Are you looking for an effortless way to invest in private real estate?
Maybe you don’t have the cash to buy rental property. RealtyMogul lets you directly invest in commercial real estate with $5,000.
Crowdfunding real estate still lets you earn passive income. You don’t have to screen tenants or fix clogged toilets like a landlord. And you can receive annual returns of at least 7% without investing in stocks.
This RealtyMogul review will help you learn how to invest in real estate.
RealtyMogul lets all investors who want to invest in commercial real estate. Accredited investors have access to private placements and 1031 exchanges. This can be a good fixed income alternative if you can accept more risk for a higher potential return.
Table of Contents
How Does RealtyMogul Work?
RealtyMogul lets you directly invest in commercial real estate. To clarify, you won’t invest in single-family homes or hotels to list two exclusions.
Specifically, you can invest in these property types:
- Multifamily apartments
- Industrial buildings
- Office complexes
- Retail shopping centers
The best part is that you do not have to manage the property. And you can invest in a taxable or IRA account.
Commercial real estate is expensive, so it is hard to invest in. But now, with crowdfunding real estate platforms like RealtyMogul, you can start with a $5,000 initial investment.
Accredited investors can invest in private placements and 1031 exchanges. The average hold periods are between three and seven years.
However, a more effortless investment option are two real estate investment trust (REIT) products. These two portfolios invest in projects across the United States.
For non-accredited investors, these REITs are the only investment option. If you make less than $200,000 a year or own less than $1 million in liquid assets, you‘re a non-accredited investor.
Private Real Estate vs Public Real Estate
What makes investing with RealtyMogul different than the real estate stocks and funds in your IRA or 401k?
First, RealtyMogul lets you be a direct investor in real estate deals. Public investments only allow you to invest in a company or broad index. As a result, you can earn a larger dividend with RealtyMogul. But crowdfunding real estate can be riskier and harder to sell.
For instance, you can invest in the Vanguard Real Estate Index Fund from your online stock brokerage. This fund has an approximate 3.19% annual dividend yield, but the MogulREIT I has a current annual dividend yield of 7.81%.
Private real estate is more illiquid, like trying to sell your house. It can take months to find a buyer. In contrast, public real estate stocks can be sold any day the stock market is open.
Also, private real estate can be riskier because you invest in fewer properties. The MogulREIT I has 14 investment properties. But the Vanguard index fund holds 185 different stocks.
Debt vs Equity Financing
Every RealtyMogul property either has debt or equity financing. The type of financing you choose determines how you make passive income.
Debt financing is like investing in bonds. You earn a monthly dividend from loan payments and monthly rent. These deals are less risky than equity investments, although your potential income is lower. For instance, you might earn an 8% annual return while an equity deal might earn 11%.
The investment period for debt-backed holdings is usually a few years shorter.
One example is investing in an existing office building. You earn monthly income when the tenants make their rent payments. And you collect interest from each loan payment.
Potential Risks of Debt Investments
If the borrower defaults on the loan, you may lose your remaining balance. Debt investors receive payment before equity investors. The proceeds from the property sale will recoup your investment first.
Equity offerings are riskier but have more potential income. This option is more like investing in growth stocks. You focus more on long-term growth than monthly dividends.
Most equity gains come from rising property values. But you won’t see these gains until the property sells. These deals can have an investment period of up to 10 years.
A sample equity project is buying multifamily apartments. Improving the complex and holding for several years can make the property value increase. Eventually, RealtyMogul sells the complex for a profit. You keep a piece of the profit and get your original investment back.
You might earn a small quarterly dividend. But you make most of your income when the property sells.
Potential Risks of Equity Investments
If the investment fails or sells for a loss, you lose money. Debt investors get paid first. You also earn a smaller dividend with a less frequent payout.
Who Can Invest?
All U.S. residents at least 18 years old can invest with RealtyMogul. However, you must be an accredited investor to invest in single projects or a 1031 exchange.
