RealtyShares – What I Learned From Losing $50,000

RealtyShares - What I Learned From Losing $50,000 - F

RealtyShares – What I Learned From Losing $50,000

Yes, it was painful writing the title of this article as I realize that most people don’t like admitting their failures.

And most people certainly don’t like putting their failures online for the entire world to see but I’ve made it a point to be open and honest on this blog so here goes nothing…

Now that I’ve been passively investing in real estate for several years, I can now reflect back at the many things I did wrong with investing, especially with RealtyShares, and losing $50,000 (more on that shortly).

During the process, I realized I broke one of my main investing rules:

NEVER invest money in something you don’t understand.”

Boy did I break that rule.

Here’s the rest of the story….

What Is RealtyShares?

RealtyShares (was) a real estate investment platform that gave new and existing investors direct access to investment opportunities and real estate operators the ability to offer new investments and raise capital. At the time I invested with them, they has approximately 400 million assets under management.

They sought out, like many other crowdfunding platforms, to develop relationships with real estate sponsors to bring them qualified investors to their deals.

Another thing that RealtyShares focused on was the customer service and value they provided their investors on the RealtyShares platform.

Here’s how I got started…

Becoming Debt-Free

After my wife and I got out from under mounds of student loan debt, I decided that I needed to make a change.

Up until that point, I’d always had goals I was trying to accomplish. For instance, when I was in college, my goal was to get into dental school.

In dental school, my goal was to graduate in the top of my class in order to get accepted into a residency.

Shortly before completing residency, I had a job offer pulled out from under me two weeks before graduation. At that time, I went into survival mode.

My only focus and goal was to learn all I could about starting and running a practice.

Heck, I learned so much I wrote a book about it: What They Don’t Teach You In Dental School

After starting a practice from scratch, I focused on paying off $250,000 of student loan debt and a house that we were paying interest only on.

Once we reached debt-free status, I felt great but unfortunately was a bit confused not really knowing where to go to next.

As a matter of fact, Dave Ramsey has now had to modify his “get out of debt” teaching that also addresses this same issue.

He’s now shifted to teaching his debt-free followers to shoot for becoming a millionaire.

He actually partnered with Chris Hogan and wrote “Everyday Millionaires” which is the largest study of millionaires since the book “The Millionaire Next Door” was written.

It was at this point in my career that I realized I had only “one” stream of income coming into our household which concerned me as I’m still an active guy.

I love sports but have also been injured multiple times playing basketball and tennis.

Yes, I occasionally “ball” with my kids. I’m not that old yet!

I do have the appropriate insurance policies to cover me if I injure my hand or arm but still wanted to do something about that one income stream.

So I decided to look into real estate investing.

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My Crowdfunding Experience

Not only did I want to begin replacing my “earned” income with passive income, I also wanted to free myself so I could continue spending more time with my kids as they’ll be out of the house in the not too distant future.

At the time I started researching real estate investing options, our personal finance portfolio looked like this:

  • 95+% Vanguard Index Funds (mainly Vanguard Total Stock Market Index Admiral Fund VTSAX)
  • 529 Plans
  • HSA account (Do not contribute anymore as we have MediShare now)
  • <1% Bonds
  • 5% Cash (Emergency Fund)
  • Remainder personal and business checking accounts

I thought about starting off buying a couple of single family homes but after talking to friends that invested in real estate full time, I decided to go a different route.

It seemed that they constantly were having to take calls from either tenants that were having problems or their management companies when structural damage needed attending to.

As someone that still practices full time and wants to stay a devoted father and husband, I decided to bypass the active real estate investing route and chose to invest passively via crowdfunding.

One of the sites I began investing with was Realty Shares.

Debt And Equity Investments

Debt Investment

I initially invested in a hand full of small debt deals to get my feet wet especially since most of these had low minimum investments. In these types of investments, the investor is acting as a lender to the property owner or the deal sponsor.

The loan is secured by the property itself and investors receive a fixed rate of return that’s determined by the interest rate on the loan and how much they have invested.

In a debt deal, the investor is at the bottom of the capital stack which means they have priority when it comes to claiming a payout from the property.

These deals were easy to understand but one of the main downsides is the fact that returns are limited by the interest rate on the loan. In other words, their returns are capped.

Equity Investment

As I became more comfortable investing with RealtyShares, I decided to step it up and began researching preferred equity investments.

With these investments, the investor is a shareholder in a specific property, and their stake is proportionate to the amount they have invested.

Returns are realized in the form of a share of the rental income the property generates, less any service fees paid to the crowdfunding platform.

Investors may also be paid out a share of any appreciation value if the property is sold.

What really attracted me to these deals was being able to capitalize on the profit once the property was sold.

In essence there were no cap on returns plus the tax benefits were outstanding.

One perk of owning an investment property is being able to deduct certain expenses associated with its ownership, such as depreciation and the cost of repairs.

With equity crowdfunding, deals are normally structured through an LLC, which is treated as a flow-through entity for tax purposes. That means that investors can reap the benefits of the depreciation deduction without having to own property directly.

Now with a potential for higher returns comes the potential for higher risk. These deals are typically riskier versus debt deals but I was still willing to take a chance.

RealtyShares Prescott Woods

I decided on investing in an apartment complex in Tulsa, OK. The complex was called Prescott Woods and the projected cash on cash return was 6-8% and targeted internal rate of return (IRR) was projected to be 17.9% – 19.9%.

Honestly, I didn’t know what I was doing back then when I originally invested in this project. My eyes immediately would look to see if they were accepting new investors and what the returns were.

RealtyShares claimed that they were approached with hundreds of deals per year and ONLY would put the cream of the crop on their site. Other sites such as Realty Mogul and others state the same thing.

I was putting my total trust in them to do the leg work for me.

