Frequently Asked Questions About Real Estate Crowdfunding
It is very common to have questions before investing in a new opportunity. We have compiled a few and answered them below.
To start, crowdfunding is a new tool, which is utilized to raise money for businesses via the power of the crowd. By offering lower entry fees to a larger number of investors, these businesses are successfully launching their next big project.
Furthermore, until recently real estate investments were only available to those with the necessary private equity. This in itself made investing in real estate seem impossible for many individuals.
However, once the Jumpstart Our Business Startups Act of 2012 changed some rules under Regulation D, many doors opened for the real estate industry. Most notably, the ability to utilize crowdfunding to gathering funding for investments. Today, investors of all kinds can easily start investing in real estate with as little as $5,000 via crowdfunding real estate platforms.
Well to start with, an eREIT stands for Real Estate investment Trusts, which can be invested in through a mutual fund. Furthermore, eREITs’ regulations and distributions differ from those of crowdfunding real estate investments.
To compare the two, eREITs generally hold high maintenance fees, as well as other costs. While crowdfunding real estate through DiversyFund allows complete control with minimal fees/no fees.
When investing in crowdfunding real estate, the two types of investments available will be equity or debt investments. Here are what both types of investment can be defined as:
Debt investments: When investing this way, the investor becomes the lender to the entity sponsoring the real estate deal. The loan is secured by the property. Furthermore, each investor receives a fixed rate of return. This is calculated via the interest rate on the loan and how much the investor has invested in the project. Overall, this type of investment leaves the investor with priority when it comes to obtaining a payout from the deal. Equity investments: With an equity investment, the investor is considered a shareholder in the property. Thus, their stake is directly proportionate to what they invest in the deal. Finally, when it comes to returns, investors can be distributed their shares in a variety of ways including rental income generated or appreciation value should the property sell. Of course, you will need to ensure the crowdfunding real estate platform does not have any fees as well.
Learn more about the differences between equity and debt investments here.
DiversyFund is a crowdfunding real estate investment platform, which connects accredited investors to exclusive investment opportunities. By connecting investors to borrowers on in-house pre-qualified investments, our platform provides a simplified way to invest in real estate.
Even more so, our team of experts in real estate and finance professionals has over twenty years of experience to assist you with further diversifying your portfolio. Through their expertise, our real estate crowdfunding platform is able to deliver access to investments that previously were considered unavailable to the general public.
- Renovating SFR’s
- New Construction on Spec. Homes
- Small, Mixed-Use Commercial Development Projects
- Income generating Commercial Properties
To become an investor with DiversyFund, you will first need to be an accredited investor. In short, the Securities and Exchange Commission (SEC) defines an accredited investor as an individual, who has a previous, current or expected year of income that is approximate $200K or $300K with a spouse. Additionally, one can be considered an accredited investor if their net worth is $1MM, not including their residence.
After ensuring you meet the SEC’s accredited investor standards, you simply need to create an investor profile on DiversyFund’s website, complete your profile and select the opportunity you would like to invest in.
Of course, if you need any assistance along they way our Investor Relations team is happy to help.
- Completed & Signed W-9
- Verification of Accreditation
Once you’ve made an investment with DiversyFund, you will receive monthly updates via email regarding your investment. We will include images, videos and more to ensure you are always aware of how your investment is progressing. Furthermore, you will have 24/7 access to your investor portal, which allows you easy access to information about your investment(s). If you happen to need further assistance or would like more information, please reach out to your investor relations representative.
Preferred Equity is a type of equity investment in real estate that combines the best of both debt and equity worlds.
While Preferred Equity is subordinate to the debt, it is senior to the common equity and developer’s profit share. Additionally, in the LLC’s Operating Agreement, the terms of the Preferred Equity are spelled out. Even more so, credit risk is generally lower than common equity.
- Single-Family Residential Homes
- Commercial Office Buildings
- Apartment Complexes
- New Construction
- Luxurious Residential Homes
For each property, DiversyFund forms a new single asset LLC. Within the LLC, preferred equity investors receive direct ownership.
Sample Scenario For example, our current project started construction this week. It is a ground-up construction of a luxury single-family residence in a gated community in Monterey, California. During the 10-month construction period, Preferred Equity investors will not receive any monthly cash flow payments. Once the property is finished and sells, proceeds from the sale will be distributed as follows:
First, to pay off the construction loan. Second, to pay the Preferred Equity investors their capital plus their 18% accrued return Last, to pay off common equity and any developer profit. So at time of sale, a Preferred Equity Investor who initially invested $100K would receive $118K (assuming the property sold at the end of one year).
It should be noted, that as the developer, DiversyFund does not receive any profits from the sale of the property until the Preferred Equity investors are paid their 18% return in full. Thus, we only take on projects that we are extremely confident in. Because of our financing capabilities, we have brokers constantly bringing us attractive off-market deals. And of those deals we review, we develop less than five percent.
When investing in preferred equity investments, investors are generally a limited member within the LLC and purchasing shares. The LLC owns the single investment property alongside the other investors or developers.
For example, a specific new construction home would be owned by the LLC and it’s sponsors.
Furthermore, by forming an LLC, you are given added liability protection, thus protecting your personal assets.
For each LLC formed, an Operating Agreement is formed, which will vary for each investment available on our platform.
Generally, each will designate a manager and limited members. Once these roles are designated, the manager typically handles the day-to-day decision making, while the limited members act as passive investors. Although, there are certain actions which may require a vote by the limited members.
In the case of DiversyFund, we are typically the manager of the LLC, while you act as the passive investor. This allows you to enjoy the benefits of investing in real estate without needing to deal with mortgage brokers, insurance agents and more.
DiversyFund, Inc. is generally the Managing Member of the LLC formed. With over two decades of experience in the real estate and finance industry, our team of experts is here to simplify the process of investing in real estate for you.
By acting as the Managing Member, our team is able to make the necessary decisions at the right moments.
For each investment opportunity available through our platform, the distribution rates will vary. While some distributions are not made until the property sells, other investments provide quarterly distributions.
Please review your investment documents for specific distribution information.
Our team estimates K-1s to be available to investors by the 1st of April each year. Once your K-1 becomes available, you will be immediately notified.
Due to needing tax information from other parties at times, there may be delays in receiving your K-1. Therefore, we cannot promise you that your K-1 will be available by April 15th. Please understand, that we all efforts will be made to get your K-1 Form to you in a timely manner.
- Interest Income
- Rental Income
- Gains from property sale
To further understand the differentiations between the various categories of income, we strongly recommend contacting your tax advisor or accountant.