Friday, September 15, 2017

My Take on Real Estate Crowdfunding

I have been reading about real estate crowdfunding platforms over the past several months. Many of these platforms seem to market to investors, showcasing high dividend yields in the 8% - 10%/year range.

I was intrigued, and tried researching those. After all, if I can obtain 10%/year investing in real estate easily, I can just retire and call it a day.

I read the following two articles in my research:

Investing with RealtyShares – see how I’m doing with real estate crowdfunding by Joe Udo

How To Invest In Real Estate Without Owning Real Estate by Mr 1500 Days.

I essentially posted the following comment on both blogs:

I believe that all of those platforms are still relatively untested. And probably giving those platforms a try could be worth it with what many refer to as “play money”.

Perhaps I do not understand these well enough and need to do more research. However, why would individual investors like you and me get a cut out of lucrative Fundrise/Mogul real estate deals, when other REITs (like the ones in VNQ) could be easily taking on those projects? I keep wondering whether those private placement real estate platforms just include mostly higher risk projects that more established players have passed up on, and may not deliver the total returns we want. The real test would be how these platforms would perform during the next recession. It would be interesting to check these out in a decade, and compare notes on how things progressed.

A decade ago, P2P loans were a new thing. Many people invested in them through Prosper & Lending Club, and the forward results were not good.

In general, those are new untested platforms, which may or may not do well for you over time. These investments have not been time tested during a recession. In addition, I do not understand very well how investment assets are segregated in those platforms, and how things would work out if a project you invested in fails miserably.

Most of you are familiar with my general screening criteria for identifying prospective dividend growth investments.

I look for companies with a long track record of annual dividend increases. Paying a rising dividend for at least decade is an indication of quality. After all, earnings can be manipulated to an extent, and share prices can go up for a period of time based on pure momentum. But cold hard cash is tough to fake for a decade ( or a quarter of a century).

I also look at the underlying profitability of each asset, and whether it has grown earnings and can grow those earnings over time.

I also look at dividend payout ratios, in order to determine whether the dividend is sustainable and can grow over time. I am looking for a safe and predictable amounts of dividend income to spend in retirement. I do not want to see companies that are paying out a higher portion of earnings by raising their dividend payout ratio. I want to see companies where dividend raises are supported by growth in earnings per share.

Reviewing things such as trends in long-term debt, revenues and shares outstanding is helpful as well. Also helpful is doing some qualitative review of the company, in order to get a general feel for the business. A basic understanding of the industry can be helpful as well. Certain industries like automobile manufacturing are highly cyclical, while others such as water utilities are less exposed to the fluctuations of the economy.

I then look at valuations, and try to determine if companies are attractively priced. I look at a lot of things in valuation such as interest rates, my opportunity set, etc.

After going through that basic framework of investment evaluating with the real estate crowdsourcing venues, I have determined that I am unable to determine if those distributions are sustainable. If are skilled in the art of evaluating real estate deals, you can probably make a more educated decision than me (such as Chad Carson or Brad Thomas or Carl from 1500days). Of course, if I had the aptitude to invest in real estate, I would have probably done so directly. My only real estate holdings include a personal residence, some legacy REITs and a REIT fund. Of course, many of the companies I own shares in, also own real estate as well. One example coming off the top of my head is McDonald's (MCD).

If you are making an investment in real estate that promises 8% - 10% dividends in a world where the average REIT fund yields around 4% - 4.50%, you have to stop and ask yourself what drives this huge difference. For my money, I am not willing to put up with illiquid, riskier and untested platforms that are difficult to evaluate. I see the risks to be too great.

Do you invest in Real Estate Crowdfunding platforms? What has been your experience? I would love to hear from you at dividendgrowthinvestor at gmail dot com.

Relevant Articles:

 -Rent Versus Buy - How to decide which one is best for you?
Five Things to Look For in a Real Estate Investment Trust
Three REITs Approaching Value Territory
How to Use Real Estate to Create Dividend-Like Income

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