One of my goals over the next few years is to build a diversified stream of passive income. I hope to use that stream to cover some of my expenses during my freedom years. One area I've been experimenting with over the past couple of years is alternative investments, specifically equity crowdfunding.
I used $30K of seed money across three different platforms to kick off my experiment, which I detailed in a past post on the subject.
The experiment was meant to last about one year but took almost twice as long. This is due to the fact most of the investments have long maturity periods and some mixed results.
Here's a recap of the three platforms I chose, along with my original thoughts behind the selections. The goal of my experiment was to narrow down the choices to just 1 or 2.
The Crowdfunding Platforms – THEN
Each of these platforms has a slightly different twist to equity crowdfunding. I initially split my initial investment equally across all three, at $10K a pop.
Here's where I had landed initially…
I had done a more detailed review at the time, of each these platforms, which you can access by using the links below. I'll be updating these individual reviews with my final results over the coming weeks, and reposting them.
Here's a brief explanation of why I originally picked each one:
Peerstreet – This platform specializes in senior debt and residential real estate. The returns appear to be lower, but that's due to the conservative nature of the team behind the investment opportunities. This should give me good exposure to real estate with lower risk relative to the other platforms.
Yieldstreet – This platform specializes in commercial real estate and litigation. The returns are more aggressive, and I like the litigation opportunities. It should be an excellent way to diversify further and opens up more chances to access a market I haven't been exposed to before.
RealtyShares – This platform is similar to peer street, but appears to have more commercial real estate opportunities, as well as more geographic opportunities. They also offer positions other than senior debt, which means potentially higher returns.
So that was my initial summary from the original Crowdfunding Experiment post.
Update: Diversyfund – This Platform is a newer addition to the crowdsourced REIT landscape. Their REIT is focused on growth opposed to income such as the other funds currently in this space. Read our full review here.
The Crowdfunding Platforms – NOW
There's been quite a bit of activity since that initial assessment.
I increased my overall exposure from $30K, total to $120K. The extra funds went into 2 of the three platforms based on my preference.
Here's a detailed summary of where things stand across the three:
I ended up investing in a total of 6 opportunities with PeerStreet. Not a single one went as planned. Half was paid off reasonably early, which meant wasted time (and interest) reallocating funds to new investments. And the other half either went into default or were late on payments, with one notably going late for over eight months.
In fairness, I did end up getting my full principal amount of $10K back, but my effective return ended up being lower than expected.
I made a total of $1,209 in interest, against the $10K investment, which was re-allocated to different placements throughout the period. By the time I got the entire principal back, I had spent 20 months on this experiment. That's effectively an annualized return of 7.25% vs. the expected 9.25%.
I have since closed the account and shifted funds to another platform. The experiment helped me realize that I was not that interested in residential real estate crowdfunding. More on that at the end.
This platform was the most interesting one to me from the very beginning. I found their investments to be somewhat unique, and I liked their lower correlation to the overall market. My initial investment of $10K was in one of their litigation funds, with an expected return of 12% over 18 months.
I made a total of $1,521 in interest against that $10K investment. My principal was returned on-time, but with a lower yield than projected. The annualized return was 10.14%, which was lower than expected and a bit disappointing.
Despite the lower returns, I was impressed by how the YieldStreet team handled the investment and their communication. It was clear that the investment was not performing as expected, so they were very proactive about addressing it, and getting investors their money back.
I added another $25K investment about six months in, which was a commercial real-estate deal. It's expected to return 9.5% annually over 24 months. Unfortunately, the borrower is struggling to make the investment work, so it appears this one will not perform either. But since the LTV ratio is so low, the likelihood of getting my principal back should be reasonably high.
In addition to the above, I also shifted the PeerStreet funds into YieldStreet's settlement fund, which yields a 2% interest rate. This is a new feature and one that I like a lot. I now have the $25K commercial real-estate investment and another $25K sitting in the settlement fund awaiting the next opportunity.
As many people already know, this platform has closed its doors to new investors. They'll be winding down their operations, and keeping a skeleton crew to close out all the remaining outstanding investments.
Unfortunately, this is the platform I was most aggressive on. I invested the initial $10K in a preferred equity commercial real estate project, with a total annualized return of 16% over five years. It hasn't been performing as expected, and time will tell how that particular investment shakes out.
I also added another $60K, which I invested in another commercial real estate project, with an expected annualized return of 16% over 36 months. That one has been performing well, paying out about $5,400 in interest yearly, with the remainder at maturity.
As you can see, I've had some somewhat mixed results with all my experiments so far.
I've made about $10K in total interest since starting the experiment almost 20 months ago, and haven't lost any of my principal (yet). With a total of $120K slotted to be invested, I'm targeting making that much yearly going forward. I still consider the experiment to be successful overall.
The experiences have re-affirmed my need to keep these types of investments at no more than 10% of total net worth. Currently, I'm at around 6% of total net worth.
I also believe that my alternative investments fund needs to be more aggressive by definition. There's no sense in chasing “normal/average” returns of 6-7% akin to index investing in the stock market. Alternative investments should be returning almost twice as much. Otherwise, the risks involved aren't justified.
With RealtyShares closing, and PeerStreet not aligning with my return goals, I'll be looking to focus on my investments with YieldStreet. Unfortunately, I'll need to wait a few years before I can consolidate all my funds into that one platform.
Once all the funds are there, I'll be splitting them across at least four opportunities to keep a diversified portfolio.
Readers, have any of you invested in equity crowdfunding? What has been your experience with performance? Do you think these platforms are an excellent opportunity for investors, or too risky by nature? Share your thoughts and comments below! – Max