There are two ways to be an accredited investor:
- Your annual income is at least $200,000 for two years or a joint income of $300,000
- You have a net worth of at least $1 million
The $1 million net worth figure can’t include the value of your primary home.
The U.S. Securities and Exchange Commission (SEC) only requires you to meet one of these requirements. If so, you have full access to the RealtyMogul investment options. Below are the two options only open to accredited investors.
Tip: Quickly track your net worth for free with Personal Capital.
You can invest in these types of individual commercial properties:
- Multifamily apartment
- Retail shopping centers
These properties are across the United States. Most of them are equity offerings with quarterly distributions.
To avoid risk, RealtyMogul doesn’t invest in hotels. Nor do they offer single-family homes (equity) or single-family mortgages (debt). They also stay away from vacant properties and land development projects.
RealtyMogul is the general investor, and you buy a small share. Most placements have a three- to seven-year investment period. The minimum investment is usually $15,000 to $50,000.
This can be an easy way to invest in commercial real estate nationwide. The RealtyMogul team physically inspects each property. They also only try to partner with experienced real estate companies. However, you should still do your own research.
Also, RealtyMogul won’t do capital calls to raise additional funds. You can invest what you initially pledge. And subsequent investments are an option if the placement needs more funding.
Do you already own rental property? You might be able to reduce your taxable income with a 1031 exchange. You can sell select properties and defer your capital gains taxes. This means you have more money to invest in a new property.
Your minimum investment can be as low as $25,000. It’s also possible to invest in debt-type deals with a 1031 exchange.
Anyone can invest in the RealtyMogul portfolio with their two public non-traded REITs. These MogulREITs are an easy way to invest in debt and equity deals.
Accredited investors can invest in these REITs as well. You might find some of these properties as a private placement.
There are currently two different MogulREITs open to all investors. To point out, each one has a different investment strategy. The minimum investment is $5,000 for each one. And subsequent investments are at least $1,000 per REIT. You have the option of investing in one or both REITs if you have the cash.
When you invest, you will buy shares of each REIT. The share price is based on the current net asset value (NAV). In October 2019, each share costs around $10. So, if you invest $1,000, you own ten shares.
The MogulREIT I balances debt and equity investments. As of October 9, 2019, this REIT has a 57% debt and 43% equity. MogulREIT I holds multifamily, office and retail properties.
This REIT is best if you want monthly dividends and less risk.
You earn a monthly dividend and has a historical 7.81% annual return (after fees). This annual return rivals the S&P 500 historical return of 7.96%.
This passive income idea means you can earn stock market-like returns while investing in commercial real estate.
More aggressive investors should consider MogulREIT II. This REIT only holds multi-family investments. This portfolio is 100% equity financing. As of October 9, 2019, MogulREIT II pays a 4.5% annual distribution. You receive payments each quarter.
MogulREIT II launched in September 2017. The REIT management team will sell current holdings. And, as they do, the long-term income should increase.
For example, RealtyMogul private placement equity deals usually earn between 8% and 11%. The long-term returns for this REIT might be similar.
If you don’t need the short-term dividend income, holding out for higher long-term growth can be worth the wait. Remember, equity deals earn most of their gains when the property sells.
Related Article: What is Dividend Income? Everything You Need to Know
Selling Your MogulREIT Shares
You must invest your cash for at least three years to avoid a repurchase fee. This fee is similar to a 401k early withdrawal fee. RealtyMogul begins repurchasing your REIT shares after the first year.
The repurchase fee depends on how long you own the MogulREIT shares.
Below is how much of your current investment you get back when you sell shares:
- Own for less than 12 months: 0%
- Between one and two years: 98%
- Between two and three years 99%
- Own for at least three years: 100%
There is no repurchase fee if the investor dies.
Here is an example. Investing in December 2019 means you must wait until December 2022 to avoid this fee. After three years, you get the original investment plus all dividends penalty-free. Selling within the first 12 months forfeits your entire investment.
