EquityMultiple Review
There are many investors that believe the era of buy and hold is dead. The idea is that investments don’t perform as they used to, and so the modern investor must come up with alternative methods of accumulating wealth in order to retire with their desired standard of living. To accomplish this, many have turned to real estate.
When used properly, real estate does make a great investment. I’m not talking about the buy a home instead of renting a place to live argument, but rather investing in properties that are in turn rented out to others. The problem, however, is that many people don’t have the desire to manage properties, and property management companies quite often charge too much to justify the costs.
In the past few years, several companies have started offering a way for more people to break into the real estate world by taking away some of the frustration associated with it.
Methods of Investing in Real Estate
There are 3 ways you can invest in real estate; each one has different merits and different downsides.
Buy a Property – At its most basic you can purchase a property, find tenants, and collect rent. You earn an income and grow equity, but you may have to go without a tenant for several months, and you have to figure out maintenance.
Invest in REITs or Other Real Estate Funds – To get around owning the physical property, many investors turn to REITs or other funds backed by real estate. They are a little more stable and obviously lack the maintenance issues, but often you don’t completely know the properties behind them, and because they’re traded they are often subject to market fluctuations instead of the performance of the properties.
Use a Company like EquityMultiple – EquityMultiple is a bit different. Using crowdfunding techniques, this company allows you to minimize your risk, remove the maintenance obligations, and allow you to reap the rewards of being invested in real estate.
How EquityMultiple is Different
EquityMultiple is not your typical real estate investment. The founders saw several needs throughout the commercial real estate industry, from those who were building or purchasing the properties, to those who wanted to invest in them, and combined everything into a digital real estate investment platform backed by specific properties.
Unlike a REIT, which you don’t control the properties that are bought and sold, investors with EquityMultiple choose exactly which project they want to help fund.
Unlike a physical property, which comes with a set of responsibilities, EquityMultiple investors don’t have to worry about anything like maintenance.
How EquityMultiple Works
After you have created an account, you can view all of the projects that seek funding. These properties (and their managers) have been thoroughly vetted so only those that are expected to generate cash are selected. Only 5% of those that apply make it through the vetting process.
The properties are categorized into three types: Equity, Preferred Equity, and Syndicated Debt. Depending on your goal or risk tolerance, you choose the one that looks most appealing.
Equity – If you’re willing to take more risk, you can earn a targeted annual cash return of 6%-12%. If the deal does really well, there’s no upward limit on how much you can earn.
Preferred Equity – Preferred equity holders are paid before equity holders are paid. Those investing in this method get a fixed return but sacrifice unlimited upward potential.
Syndicated Debt – Essentially you act as the bank. This functions very much like a bond where you earn a fixed return with a repayment at the end of the term.
By taking this unique approach, you can invest directly into a specific property, and reap the rewards of loan repayment, growth, or a mixture of both, depending on how you structure your portfolio. Spreading your investments among many different properties with different goals results in a diversified real estate portfolio.
You can be an Investor or a Sponsor
As mentioned, there are two working parts to EquityMultiple: the investors and the sponsors. For those who are looking to generate funding for their real estate project, they can sign on as a sponsor. However, there are very specific “rules” to become a sponsor, and at this time only commercial ventures are being considered.
But You Must be an Accredited Investor
There’s one big caveat to those thinking this is a great way to break into the real estate investment world. At this time, only accredited investors are able to utilize the EquityMultiple platform. That means as an individual you must make over $200,000 or have a net worth (not including primary residence) of over $1 million. Essentially accredited investors can invest in securities that aren’t registered; such as “shares” of a building.
The Risks vs. The Benefits
If you meet the requirements, and you’re interested in investing, you still need to know the risks and the benefits. It may not be as picture perfect as the estimated 15%-20% return you see on the projection.
The Benefits – Minimal managerial expenses means that you keep more of your money. Most of the EquityMultiple projects have a management expense of between .25 and .50 basis points. You pick the investment, no guessing at what building(s) you own. Short terms; many are less than 3 years so you’re not tied up in one investment for decades. Backed by Mission Capital – a national leader in commercial real estate debt and equity finance.
The Risks – The project may fail. Like all investments, if something goes south everything is gone. Plus, it’s not liquid. While EquityMultiple will analyze buy-outs and trades on a case by case basis, you are for the most part invested until the term is over. They’re new – EquityMultiple started in February 2015 and was able to start processing transactions in September of that year. That means they only have two and a half years of experience.
Invest in Real Estate without the Physical Property
Other companies have created similar platforms, and they prove to be very popular. While buildings may lose value in a recession, companies still need office space and people still need a place to live. Collecting rental income is recession resistant. Now it’s easy to invest in properties without having to buy the physical properties.
