The Money Mix asked me to review a private real-estate investment company that had a unique method of purchasing properties. Here is a review of the platform and a comparison with another popular real estate crowdsourcing platform, Fundrise.
You may be a regular reader of personal finance blog and know that real-estate investing is a popular topic. Bloggers promote and review companies such as Fundrise, Realty Mogul and PeerStreet. Diversyfund is a relatively new but highly competitive fund.
The following is an overview of our findings, and what we believe makes DiversyFund different in the market. We think that by the end of this post, you will agree that DiversyFund is a great option for passive real estate investing.
Let’s take a look at the topic in more detail.
Table of Contents
Publicly traded REITs
Private Equity
Crowdfunded Real Estate Funds
DiversyFund fee structure
Fundrise Fee Structure
Fund Investments
DiversyFund Investments
Fundrise Investments
What about liquidity?
Investment Risks
Final Thoughts
Publicly traded REITs
Real estate investment trusts, or REITs as they are pronounced (pronounced Reets), are the most popular and easily accessible way to invest in property. REITs can purchase different types of property (residential or commercial, multifamily, etc.).
These types of properties are offered by many REITs in their funds. The majority of REITs trade on stock exchanges as ETFs or Mutual Funds. These REITs are registered with the Securities Exchange Commission. The Securities Exchange Commission (SEC) has rules and regulations governing the creation, purchase and sale of securities.
Investment firms are the ones that provide them. Investment companies that offer products are registered differently than private investment funds. Let me explain this shortly.
Private Equity
Private equity real estate funds were previously only available to the rich. To invest in the typical fund, individuals must be accredited.
Investors who are accredited must have a minimum of $200,000 income ($300,000.00 joint) or at least $1,000,00 in net worth (exclusively residence). This excludes the vast majority from investing. Only 1% of the population can participate. This is the main complaint about private equity funds.
High fees is another criticism of these funds. In the beginning they had a fee structure called two and twenty. T
Investors paid a 2% management fee. Management took 20% of any profits made by the fund. The majority of people think that these fees are too high. These fees have been lowered by public pressure and competition. These fees are still high compared to other industries.
Private equity funds are not investment companies, but pooled funds. They don’t need to be registered as investment companies at the SEC. The SEC’s Private Advisor Rule grants them an exemption.
This is a benefit to both the fund and its shareholders. Costs and time are involved in complying with investment company regulations. The Private Advisor Rule eases reporting requirements.
Private advisors are viewed by some as being unreliable. The larger investors have been investing billions of dollars in these funds ever since they started.
Crowdfunded Real Estate Funds
Real estate crowdfunding has become popular in recent years. Most often, REITs offered by crowdfunding are private funds. They are not listed on the stock exchange. These funds are registered with the SEC under Regulation Crowdfunding, which is usually the SEC’s Regulation Crowdfunding.
Like crowdfunding for individuals or small businesses, real estate crowdfunding gives smaller investors access to an investment area that they haven’t had before.
FundRise, as well as DiversyFund, are both crowdfunded real estate funds. Crowdfunding allows investors to invest smaller amounts in items that are usually only available to wealthy people. It has been a disruptive factor in the small business and investment communities.
It is a way to raise money that bypasses the big banks and their high fees. We consumers are the real winners. Non-accredited real estate investors are able to play on the same field as accredited investors.
Let me now tell you about DiversyFund.
Fee Structure for DiversyFund
DiversyFund’s platform structure is what makes it unique. Platform is the structure under which a fund purchases assets, raises funds, distributes profits, etc.
Private equity funds often hire firms outside to handle everything from buying and researching properties to raising capital from investors. Each outside entity that is used to do these things comes with a price. The higher the cost, the more resources an organization uses from outside.
DiversyFund has a vertically-integrated platform. The company does everything internally. They have a team that searches for properties and analyzes their value, cash flow, and growth. They purchase properties in need of upgrades. They also handle the upgrades.
They manage their own properties after purchasing them. Investors don’t pay brokerage or middle-man fees.
They claim on their website that they are the only fund without platform fees. This is the only one I’ve seen that makes this claim. Although management and platform costs have decreased, REITs continue to charge fees. Fees can add up, and reduce returns for investors. One of the keys to success is keeping them low.
DiversyFund can help.
Fundrise Fee Structure
Fundrise charges a platform fee (Fundrise Direct) of 1%.
Investment Advisor Fee – 0.15%
Asset Management Fee – 0.85%
Additional acquisition fees are between 0% and 2%.
Fundrise’s fees, even at 3% are still far lower than the fees charged by traditional private equity funds to accredited investors. Although fees have decreased from two to twenty, it is common for fees of 1% assets and 15% profits. These firms are able to be very creative in their fee structures.
Fees for crowdfunded platforms such as Fundrise, DiversyFund, and others are much more transparent. You can see that they are lower than the majority of accreditor funds available on the market.
