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RealtyShares Review

RealtyShares Review 2019: Is It Legit or A Scam?

Description

Our RealtyShares review will help you decide whether or not the online real estate investment platform is worth the risk.

RealtyShares Review

Introduction

Betterment and Wealthfront pioneered the robo-advisory market – helping to breakdown the wall that was keeping the general public from investment opportunities. In 2011, Fundrise took it a step further by developing the first-ever online platform for real estate investments.

Founded in 2013, RealtyShares originally stepped up to the challenge of all three companies.

But RealtyShares wasn't only an online platform for real estate investors. Companies in need of real estate project financing could also engage the company's services and offer shares in their project to investors. In this way, RealtyShares also comes into direct competition with IndieGoGo.

One area where RealtyShares has not been able to compete with their main competitor, Fundrise, is in the type of investors who can make use of the platform. While Fundrise has eREIT options for non-accredited investors, RealtyShares does not.

That means you do have to be an accredited investor to become a RealtyShares client. In order to become an accredited investor, you need either a net worth of at least $1 million (excluding your own real estate) and/or two years history of an income of at least $200,000. You'll also need to be reasonably certain that you'll earn the same in the next year.

Even though there are some projects that carry an investment minimum of $1,000, most have a minimum of $5,000. Unfortunately, this means that RealtyShares doesn't complete its tearing down of that wall we mentioned earlier.

However, if you're an accredited investor looking to invest in real estate, RealtyShares was an attractive investment platform back in its heyday. The firm implemented an optional 30-day waiting period that allowed you to research not only the company itself, but to browse through the available investments as well.

Once you found an investment opportunity that caught your attention, you could access further information on that specific property. This included legal and financial documents, information about the actual property, financials, and property management.

Considering the high minimum investment, you'd have been happy to know that RealtyShares had a strict review process. In fact, less than 10% of the properties submitted met the firm's standards and became available for investment on their platform. This was a definite bonus for investors, but it could be a stumbling block for companies that wanted to use the platform to attract those investors to help finance their projects.

You're probably wondering why we keep referring to the company and its activities in the past tense.

RealtyShares isn't accepting new investors anymore. This is because the company has had severe difficulties in raising funds to stay afloat.

However, if the company pulls through, they'll be taking on new investors once again. Lima One acquired RealtyShares in late 2017, so while it doesn't seem likely at the moment, the firm might make a comeback after all. Details are in short supply.

In the meantime, it's still worth taking some time to read through their learning center resources. If you're set on getting started with real estate investments and don't want to wait for RealtyShares to pull the proverbial rabbit out of a hat (or you simply aren't willing to take the risk even if they do), then take a look at our Fundrise Review.1

On the other hand, you might like to invest with RealtyShares if they do open up applications once more. Our review will help you get some important information on the company so you can make a more informed decision.

Quick Facts

  • Investment minimums of $5,000 (most at $10,000, though there are some available for $1,000 too)
  • Portfolio diversification away from stocks and bonds
  • Long-term growth potential and tax benefits
  • Not currently in business, but might reopen applications in the future

RealtyShares is Best For

Investors meeting the following requirements and/or having these goals in mind will benefit the most from RealtyShares should the company make a comeback:

  • Accredited investors
    • Investors interested in debt investment (typically a 12-month term with lower risk)
      • Those with long-term (three to five years) vision and an interest in equity investment (high risk, but also high returns potential)
        • Investors looking to diversify away from stocks and bonds
          • Those willing and capable to spend days at a time researching the company and single investment opportunities (this is true of all real estate investments, but especially RealtyShares)
            • Investors who want greater control over the specific property or properties they invest in. Unlike REITs, which only allow investors to specify asset class by location, RealtyShares allowed (and would presumably continue to allow) you to specify property type. You would be able to choose between single-family rental properties, preferred equity/mezzanine debt, and joint venture equities.
              • Investors willing to take the risk of investing through an online platform that has previously run out of capital and had to close their doors.

Pros

It's hard to imagine that a company, who had to stop operating due to bankruptcy, could have many pros, especially in the investment industry. However, it's still worth mentioning what RealtyShares did have going for themselves.

+No Direct Property Management

RealtyShares allowed investors to effectively own property without having to directly manage them, making for a passive income opportunity.

+Portfolio Diversification

As we've mentioned in other articles and reviews, portfolio diversification is an important facet of investment. Diversification balances risk and reward across different assets that aren't directly correlated.

If, for example, the stock market is performing poorly but your real estate is performing positively, the positive returns from your real estate investment(s) can cancel out the losses experienced by your stock holdings. If your portfolio is diverse enough, you could even find investments that are performing positively outweigh your losses in other areas.

RealtyShares was particularly good in this regard. Not only did investors have the option of commercial and residential properties, which are the two property types most investors are familiar with, but also debt and equity opportunities.

