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RealtyShares Review. Is RealtyShares Legitimate and Safe?


Is RealtyShares safe, legitimate and insured company? Is RealtyShares scam? RealtyShares review: borrower, investor returns, IRA account fees and rates.



RealtyShares Overview


RealtyShares entered the crowdfunding space to offer accredited investors an efficient way to add diversification and tangible assets to portfolios filled with volatile stocks, low-yield bonds, and anemic money market accounts. It backs up this claim by offering investors the opportunity to invest in debt and equity deals supporting residential and commercial real estate developments around the United States. The RealtyShares platform allows you to serve as a hard money lender or part owner of a property without bearing the exposure associated with physical ownership and long-distance landlord risks. With participation offerings starting at $1,000, averaging $5,000, and interest rates on secured loans ranging between 8% and 12%, does RealtyShares live up to the hype? The site funded more than 550 projects since inception, returned more than $59MM in principal to investors, and has more than 92,000 registered investors.


RealtyShares Borrower Due Diligence


Who is borrowing money at 9% - 12% in a near zero rate interest environment? Plenty of people! That is especially true for investors seeking to boost private returns using leverage, looking for bridge loans to buy time to close lucrative deals, or those needing access to capital to improve properties and remarket them. RealtyShares is displacing what was once a mostly informal market that was dominated by many small scale hard money lenders. Their fees were high, they operated mostly through social networks and referrals, and their operating costs dragged down returns for lenders.

RealtyShares promises borrowers funding in as little as 10 days and directly markets to experienced real estate investors. RealtyShares refers to debtors as project “sponsors” and reports that it receives approximately 1,200 sponsorship applications / funding requests each month. While it is flooded with applications, my experience with the platform is that most of these sponsorship applications are rejected for a slew of reasons and only 10-15 are marketed to investors each month. Deals surviving screening typically take 20+ days to reach peak funding. Sponsors are weeded out by an initial screening process RealtyShares performs to ensure continued platform viability and reduce the number of bad or fraudulent offerings. Only business borrowers qualify for loans, owner-occupied properties will need to find funding elsewhere.

Project sponsors need to demonstrate a history of success in the real estate industry with similarly sized and positioned real estate projects. RealtyShares will not allow a successful residential house flipper in Denver to sponsor a strip mall project in Las Vegas. Assuming a sponsor has sufficient performance history to pass the test, RealtyShares will perform a credit and background check on the sponsor. The process resembles a scaled down version of manual mortgage underwriting and requires sponsors to show assets, cash flow positions, and debts. While sponsors are typically signing loan agreements in their corporate capacity, loans are often personally guaranteed, making the individual’s financial health relevant.

When a project is offered on the platform, investors are offered access to sponsor generated data. Information includes business plans, competitive market analysis data, financial data, information about the property and management company, and miscellaneous sponsor uploaded documents. Larger offerings tend to provide video tours of the property, too. RealtyShares does not independently certify or audit the data the sponsor uses to promote the offering. It is imperative that you let common sense prevail when evaluating deals. If it looks too good to be true, it probably is.


RealtyShares Lender Criteria


RealtyShares limits investor participation to accredited investors. To qualify for participation, you need a demonstrated income of $200,000 in each of the past two years ($300,000 if you are married) or a $1MM net worth excluding the value of your primary residence. RealtyShares offers investment opportunities under a specific provision of federal law that exempts them from any requirement to do extensive investor certifications. They verify investor accredited status through a series of questionnaires, self-certifications, and phone verifications with investors before they confirm commitment on investment opportunities.

While RealtyShares lacks stringent lender verification to ensure compliance, it is a good idea to remember that these regulations were put in place for a reason and that skirting the regulations may result in exposure to unacceptably large losses for small time investors.


RealtyShares Capital Stack


At the time of writing, there were only 8 debt and equity offerings open for investment on RealtyShares’ website. System minimums were $1,000, but most offerings required minimum investments of $5,000. Residential properties qualifying for funding range in value between $100,000 - $10MM, while commercial properties range between $500,000 - $10MM. Current offering minimum investments were $5,000, $10,000, and $20,000 with targeted returns ranging between 8% and 17%.

The RealtyShares capital stock offers senior debt, preferred equity, and JV equity and provides funding for up to 97% of the capital stack for commercial projects and up to 90% loan to cost for residential properties. Offerings include positions in senior debt, subordinate debt, preferred equity, and common equity.

Senior debt positions are classic mortgage positions. They are the safest and lowest yielding. They are generally 12-month term loans that are secured both by the property and are almost always backed by a personal guaranty from the debtor.

Subordinate debt positions are offered between the senior debt position and the equity position. These second position mortgages are rare and I have only seen a few of them offered through the platform.

Preferred equity is treated as debt for tax purposes and does not benefit from foreclosure protection. If the debtor stops paying, RS Lending, Inc. needs to sue on your behalf.

Common equity is a simple ownership position. Most of the offerings of common equity on the site now range between 3-5 years and will pay investors excess cash flow and realized appreciation upon the ultimate sale of the property. Returns are paid out on the RealtyShares platform on a quarterly basis.


RealtyShares Commissions, Fees, and Minimum Deposit


RealtyShares charges a 1% annual fee for equity investments and reserve the right to charge an “over-raise’ fee to reimburse legal expenses directly related to the investment. Debt deals pay RealtyShares through a service fee that occupies a space between the interest rate charged to the borrower and the rate paid the lenders.