Fund Investments
Private equity funds, like publicly traded REITs can invest in a wide variety of types of real estate. Some funds focus on commercial properties such as small strip shopping centres. Some funds may concentrate on residential real estate, from single-family homes to multi-unit housing (apartments). Some invest in commercial office space located downtown.
Investors should always be aware of what they’re investing in. This is especially true in the case of real estate. The location of the property, its type, lease structure, and other factors can affect the return on investment.
Below, I will outline the investments Fundrise makes and DiversyFund.
DiversyFund Investments
DiversyFund keeps things simple. The team believes that value-add multifamily units are the best commercial real estate investment. This is supported by historical returns.
Wikipedia defines multi-family housing as “multiple residential units that are located in one or more buildings of a complex.” The units can be stacked one on top of the other or side-by-side.
Why is this important to investors? Let’s examine this in detail.
In most places, apartments, townhouses and similar housing are more affordable than single-family houses. DiversyFund’s team looks for two things when they research properties.
The area must be in a growing economic market. The properties that they buy must also be generating cash flow. They must be making money already for their owners.
Value-add is the third component of the decision. They purchase properties that require some improvements. This does not include foreclosures or new construction. Perhaps the units require modernization. Maybe they just need some cosmetic improvements on the outside. The fund can increase the rent, increasing cash flow and the potential value of the property.
The fund’s goal is to sell properties for a higher price than what was paid and include any improvements. By focusing on this, they can only consider properties that fit the criteria.
They don’t try to be everything to everyone. Investors should look for capital growth over the long-term.
Fundrise Investments
Fundrise offers three main plans:
Additional Income
As the name implies, the goal of the supplemental Income Fund is to generate income. The fund invests in properties that produce income and pays quarterly dividends. The fund’s primary investments are in real estate debt assets (realty loans).
Balance
The goal of the balanced fund is to provide a mix of income and growth. In order to achieve this, the funds invest in debt and equity real-estate assets.
Long-Term Growth
Dividends and incomes are not the goal of a long-term growth portfolio. The managers are looking for property that will appreciate in value during the holding period. They do not invest in debt assets. They only invest in hard assets.
This is a detailed analysis of the three strategies, comparing the debt to equity mix and the expected return of each.
What about liquidity?
Stocks and real estate investments should be made for the long term. If you will need the money within a year or two, it is not advisable to invest. Fundrise and DiversyFund, unlike publicly traded REITs are private funds.
The money invested in these funds is not liquid. If you want money out of the fund before it closes or sells properties, there are certain restrictions.
DiversyFund liquidity
DiversyFund doesn’t offer investors liquidity before selling their properties because of the nature of their long-term investments. Investors with high incomes and net worth can build wealth through the ownership and sale of properties. DiversyFund’s strategy is to buy and sell properties at a profit.
DiversyFund is not for investors who want to earn income. This is not the aim. This fund is for investors who understand the importance of long-term investment growth.
This may be viewed as a disadvantage by some investors, but not me. DiversyFund knows who they are, and what they expect from their real estate. They don’t try to be everything to everyone. That’s also something I like. They are true to themselves and their strategy.
Fundrise Liquidity
The investment period for Fundrise Investments is stated as five years. Fundrise does not guarantee that the investments will be liquidated in five years. Investors receive quarterly dividends. Capital gains and invested capital are realized when selling properties.
Dividends and capital gains can be taken in cash by investors or reinvested.
Investment Risks
Crowdfunded real estate is no different. Investors are not guaranteed to get the same results as in the past, or even the expected return. Investors are not guaranteed to make money. Real estate investment is not without its risks. Rents may not be paid by tenants in a bad economy or slowing down of the job market. It is possible that the value of your property may not increase as you expected.
Investors should always consider the risks associated with any investment. The general principle of investment is that the greater the return on investment, the greater the risk. Risk and return are linked.
Accredited investors tend have more money invested in real-estate. Why? Why?
Investors who are smaller should carefully consider the amount they invest in real estate. This includes both publicly traded REITs and private equity funds such as Fundrise and DiversyFund.
Final Thoughts
Many ways exist to invest in property. After this discussion, I hope that you will have a clearer understanding of what to do. Private equity has dominated the world of wealth for too long. Crowdfunded real-estate funds allow smaller investors to invest in previously unattainable investments.
Fundrise, DiversyFund, and other crowdfunded funds for real estate can help you achieve your dream.
When investing in stocks, bonds or real estate, diversification is essential. When considering real estate funds, keep this in mind. These funds may be a great addition to your existing investment strategy. You can invest as little as $500 in these two funds and then see what happens. Both funds allow you to add more money.
I recommend sticking with the DiversyFund real estate growth strategy. You will get a portfolio of multi-family, well managed properties that are expected to sell for a higher price than the money you invested in them and the improvements made.
The team is a highly experienced group. The team does not take profit until investors. The team manages the entire process. Platform fees are not charged. There are no gimmicks. Real estate investing is a good and sound investment.
DiversyFund is a good option if you are thinking of investing in this asset class.
This article originally appeared on Your Money Geek. This post is reproduced here with permission.
