If you’ve got $500 burning a hole in your pocket and 5 years to let it ride in an investment, you could join the wealthy and become a real estate investor. Or at least that’s the claim of DiversyFund.
After all, if the 1% allocate 30% of their assets to the private market real estate, while the 99% invest 70% of their assets in stocks, then the wealthiest investors must be doing something right. Or they wouldn’t be in the 1%.
DiversyFund is a real estate investment trust, or REIT, that allows regular, everyday investors to move away from the volatility of the stock market and find diversification from stocks and bonds. Its real estate investments, the company, says, earn returns through dividends and appreciation that have beaten the stock market.
The minimum investment is $500 and there are no management fees. All distributions are reinvested into properties until they’re sold, which is about five years.
The company was started in 2016 by Craig Cecilio and Alan Lewis, and is based in San Diego. Cecilio worked for more than 20 years raising and managing more than $500 million in assets. Lewis spent nearly a decade as a corporate lawyer and investment banker on Wall Street before moving into real estate development in 2014.
DiversyFund charges no fees. These include no broker fees, annual fees, or the 1% management fee that other REIT platforms charge.
Each real estate project, however, may have developer fees of 2-8% for finding, acquiring and managing each holding, because DiversyFund acts as the developer.
The company owns all of the real estate assets that are being purchased, thus cutting out the middleman and middleman fees. Other real estate crowdfunding platforms raise funds for third-party projects, which often require fees. DiversyFund profits alongside its investors when a project is completed and sold.
The minimum investment in DiversyFund is $500. The initial investment was $2,500, but in May 2019 the Securities and Exchange Commission, or SEC, approved DiversyFund’s request to lower the minimum investment.
Its one investment is the DiversyFund Growth REIT. It consists of multifamily properties, also called apartment complexes. The average investment is $2,500, according to the company. Investors co-own all of the multifamily assets the fund holds.
There are many types of investments that are worth comparing REITs to when looking for the best returns. We discussed the stock market earlier, pointing out that the Dow Jones index has averaged an annual return of 5.42% through May 2018. The S&P index has averaged annual returns of 10% from its inception through 2018.
Here are what some other investments have averaged:
The S&P 500 is a type of exchange-traded fund. ETFs are traded on stock exchanges and are similar to mutual funds. They’re sold throughout the day, while mutual funds are sold at day’s end. Finding an average return for ETFs is difficult since there are so many of them.
In 2020, mutual funds in seven broad categories averaged a return of roughly $10%, almost double the average annual return over the past 15 years.
Roth IRAs have historically earned 7-10% average annual returns. A traditional Individual Retirement Account invested in large-company stocks has earned an average annual return rate of 11.31%, according to data from New York University.
Long-term government bonds have returned between 5% and 6%, according to investment researcher Morningstar.
Past performance is no guarantee of future returns, but DiversyFund makes it clear at various places on its website that long-term real estate holdings are a great way to see long-term wealth creation.
It points out that the historical performance of a $10,000 REIT investment from September 2019 to April 2020 would grow the investment to $10,424 in April 2020.
Dividends from cash flow during that time are also coming in from monthly rental income, such as $43.44 in April 2020 from the historical dividend growth on the same investment, according to DiversyFund.
Such dividends from rental income are automatically reinvested to pay for the renovation of the properties. Rents are also increased to raise dividends.
The properties also appreciate in value over time and are sold at the end of the investment term.
The company points out that it can’t provide investors with a projected return or predict how the investment will perform, per SEC guidelines. But it can refer to its track record.
In 2017, its investors saw average annualized return of 18%, followed by 17.3% in 2018. Its Growth REIT was launched in 2020 and is still acquiring properties, so lower returns are expected during this early period.
In 2019 REIT investors saw a 5% dividend yield, which DiversyFund expects to increase as it renovates properties and raises rents. This dividend isn’t the total return on investment, but only the cash-flow from incoming rents. Property price appreciation over time can raise the return.
Stock market returns
By comparison, the stock market had a better return in 2017, but lost money 2018:
Dow Jones Industrial Average:
Total return 2017: 29.11%
Total return 2018: -3.48%.
The Dow Jones started on May 26, 1896. Through May 25, 2018, the index’s average annual return has been 5.42%.
S&P 500 index:
Total return 2017: 21.83%
Total return 2018: -4.38%
The S&P index began in 1926 when it was called the Composite Index and had 90 stocks. The index adopted its current format in 1957 of 500 stocks. Average annual returns for the index from 1957 through the end of 2018 were about 7.96%. Since its inception in 1928 through 2018 it has earned 10% in average annual returns.
DiversyFund says that after properties are sold, investors get their principal back and a 7% preferred return before the company receives any profits.
If the profit is higher than 7%, profits are shared with 65% going to investors and 35% to the company. This ends when investors make a return averaging 12% per year when remaining profits are split 50-50.
The properties are expected to be sold at the end of 2023, though DiversyFund can choose to extend it two years.
This is an important feature to understand about DiversyFund. The minimum investment of $500 is great, but prospective investors should realize that any amount of money they invest is a long-term investment.
The DiversyFund Growth REIT has a five-year projected term, meaning you can’t pull out your money before then.
The company’s goal is to invest in projects that can be liquidated, or sold, within about five years. Revenue is also generated from rental income.
Properties are sold when market conditions allow a profit when investors will receive their principal and returns back. Again, this is expected to be five years. A prorated adjustment on the return is made based on how long someone was in the fund to compensate those who have been in it the longest.
Some assets are sold after year four of the investment term. Investors will receive dividends if profits are made from these sales.
