How we started crowdfunding and learned to put our eggs in more than one basket
In the previous post (Road to Financial Independence – Part 1), we covered our first steps on the road to financial freedom and early retirement, with the goal of leading a completely fulfilling lives. The massive step towards it has been the purchase of Our First Investment property; make sure you check one of our most read posts, Sherry’s detailed breakdown of the deal.
Patience is virtue…especially in the booming market and with skyrocketing prices, but we were still eager to make our savings work for us. We still searched for good real estate deals, and every once in a while, one would pop up. However, being abroad made it hard for us to be able to evaluate the property and they ended up selling very fast. And after shelving the Turnkey idea (at least for now) due to really high prices, we were ready to think outside of the box.
Lend the money, get it back – and own the property
As we were doing our research on where and how to invest (shout out to Bigger Pockets, the home of truly inspirational stories and great advices), we ended up finding a combination of lending the money for interest and owning of the property!
The company we invested in is called Holdfolio and their modus operandi is crowdfunding. How it works is, they find a property they wish to buy and negotiate a good deal. Usually it’s a multi-family apartment building or a portfolio of 10 single-family houses. Then, they invite investors to lend them money for the purchase. In turn, the investors get to own percentage of the property and receive the same percentage of rents they will later collect. If in the future they decide to sell for profits, the investors receive their money back in addition to percentage of the profits as well.
To put it simply, we put our money together and buy a property we wouldn’t be able on our own. We then all partake in profits, with preferred minimum returns of 8%.
It is extremely passive investment, as investors, after the purchase, don’t need to be bothered by day-to-day decisions. The company renovates the property (if necessary), finds the tenants, manages the property and deals with any problems. The risk involved is if the company didn’t do a good job researching and pricing the property or is unable to find tenants; you might not receive profits or even lose the money you invested. Of course, that is the worst-case scenario, but investors should always consider those and see if they can live with them.
We invested 20k USD and bought a percentage in a 50-unit apartment building just outside Indianapolis, with 45 units rented out and the company planning to improve 5 vacant units and rent out those as well. After 12-18 months, they plan to re-finance the purchase through loan and pay investors back majority of their investment back while we still keep our percentage of the rent. The return we get is 8% preferred (meaning after all expenses, we are paid first from the profits), while everything above that is split 75% to the investors and 25% to the company. In the future, if the company decides to sell the property, all the profits will be split the same – 75% to the investors and 25% to the company.
6 months report
The building/portfolio was purchased on Sept 1st, 2017, which means we have had half a year to monitor how well it did. All the profits and reports from the Holdfolio company are received on a quarterly basis, meaning every 3 months. Here is the breakdown after half a year (2 reports combined into 1):
Date of report: Mar 31st, 2018
Earnings: 850.85 USD
Total return to date (Earnings divided with total amount of invested money): 4.25%
Building occupancy: 88%
As evidenced from the report, based on investment of 20k USD, after 6 months we have received profits from the rent of 850.85 USD. That equates to 4.25% of total return; if the rest of the year posted same profit, that would translate to 8.5% annual return. That result is of course, higher that the minimum preferred of 8%, but that’s still not full potential of the profit. The reason for that can be found in the occupancy, which is still at 88% and not at full (or near full). When the company acquired the building, a lot of the renters had contracts until end of February. Since not all renters extended them, the company had to fix up those units and put them back on the market to rent. They are expecting to get over 95% occupancy in the next couple of months, which would also result in higher profits for next quarter and hopefully increase in annual results.
What next?
Holdfolio plans to add value to the property (it was purchased for 1.55M USD, projected value 1.88M USD) and then refinance with a bank loan in another 12 months. For investors, that is going to mean we will get majority of our invested money back, 75% or more (in our case that’s 15k+), while still retaining percentage in rents income! In that scenario, we will have 5k USD invested, while receiving 15%-18% returns! In the future, once Holdfolio decides to sell property for profit, we will receive all our money back, and 75% of the profit will be divided among investors!
All in all, we are happy with diversification of our investments and are always looking out for new opportunities, so as always, feel free to comment, ask questions or advise! Looking forward to FI!
Update: 9 months report (Jun 30th, 2018)
The end of 2nd Quarter of 2018 brought an update which we were not happy with. Instead of the regular pay out that would maintain 8 percent annual return, there was no cash slow to be paid out at all. The reason given was that on account of big expenses, which included property tax payment and annual insurance premium, there was no cash flow left to distribute. We reached out to the CEO to inquire about this, as we were under the impression these expenses were already included in projections. He assured us that they will be changing their expenses management process as to avoid similar big payments. He is still optimistic about meeting 8 percent return for investors, even with this Q2 setback. We are less optimistic than we were, but are still making lot more interest than we would with a regular bank savings account, for example. Refinancing of the loan and return of principal investment still planned in 6 to 12 months.