). With $104 billion of previous real estate experience, they dwarf even the most excellent closest competitor (with $5.4 billion at #2). And their conservative core-plus diversified commercial real estate strategy, got one of our "Best core-plus funds" award. I feel this is an excellent single pick. However, there's also 2 possible hitches. First, you have to have some serious cash: either $250,000 of net worth, or $70,000 worth of net worth along with the $70,000 income. Second, if you don't have a fee-based investment advisor or institutional account, you have to go through a broker...and the broker fees are ridiculous and not worth it in my opinion. (See the review for details). So if either of these are an issue then you may want to keep looking.
The "Triple-Play" Fund
Some equally experienced managers can be found in the institutional fund sleeve of BroadStone Real Estate Access (BDREX) ($2,500 minimum).
This fund implements a unique core-plus strategy in 3 parts:
Institutional real-estate funds: Funds that normally require $1.5 to $5 million to access (including some in the conservative ODCE index of core real-estate funds).
Direct real estate: Triple net lease and multfamily but with lower debt than BREIT.
Liquidity sleeve/Public REITs
And BDREX does this with rock-bottom fees, no promote and doesn't require a broker. In my opinion this can be another good core portfolio holding.
A walk down REIT "stREIT"
The next most experienced manager ($5.4 billion) and 3rd place honors for running a conservative core-plus strategy is: stREITwise: 1st stREIT Office. ($1000 minimum) The disadvantage versus Blackstone and Broadstone is that strREITwise only does office and industrial, and not apartments. And these have historically been more volatile in downturns. So this fund would expected to be more cyclical and subject to more risk in a bad times.
If you're more aggressive and okay with that risk, it might be fine. More conservative investors may pass, or may want to pair this fund with one or more of the funds above (BREIT, BDREX).
Next, make some loans
Have a little bit more money? Cool. Your core plus funds are all or mostly equity investments. At this point I recommend diversifying into a real estate debt fund. Debt tends to under-perform equity over the long term, but it is also more stable (when properly underwritten) and has additional protection of collateral when things go wrong. So this gives your portfolio better diversification and balance. The "Best for Debt" Honors went to:
The Realty Mogul fund yields about 8%.
Mo' money, mo' money
Still have more cash to deploy? Great. The more you spread out your investments, the more diversity and protection you have. You've already picked the entrée. Now it's time to pick some side dishes. These all have riskier strategies, so you want to keep that in mind as you pick how much to devote to each fund and your car real estate portfolio. If you're conservative, you should still be putting more of your money into the entrée funds and less into the side dishes. And if you're aggressive, you want to load up on side dishes and have less of the entrée.
Here's the side dishes to choose from, to see what hits your fancy. (As a reminder, the 4 investment strategies in order of least risk to most are: core, core plus, value-added, opportunistic).
Impact Housing REIT: This implements a value-added strategy on class B/C apartments, and creates affordable housing for low income people. On one hand, the strong sponsor experience and buying such heavily discounted apartments gives the fund some additional safety over typical value-added strategy. On the other, it's 80% maximum leverage is much more aggressive than the typical value-added. So it's unclear how the two may offset each other. This one has the perk of winning our "Socially Conscious" award for providing free services to low income renters. ($1000 minimum)
MogulREIT II: This one is too new to have much of a track record, but in theory it's a hybrid based on it's target summary. It plans to combine core plus apartments with value-added apartments. If It does, it is a nice addition for conservative investors looking for something more conservative than the typical value-added fund. On the other hand, without a track record, it's tough to tell if they will follow through or not. So some may pass on this one for now and wait to see how it develops.($5000 minimum)
Medalist Diversified REIT: This implements a value-added strategy on apartments, hotels, industrials and anchored retail properties in the southern US. So it has a nice diversity of commercial asset classes, combined with the regional focus. ($5000 minimum)
Fundrise eFunds (West Coast, Heartland, East Coast): It's difficult to pin these funds down. They seem to be a combination of value-added and opportunistic strategy funds that target commercial real estate debt that maximizes current income and also equity with significant value potential. ($1000 minimum).
I have room for dessert!
Still have more money? Excellent. It's time for dessert! Again, if you're conservative, you want to go very easy here (and perhaps not at all). If you're aggressive, you don't want to fill up on your entrée so you have plenty of room for this. And if you're really aggressive, maybe all you want is dessert.
Fundrise Growth eREIT: This fund is also difficult to pin down. On one hand it says that it is an opportunistic strategy fund. On the other, it references institutional quality investments of sub-institutional size. That may make it a hybrid between value-added and opportunistic. ($500 minimum)
Fundrise eFunds (Los Angeles, Washington DC): These opportunistic strategy funds purchase land and develop housing for first-time home-buyers. They are also winner of our "most aggressive" award. ($1000 minimum).
Dealing with Fundrise's "Investment Advisor"
The Fundrise site has a wizard ("investment advisor") that makes it very easy for you to diversify into all their funds. It works great if all you're doing is choosing their funds and no one else's. If you're trying to create a best-of-breed portfolio across multiple sites, it's just a pain and gets in your way. And it seems to pop up everywhere you try to invest on the site.
Fortunately, there is a hidden way to get around it. Do a Google search on Fundrise and the name of the fund that you're interested in, and you will find a way to directly invest. For example if you Google "Fundrise heartland eREIT" you'll see a page that tells you all sorts of information about the fund and you can click on the orange "start investing" button. It will again try to steer you to the investment advisor, but if you tell it you don't want to, then you can invest directly in the fund. Hope this helps. If anyone has any questions, suggestions, or feedback, please let me know in the private investor forums.
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