It is free to join RealtyMogul. You only pay fees once you invest. These fees are similar to index fund fees and robo-advisor account management fees.
One downside of crowdfunding investing is that you pay more fees than with an index fund. You can find the exact charges by reading the investment offering circular. This document is similar to an index fund prospectus. It details information like the investment goals, fees and potential risks.
Even with these fees, your cash can still earn a steady passive income. In fact, it can earn more than a high-yield online savings account. However, crowdfunding real estate is riskier.
Here are the fees RealtyMogul collects for the MogulREIT I:
- Upfront fee: Up to 3% of your contribution amount (one-time fee)
- Asset management fee: 1% annualized of average investment value
- Disposition fee: Up to 2% of the contract sales price or each property sold (equity assets only)
- Servicing fee: 0.5% of the original loan amount (debt assets only)
If you invest $5,000 in MogulREIT I, up to $150 in one-time upfront fees might be withheld. These upfront fees include third-party expenses and operating expenses. The 1% annual asset management fee is $10 for every $1,000 in your account.
These fees are similar to other crowdfunding platforms. Once again, all applicable charges are in the offering circular.
You will need to report your RealtyMogul earnings when you file your taxes.
All MogulREIT investments will get a Form 1099-DIV by January 31. This is the same form you might get from your online brokerage. Your dividends are taxed as ordinary income. So it is just like your day job or side hustle income.
Private placements will receive the more complex K-1 tax form. RealtyMogul tries to mail all K-1 forms by April 1.
A self-directed IRA can reduce your taxable income. It can either be Roth or Traditional IRA.
Traditional IRAs reduce your taxable income for the current tax year. The contributions grow tax-deferred, and you only pay taxes when you make a withdrawal.
Roth IRAs grow tax-free. But you pay taxes on your contribution amount now. On the positive side, you won’t be paying taxes on these gains in retirement.
You must pay attention to annual contribution limits. In 2019, you can add $6,000 to each IRA if you’re under the age of 50. If you are 50 or older, you can contribute $7,000 per year.
You can also rollover your 401k to fund a self-directed IRA. If you invest in a MogulREIT, the minimum initial investment is $5,000. And it is the same minimum if you invest with a taxable account.
What Makes RealtyMogul Unique?
Accredited investors can invest in many private placements and 1031 exchanges. Other platforms may only let you invest in residential real estate.
You also have the option to invest in public non-traded REITs. These two REITs are open to accredited and non-accredited investors.
Once again, not all crowdfunding real estate platforms offer REITs and private placements. Usually, they only accept accredited or non-accredited investors, not both types.
Is RealtyMogul Safe?
Like any investment, crowdfunding real estate has some risks. Here are some of the steps RealtyMogul takes to limit risk:
- Usually partner with experienced third-party real estate companies
- Visits every property during the underwriting process
- Approves less than 1% of investment proposals
- Invests in multiple property types across the United States
- Avoids “high-risk” properties like new construction, hotels and high-vacancy buildings
For each MogulREIT and private placement, you can read the unique risk factors. RealtyMogul has only been around since 2012 and hasn’t been “recession-tested.” If a borrower defaults or an equity investment fails, you can lose money investing. Defaults can increase if vacancy rates rise or property values fall.
To limit risk, only invest what you feel is a comfortable amount. Always maintain a diversified portfolio. Also, make sure you understand how the investment can make or lose money.
Positives and Negatives
There are some pros and cons to consider.
- Private placements and 1031 exchanges for accredited investors
- Two MogulREITs open to all investors
- Can invest in multiple types of commercial real estate
- Self-directed IRA investing is available
- $5,000 initial investment for MogulREITs (maybe too high for some investors)
- Must hold MogulREITs for three years to avoid repurchase fee
- Hold periods can be up to seven years
RealtyMogul is a legit way to invest small amounts of money in real estate. The MogulREITs are an effortless way to invest in this hard-to-access niche. Accredited investors have the most flexibility, thanks to private placements and 1031 exchanges.