For this particular investment, the minimum was $50,000 and was for accredited investors only.

Again, investing in this property was my BIG mistake due to lack of due diligence on my part with the sponsor.

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Here’s the update RealtyShares sent me on 8/19/19 after IIRR Management Services,LLC (IRM) took over their site:

According to our findings, this asset has been identified as a Tier 3 asset. All possible distributions, interest payments and proceeds from this investment have now been collected and paid in accordance with the investors’ rights per the loan documents.

IRM has classified this investment as Failed. This is because the sponsor underestimated how challenging it would be to turn around an apartment complex at the edge of a rough neighborhood in Tulsa.

The crime and resulting stigma of the neighborhood put a cap on the rents that tenants would pay and the resulting renovation to the subject apartments did not allow the sponsor to charge a premium for renovated apartments.

Compounding this error, the sponsor’s fast-paced construction schedule meant that the renovation dollars were spent before the sponsor recognized that higher rents for renovated units were not achievable. They were also unable to secure additional capital.

The commercial property sold for $8.3MM, which resulted in a total loss for investors. There is no further remedy available to IRM to pursue such as a guarantee other security.

IRM will now close this investment, no further updates, payments or distributions will be made for this investment.

After I originally received this notification, I got a sick feeling in my stomach. This entire ordeal had been going on for over two years and I finally was hit with reality….my entire investment was gone.

What Would Rocky Do?

Whenever I face failures and tough times, my mind always goes back to a scene in Rocky.

I’m not sure if it’s Rocky 8 or 9 or some other number. It’s the one that came out in 2006.

I reminisce the part where he’s talking to his son about facing adversity.

YouTube video

“Let me tell you something you already know. The world ain’t all sunshine and rainbows. It’s a very mean and nasty place, and I don’t care how tough you are, it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life.

But it ain’t about how hard you hit. It’s about how hard you can get hit and keep moving forward; how much you can take and keep moving forward.

That’s how winning is done! Now if you know what you’re worth, then go out and get what you’re worth, but you gotta be willing to take the hits, and not pointing fingers saying you ain’t where you wanna be because of him, or her, or anybody. Cowards do that and that ain’t you. You’re better than that!”

Multifamily Syndications

I realize it would have been easy to quit the real estate investing thing after such a large loss but I don’t think that things happen to us, they happen for us.

The experience actually inspired me to both learn more about these types of deals, specifically multifamily syndications, and also help educate others on what you should know before investing in these investments.

I encourage folks to do their part and learn as much as they can before considering investing.

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One other thing I highly recommend is to join the Passive Investors Circle.

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  1. Wow.

    That is gut wrenching to say the least 🙁 Sorry for that, it is a major hit for sure no matter what your net worth is.

    I went on the Realty Shares platform for 3 different debt investments and luckily got paid as promised with return of capital.

    Yours is a precautionary tale for sure on what could go wrong with investments. Hopefully your next ones will be much better.

  2. Woah, really interesting post about real estate investing. Awesome transparency. At least it was a tax write off, right?

    Congrats on paying off your student loans so quickly too. 🙂

  3. I feel your pain. I haven’t officially lost any capital yet, but one investment I’m in is looking like it will lose half if not all of my principal. It has been a comedy of errors from day one. One of my top criteria now is sponsor track record on previous projects.

  4. Right post at the right time. Currently reading voraciously and investigating investment property as part of an act two, and this is the cautionary tale I needed to hear. Thank you!

  5. Good overview. I am currently in a similar situation with a loss on an investment with Realtyshares. I m also unsure of the extent of tax write off until K-1 is issued next year.
    I am trying to understand how do you do due diligence on a particular property where not much independent verifiable info exists ; you have to more or less trust that crowdfunding site (Realtyshares) has done that for you since they have more access to info from the entity. They had a good review of the sponsor past track record. It will be hard to assess or predict with high probability how a particular investment will do in such situations. Its not like a company stock where tons of research info may be available.

    1. This is the exact reason why I no longer invest with crowdfunding sites. I sought out and have personally met sponsors that I trust that also have the same type of investment philosophy as myself.

      I now only do deals with those handful of operators.

  6. This is a great post. Thanks, Jeff.

    In doing a lot of analysis on sponsors and deals, we have learned that the crowdfunding sites are very limited in the amount of due diligence they can do. It is incumbent on all of us to do very detailed due diligence on all sponsors, regardless of the source. Even if they are highly recommended by a close friend or any website.

    I appreciate your site, Jeff. Your readers are fortunate to have a resource like you!

  7. I was with Realty Shares almost from their beginning. I have had real estate deals with local partnerships as well as a number of crowdfunding sites. Realty Shares was my favorite with most of my deals. You can bet I puckered when they made their announcement that they were no longer taking investments. I still have 6 deals active there now. Looking back on it, the only crowdfunding deals that I have really lost anything in I could have predicted were going bad. Such as second mortgages on very expensive houses and loans to fund the purchase and building of a food franchise. Apartments are great if there is some way for the sponsor to add value by increasing the income since the value of the asset is based on the income stream. Office buildings and shopping centers can be good, but watch out for shoppers shifting to online purchases. On any crowdfunding deal, I always go online and look at the area it is in. You don’t always have the address, but with a little detective work online, you can figure out where the asset is. Read the ratings from the tenants. There will always be some haters, but you can read between those lines. Also, try to spread your investments around into many deals and areas. This spreads out the risk. Do the best you can then go for it. Good luck!

  8. Great post.

    I wish more people would post about their bad investments.

    It’s great to learn from other’s mistakes.

    Thanks for sharing!

  9. I can feel your pain. Think I have lost more than $75k on Realty Shares investments. So much for that underwriting they were bragging about…. Lesson learned. Since then I have invested primarily in REIT’s and have done very well.

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