4 Tips to Rebalance Your Portfolio for Post-COVID World
Dear Rich Lifer,
Owning a rental property can be a great investment.
Especially if you buy in a growing neighborhood, when the market is on an upward trajectory, and your tenant is quiet and clean.
But that’s almost never the case. We’ve all heard some horror stories….
Drug dealing tenants, mice, bed bugs, holes through drywall, backed-up toilets… You name it.
This isn’t to send you running. We also know a lot of people who have had great success investing in rental properties, both commercial and residential, without too many headaches.
Their days are envious. A few phone calls to their property manager in the morning, troubleshooting any issues that come up in the afternoon, and checks arrive in the mail or through direct deposit the first of every month. Not bad.
As far as investments go, real estate has a lot going for it. It’s a hard asset, meaning you can reach out and touch it. It’s relatively stable — regardless of the economy, people still need a place to call home.
And, having tenants who pay you rent every month qualifies you for some decent tax breaks.
But should you buy a rental property and become a landlord or is it smarter to seek out more passive real estate investment opportunities?
What’s the Difference?
The main difference between becoming a landlord and passively investing in real estate is the time commitment.
When you buy a rental property and become a landlord, you’re essentially signing up for a second job. At a moment’s notice, you might have to drop what you’re doing and worry about things like:
- Lost keys in the middle of the night
- Noise complaints
- Backed-up toilets
- Bed bugs
- Property depreciation
- Tenants that don’t pay
- And the list goes on…
However, the upside is you could own a property that only requires minimal maintenance, with a tenant who’s respectful and pays their rent on time. While your mortgage is being paid off, you’re building equity until you finally decide to sell or buy another property.
However, becoming a landlord is not the only way to invest in real estate. There are lots of passive investment opportunities in real estate now that come with a lot less headaches.
The most popular is publicly traded real estate investment trusts (REITs). These funds are professionally managed and typically consist of many different properties pooled together.
You can invest in REITs directly or through mutual funds or exchange-traded funds (ETFs). Another lesser-talked-about option gaining in popularity is crowdfunded real estate, where investors pool their money together to buy a number of investment properties.
We’ll explain why this is one of the best opportunities for real estate investors today. But first, how does crowdfunding work?
Crowdfunding and the JOBS Act
In 2012, Obama signed the JOBS Act to encourage funding of small businesses in the U.S. by easing securities regulations.
What drew the most attention from the bill was Title III, also known as the CROWDFUND Act, because it created a way for companies to use crowdfunding to issue securities.
Basically, it created the opportunity for online platforms to attract individual investors who could pool their money together and directly invest in things they might not have been able to before, like real estate.
There’s one little catch…
While the JOBS act opened the door to a host of new investment opportunities for individual investors, there was a catch…
Many crowdfunding platforms and opportunities were restricted to accredited investors only. That’s to say, only individuals who fall within a specific framework set out by financial regulators could play.
To qualify as an accredited investor, you must:
Have a net worth of $1,000,000, not including the value of your primary residence.
Or, have an income of at least $200k per year for the past two years, or $300k for a married couple.
If using income to qualify, the investor must also expect to make the same amount in the upcoming year.
So, even though the JOBS act created new investment opportunities for accredited investors, non-accredited investors were essentially left out to dry.
Of course, the reasoning behind this is that it’s for the safety of the investor. Regulators don’t want average Joe’s losing their savings in deals they don’t fully understand. And that’s fair. However, what about the non-accredited investors who do understand the risks?
The Rise of Crowdfunding Platforms
Over the last five or so years, real estate crowdfunding has gained considerable steam. Similar to how peer-to-peer lending has taken off, real estate crowdfunding as an investment offers many benefits.
What separates real estate crowdfunding from P2P lending is the level of research conducted by crowdfunding sites. Real estate crowdfunding requires extensive due diligence by smart and experienced real estate investors.
Often deals are closed before investors even contribute just to secure properties. This is good news if you’re an investor since a lot of the leg work has already been done for you. Crowdfunding platforms need to do their homework or else they lose the trust of investors and are left holding the bag. For these reasons, we like real estate crowdfunding more than P2P lending because it puts more risk on the platform in delivering.
But, of course, not every deal works out so you still need to do your diligence to understand what exactly you’re invested in.
Like we said before, one of the problems with most real estate crowdfunding platforms is you need to be an accredited investor to participate. Luckily, that’s not the case anymore. We found a few platforms that non-accredited investors can take advantage of today.
So, if you’re looking to diversify your portfolio in real estate but don’t want the headaches of becoming a landlord or you simply don’t have a lot of cash to invest, here are some real estate crowdfunding platforms you should consider:
Possibly the most well-known real estate crowdfunding platform online is Fundrise, which launched in 2010, even before the JOBS Act was passed.
Fundrise has three public offerings for unaccredited investors and is planning on expanding its lineup pending easing access rules on crowdfunding opportunities for less-capitalized or lower-income investors.
We like Fundrise for a number of reasons, first they offer low minimum investments, second it’s open to all investors, and third the platform is easy to navigate and they even offer IRA accounts which is ideal for investors looking to diversify their retirement savings.
Some drawbacks to the platform include the fact that most opportunities are highly illiquid and some of their fees are a bit tricky to understand. If you plan on investing in real estate for the long haul though, then Fundrise might be a great fit.
Similiar to Fundrise, RealtyMogul.com uses securities exemption regulation A+ to give non-accredited and accredited investors the opportunity to invest in real estate projects.
CEO, Jilliene Helman says, RealtyMogul enables investors to connect with unique real estate investments that fill a need not being met by traditional equities, bonds, commodities, etc.
The minimum investment for a crowdfunded real estate product through RealtyMogul is $1,000. If you’re accredited, this platform offers a lot of opportunities as well.
Calling themselves a “wealth tech company,” GROUNDFLOOR is focused on the general public rather than high-net-worth and accredited investors.
What separates GROUNDFLOOR from the pack is the platform’s investment options are underpinned by secured, collateralized real estate debt, with relatively short terms, think 12-18 months.
You can start investing with as little as $10, and the GROUNDFLOOR says average returns are 10% per year. GROUNDFLOOR’s focus on being a tech-first company delivers a really nice user interface and some awesome data resources for deeper market research.
The last real estate crowdfunding platform we recommend you check out is CrowdStreet. Of all the crowdfunded real estate sites, CrowdStreet seems to be most focused on commercial real estate deals.
These include apartment complexes, strip malls, condominiums, and office buildings. While they offer options for non-accredited investors, their minimum is quite high compared to the others.
To invest with CrowdStreet you need at least $10,000. This is both good and bad news. It’s bad because it’s less accessible for everyone. But it’s good because it creates a barrier to entry and less competition for deals.
CrowdStreet is free to sign up for an account and you can choose between individual deals, funds, or have CrowdStreet build your real estate portfolio.
Ultimately, there are lots of ways you can begin investing in real estate. Crowdfunding is one more way you can take advantage of the red hot housing market. We like that crowdfunding is becoming more accessible to more people. If you’re considering investing in real estate this year, check out the platforms we listed here for more information.
To a Richer Life,
The Rich Life Roadmap Team