What is RealtyShares and What is it All About?

Question

Hello BP Fam,I have seen the name advertised on BP podcasts time and time again, though am uncertain as to what it really is. Does it have to do with REITs?

Jim Groves · Answer

Some REITs also charge substantially higher fees, oftentimes close to 15% of invested capital. Finally, because most REITs are publicly traded, they have traditionally experienced substantial volatility along with the stock market.

I have to reply to these two points.  "Some REITs" that charge fees upward of 15% are typically private, non-traded REITs.  They're sold by broker-dealers who take about 6-7% commissions, and the manager typically charges an acquisition and disposition fee.  Crowdfunding sites are better from a fee standpoint, but you still have to look at what the sponsor is charging to the partnership.

As for the "substantial volatility" comment, this is very misleading.  Whether you buy a REIT stock or a property directly, the underlying asset is real estate.  The former is marked-to-market on a daily basis, the latter is not.  The REIT stock can be sold with a click of a button, the property investment can not.  Watching the daily fluctuations is a small price to pay for the liquidity the REIT stock provides.  Just because you don't know the daily price fluctuations of your property investment doesn't make it any less volatile.

Account Closed · Answer

The RealtyShares Investment Platform,allows accredited investors access to a variety of real estate asset classes, including: Residential,  Commercial, Retail and Mixed-Use.  Investors can also access both debt  investments in the form of first or second-position loans secured  directly or indirectly by residential and commercial properties usually  yielding a fixed interest rate of 8-12% annually as well as equity  investments in residential and commercial properties offering cash flows  during the hold period and/or a portion of the profits upon a sale of  the property.

RealtyShares is an online investment platform that uses the internet to  pool investors into funds that hold an interest in a pre-identified  private real estate investment.  Accredited Investor members have access  to information on a variety of investment opportunities and can invest  as little as $5,000 into each such opportunity via a discrete  RealtyShares Fund. Execution of investor documents and fund transfers  are handled securely through the platform as well, allowing you to  complete the entire transaction through the website.

RealtyShares allows you to choose and invest in a specific property or a  group of pre-determined properties, whereas a REIT only allows  investments into pools of capital that are often limited by asset class  or geography. Some REITs also charge substantially higher fees,  oftentimes close to 15% of invested capital. Finally, because most REITs  are publicly traded, they have traditionally experienced substantial  volatility along with the stock market.

Ian Ippolito · Answer

@Bryan Hancock, the blog link I posted on why regulation A+ is not working out the way many of the sites hoped, also seems to have disappeared.

I'm trying it again: http://www.therealestatecrowdfundingreview.com/#!regulation-a-plus-reform-rules/cae

Ian Ippolito · Answer

Hey Jim, sorry, somehow I see the links that I posted to backup my points were removed, so obviously you couldn't see them. I'm new to the site, and am not sure if it's a bug or if a moderator removed it for some reason.

Trying once again. Here is the link analyzing REITs versus direct real estate (and with links to the academic paper on the liquidity premium): http://www.therealestatecrowdfundingreview.com/#!why-not-a-reit-part-2-publicly-listed/cva

I can see a point to your argument that core real estate is going to be more stable than overall real estate in the REIT index. However, if you look at the differences in the graph, it's fairly severe. It seems to me that that couldn't explain all the differences in the volatility.

Hopefully this time the link will actually "stick".

Ian

Jim Groves · Answer

Ian, I believe the index you're referring to is part of the NCREIF index which includes values of private real estate held by pension funds.  I could argue that the REITs tend to not hold the same quality of property that pension funds do, so that may explain some difference in the variability.  However, I'll concede that at some level the volatility of REIT stocks can also be related to some factors that have nothing to do with their underlying assets.  For example, fund flows in the retail stock market (people exiting tech stocks for dividend paying stocks) could contribute to this volatility.  But the underlying assets remain the same, and the fundamentals of those assets do not change whether they are held by a public or private entity.

In regards to the liquidity premium, I agree.  For example, EQR, PPS, and AIV yield around a 3% dividend whereas the properties they own likely yield 6-7%.  If you plan to hold these assets for 5+ years, direct ownership is the better way to go.

Ian Ippolito · Answer

@Bryan Hancock, I originally thought the same as you and thought sites would be offering real estate crowdfunding to nonaccredited investors soon through A+. Unfortunately, the sites I interviewed said that it's too crippled for them to use:

so unfortunately, this won't be coming anytime soon. :(

@Jim Groves, I have heard others give the same point as you about REITs being not being as volatile as they seem (in relation to direct real estate). In my opinion, there is a small element of truth to that, but ultimately, it is largely incorrect.

Yes, REITs are valued daily, while direct real estate is not. This is usually why people say REITs look more volatile, but can't truly be compared.

However, there is a way to fairly compare the two. Simply compare REITs on a yearly basis to a direct real estate index that indexes the large, multibillion-dollar funds where the properties are required in their charter to be appraised on a yearly basis. Many of these do exist. For example, the NFI ODCE direct private real estate index.

I did this on my blog posting, and you can see that since 1978, REITs go negative about every five years, while direct real estate only goes negative about every 15 years. The gyrations are much more severe, because they track the severe gyrations of the stock market. Direct real estate is much less volatile and uncorrelated with the stock market.

Also, I've seen many people also quoting the liquidity of REITs as an advantage, and at the same time ignoring the fact that nothing comes for free. Academic papers have found that investors pay a significant liquidity premium on a REIT, that can cost as much as 12 to 20% during certain periods. I talk about their findings, and the repercussions in the blog posting too.

Bryan Hancock · Answer

There are some sites that offer projects to non-accredited investors, but you have to reside in the right state(s) to be eligible.  If you live in Massachusetts you're in THE WORST state in the country for non-accredited investors.  Your state actually just sued the SEC over Regulation A+ recently and wants to protect you from investing your own money.

Later this year I expect sites to begin offering securities to non-accredited investors.  I am sure there are many people waiting out the lawsuit before risking money in the securities costs for A+, but some of the larger and more prominent portals are likely going to be the first to market with these types of offerings.  Expect them to be done in pools given the lag time in getting sign off of the offering from the SEC.

Patrick Sullivan · Answer

Thanks Ryan!So say I am not "accredited", though end up saving $5,000, am I eligible to essentially invest in a RealtyShares portfolio? Or is this only for those more experienced investors?Thank You,Patrick S.

What is RealtyShares and What is it All About?

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