DiversyFund’s REIT isn’t open-ended, meaning it won’t go on indefinitely. It goes through a five-year cycle of acquiring properties, renovating, raising rents, and then selling the assets. DiversyFund is qualified by the SEC to raise up to $50 million when it will close the REIT and open a new one.
After investors get their payout in five years, they can either reinvest in DiversyFund’s next fund or take a full payout.
Nonaccredited investors allowed
Accredited investors aren’t the only kind of new investors allowed in this long-term investment. Some real estate crowdfunding platforms only allow accredited investors.
They’re defined by the SEC as having a net worth of more than $1 million, excluding their home’s value, or annual income in each of the last two years of at least $200,000 for individuals or $300,000 for a couple.
DiversyFund is open to all U.S. residents, meaning they can be nonaccredited investors.
Accredited investors are legally allowed to buy securities that aren’t registered with the SEC, which can save the exempt companies a lot of money. Such offerings can put accredited investors at a lot of risk, and authorities want to ensure they’re financially stable and realize the risk they’re taking.
Who is DiversyFund best for?
Nonaccredited investors seeking diversification
If you're a nonaccredited investor and you want diversification in your portfolio, DiversyFund might be for you. It makes it easy to invest in real estate by being crowdfunded.
Investors who don’t need money back soon
It can also be a good choice for investors who don’t need the cash or any dividends from their investment back in three to five years.
People with only $500 to invest
Investors with only $500 to invest may also benefit from using DiversyFund.
Who shouldn’t use DiversyFund?
People who want liquidity
You can’t sell your investment in DiversyFund until the company decides to sell its investment properties. The plan is for that to happen in three to five years, most likely in five. Any dividends earned are automatically reinvested for renovations.
People who don’t like limited investment choices
DiversyFund offers only one REIT, called the DiversyFund Growth REIT. And you’ll have to own it for five years before you can cash out. This one choice may be fine for some new investors, but others may want more investment opportunities to choose from.
Another option is a publicly traded REIT that’s traded on an exchange. They’re liquid investments that can more easily be bought and sold. REIT mutual funds can also easily diversify real estate investment portfolios for everyday investors.
Diversify portfolio: Access to commercial real estate deals, as opposed to stocks and bonds that most people are invested in.
No management fees: No fees are charged because DiversyFund cuts out the middleman and buys, runs, and sells the properties. For that service, the company takes 2-8%.
Don’t have to be accredited investors: Nonaccredited investors can join, which basically means they don’t have to have a high income.
Long timeline: Five-year investment until paid out.
No liquidity: Investors can’t take their money out before the properties are sold in five years.
Limited choices: Only one REIT is available through DiversyFund.
DiversyFund vs competitors
Up to 3%
Fundrise also sells REITs, with investment money funding real estate deals from small businesses to multifamily apartments.
Its platform fees are relatively low, with Fundrise comparing its fees to higher ones at Vanguard and Schwab in selling REITs. Like DiversyFund, Fundrise works to cut out the middleman and could charge an unspecified “development fee and liquidation fee” that it says is rarely charged but is an industry-standard.
Like many other investments, dividends from the DiversyFund REIT are taxed. The dividends are generated each month and automatically reinvested, and are taxed as ordinary income. Investors will receive a 1099-DIV form to file with their taxes every year. It will reflect all appropriate deductions from depreciation. When the REIT is liquidated at the end of the investment term, it will be treated as capital gains.
What exactly is my investment in?
The REIT offered by DiversyFund owns several multifamily properties. You’re not investing in one property but across the assets owned by the REIT. As more money is raised and more property is bought, investors become more diversified. DiversyFund buys apartment complexes throughout the U.S. The buildings are about 150-200 units or apartments in areas with strong job growth, population growth, and vacancy rates below the national average. The company says it focuses on multifamily properties because they tend to perform very well in the long term, especially during an economic downturn or recession when people are downsizing or moving from their large single-family homes and luxury apartments into multifamily assets.
Where is the property?
The REIT mostly invests in apartment real estate in California, Texas and North Carolina.
Can I cash out early?
No. It’s a non-traded REIT that isn’t liquid. Once the investment is processed, funds are used to buy properties. DiversyFund doesn’t offer early withdrawals, so investors should be comfortable with the five-year term before deciding to invest.
How do I process my first investment?
As we mentioned earlier, the online process of creating an account and funding it is easy. The website walks you through the process. You provide your name, email address, zip code, phone number and create a password. Once an account is created, you can invest in the REIT. This is a six-step process that users are guided through. To properly report your earnings, the SEC requires investors to provide their full legal name, street address, and Social Security Number or Tax-ID number. You then set up the form of ownership, such as joint ownership with a spouse. Your bank account is connected so that the amount of money you want to invest, and possibly add to each month with more money, is moved to the account. The money is held in escrow for five to eight days. Proof of certain documentation, such as a driver’s license or passport, may be required to verify the owner of the investment.
Does DiversyFund have customer support?
Its customer service agents are available to help via phone, email or live chat on weekdays from noon to 8 p.m. Eastern time.
The bottom line
Diversification is always a good thing to have in your investment portfolio. Stocks and bonds are just the beginning, however. To be a legit investor in the ranks of the wealthy, you can follow their lead and invest in commercial real estate.
A real estate investment trust, or REIT, offered by DiversyFund is one of a few real estate crowdfunding platforms that can expand your investment options. It requires a minimum investment of $500, though your money will be tied up for five years until the property in the REIT is sold.
That may be a risk you want to take if you don’t need your investment money back within five years. If you think you will, then mutual funds, ETFs and other long-term investments may suit you better.
But for returns that could put you in the same investing circles as the top 1%, a REIT at DiversyFund is worth looking at closely.
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