+Tax Advantages

While not guaranteed, some of the investments RealtyShares offered had tax benefits attached. Using mortgage interest and property value depreciation, taxable income from your property investments could be effectively lowered.

This isn't unique to RealtyShares of course, nor even to real estate investments. The process, called tax-loss harvesting, is especially popular in stock market trading. As long as your market exposure is kept at a constant, a loss that's been handled properly can end up resulting in higher returns as well as lowered taxes.

+Research & Due Diligence

Real estate investment requires a lot of research. In fact, the calculations alone can be so complicated that BiggerPockets rather aptly compares it to teaching yourself calculus without first learning basic addition.

This is where RealtyShares had a strong advantage: they handled most of the research and due diligence that you would have ordinarily been left with. To be sure, there was still a lot that would need to be researched and properly calculated from your side (hence their 30-day cooling period).

But the fact the company assisted in minimizing that amount of research is definitely something that some of their competitors could learn from.

Cons

Unfortunately, there are some rather obvious cons to RealtyShares – and some of them are going to be very difficult to overlook.

-Illiquid Investments

Depending on your financial situation and whether your investment plans are short-term or long-term, this may not actually be a downside at all. But the fact remains: all property investments are illiquid.

That means that the holding time is upwards of three years. Five years is usually the recommended term for property investments.

This is because property investments through companies like RealtyShares aren't traded publicly. There's no guarantee of a buyer, which would also mean you may have to sit on your investment for much longer than you were originally planning to.

Even if the investment opportunity originally came from a company looking to raise capital through investors, and despite that opportunity having passed RealtyShares' rigorous vetting process, you could find your five-year plan becoming a seven- or even ten-year plan.

To be fair, this isn't unique to RealtyShares. The same would be true with all privately traded property assets, regardless of whether you invest on your own or through one of the company's competitors.

According to this article, in late 2018, investors were also told their existing RealtyShares investments would no longer be serviced by the company.

Instead, NES – a third-party administrator – took over. Allegedly, two days before this announcement, RealtyShares had assured their clients that “from this point forward, RealtyShares' focus will be servicing our existing investors” via a mass email.

In our books, every aspect of the way RealtyShares has handled the illiquidity of their investment opportunities becomes a red flag.

-Exclusive Investment Opportunities

Despite having set out to knock down the wall separating the general public from real estate investment, RealtyShares fell short of the mark, even before the company effectively folded.

Unlike some of their competitors, such as online real estate investment pioneers Fundrise, you had to be an accredited investor in order to become a client. Even though the firm offered investment opportunities as low as $1,000 (the same as Fundrise's minimums), you still had to have a net worth of $1 million and/or an annual income of $200,000+.

This set the entry bar impossibly high for most of the general public. The same target market RealtyShares set out to cater for were heavily let down.

In fact, this may have been one of the deciding factors in clients having steered away from the company, leading to its ultimate demise. If RealtyShares does indeed make a comeback in the uncertain future, we can only speculate as to whether they'll rectify this mistake.

-Tax Complications

Another contention many clients would have had with RealtyShares is that, even though they helped with property tax-loss harvesting, taxation became perversely complicated.

Rather than filing tax returns in one go, RealtyShares' set-up meant that investors may have been required to file a return in each state where they held property. This wasn't necessarily the case for every investor, but it would certainly have been an unattractive feature.

-Out of Business

The biggest (and arguably most obvious) con is that RealtyShares is, for all intents and purposes, out of business.

Not only is their having effectively burned through $63 million a major contention point on its own, but the company has reportedly given no indication as to how they plan to cover expenses – including paying back any part of that $63 million.

There's a trickle-down effect to the company having gone out of business. Even if they somehow manage to bounce back and reopen their virtual doors, RealtyEstate is going to be looked upon with disfavor by discerning investors. It's difficult to imagine them recovering from this major knock, let alone staying afloat if they do manage that much.

Is RealtyShares Right For You?

Usually, we'd shy away from giving a definite yes/no answer here.

But despite the strengths that RealtyShares once boasted and would presumably continue offering should they reopen in the future, the very fact that they had to close their doors is a major red flag for smart investors.

We do our best to help all investors make smart investment decisions. Unfortunately, in the case of RealtyShares, that means steering readers away from the platform.

Conclusion

Just because RealtyShares has turned out to be a bust, doesn't mean you can't still invest in real estate.

However, when considering an alternative marketplace platform such as Fundrise, Roofstock, CrowdStreet, or Vanguard (to name a few), you should ask the following questions:

  • What's their customer service like?
  • What are their due diligence processes?
  • What's their track record?
  • Are they making unrealistic promises regarding investment returns?
  • How are their investments structured?
  • What would happen to my investments should the company fold?
  • What's their financial status and growth plans?
  • How experienced are their employees?

    Notes


    1. Link to Fundrise Review when publishing 

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