Accounts require a $5,000 minimum deposit, but deals can be found for as little as $1,000 and must be tethered to an American bank account. Users can make deposits via check, ACH, and Bitcoin. Only US residents are eligible to participate in RealtyShares offerings. Additional fees apply if you are operating your RealtyShares account through a Simple IRA with the help of one of their approved funds custodians.


RealtyShares New Account Setup


If you are looking to get your first real estate deal done right now, you’re in for a disappointment. RealtyShares is required to put all accounts through a 30-day SEC enforced cooling off period. You’ll be able to browse deals, but you won’t be able to fund any of them. Because good deals tend to go quickly, if you’re seriously considering RealtyShares participation, it makes sense to open an account as soon as possible to start the cooling off clock. There is no requirement that you fund the account or link any accounts to your RealtyShares account, so there are no risks associated with simply starting the cooling off clock. Starting the clock early is also beneficial because you will never be able to invest in offerings that were on the market before your cooling off period expired.

RealtyShares Tax Treatment


RealtyShares investors face the same tax treatment as bondholders, REIT investors, and Lending Club / Prosper lenders. Profits are taxed at the lender’s marginal income tax rate and because the platform is restricted in participation to accredited investors, this can create an enormous drag on expected returns. Investments that pay 9% are highly appealing, unless you lose 40%+ of that to taxes!

Unlike the peer-to-peer lending platforms Prosper and Lending Club, RealtyShares investors are required to file state income tax returns in the states that house their investments. If you are purchasing a senior debt position in a commercial property in New York, you will need to file a New York state tax return. This isn’t a problem if you have multiple investments in the same state or reside in the state you are targeting for deals, but it can add a layer of tax compliance complexity that turns off investors. For those in especially high tax brackets or living in states with aggressive state income taxes, RealtyShares participation may only be efficient if done through a tax advantaged account. While some properties will create tax advantages that pass to investors (e.g. depreciation, deductions due to interest, etc.), it is still a generally tax inefficient investment when compared to ultra-low turnover index funds.

IRS regulation prohibits the direct investment of funds from IRAs, 401(k)s, and Roth accounts into RealtyShares. IRS Code 4975 allows investors to invest in RealtyShares through a self-directed IRA. RealtyShares works with two self-directed IRA custodians to support investors who want to capture returns without adding tax complexity. There are costs associated with these services, but for investors anticipating significant investment participating with the RealtyShares platform, it makes sense to consider a self-directed IRA.


IS RealtyShares Safe, Legitimate and Insured?


The contractual relationships of many of the crowdfunding sites are set up similarly. Lending Club, Prosper, and RealtyShares all require investors to indirectly invest in the underlying debt or asset. When you participate in a debt or equity offering through RealtyShares, you are entering into a three-way relationship with the debtor and RS Lending, Inc. RS Lending, Inc. executes the loan with the debtor and then sells investors a debt security that is effectively a promissory note that replicates the repayment terms of the investment and is contingent upon ongoing performance by the borrower.

This relationship does introduce an element of counterparty risk absent from ordinary securities because it forces investors to surrender the ability to sue or force foreclosure on defaulted notes to RS Lending, Inc. Additional risk is created in the event of a RS Lending, Inc. bankruptcy. Should RS Lending, Inc. file bankruptcy, investors may be inconvenienced or have their returns impaired. RealtyShares established several substantial legal protections to limit the risk a bankruptcy poses to investors, but the risk is still present to some degree.


RealtyShares Pros


Diversification – You can cultivate a portfolio of equity and debt offerings at various levels of risk covering properties around the country.

Information – RealtyShares is great about providing investors a ton of information when it comes to financial statements and pitch decks. You can evaluate deals based on ARV, DTI/LTV, and full balance sheets. You can consider where the project is located, market performance, and a slew of other factors that will drive performance before making your investments.

Direct Deposit – RealtyShares directly deposits interest and principal returns into a bank account of your choice. This creates a steady income stream that is almost entirely passive.

Low Entry Costs – All that is required to start is a $5,000 deposit and investments can be made for as little as $1,000 for some projects.

Bitcoin Friendly – You can fund your RealtyShares account with Bitcoins. No USD conversion needed.

RealtyShares Cons


Counterparty Risks – Investors do not enjoy the legal protections afforded to direct holders of first position mortgages. They cannot force RS Lending, Inc. to foreclose, sue on debts, or take any other action to protect creditor interests. If RS Lending, Inc. goes bankrupt or has service disruptions, it may impact investor experience.

Tax Inefficiency – Investors need to file a return in every state they invest in and will pay taxes at their marginal tax rate on the interest and cash flow payments.

Regulatory Compliance – RealtyShares is limited to accredited investors.


RealtyShares Review Summary


So, does it live up to the hype? Yes! While I limited my RealtyShares position to roughly 5% of my net worth, I’ve had a great experience with Realty Shares. The returns are predictable and with the introduction of low investment threshold opportunities it is easier than ever to minimize risks. I only invest in the state I live in, so tax complications are minimized. It is a fun way to add an investment that has minimal correlation to the S&P 500 to your portfolio. If you qualify, give it a try!

My experience on this platform smokes my experience on other peer-to-peer lending platforms. Having a secured interest where something is returned in the case of default is worth losing the premium associated with unsecured debt.



RealtyShares reviewed by Brokerage-Review.com on . Rating: 5



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