Last week a company called RealtyShares, essentially went bust. They told their investors they weren’t taking in any new investors and would simply focus on those already with money invested with them.
You may not have heard of RealtyShares, so let me back up a bit. One of the key parts of investing is to diversify, to have many eggs in many baskets. Usually when we talk about diversification we talk about mutual funds and diversifying between stocks and bonds. A big area for mixing it up though is to add real estate into your portfolio.
The problem with adding real estate is how do you do it. Well you could buy a house or condo and rent it out. This is fine but obviously requires work, being a landlord is hard.
You could also invest in a REIT which you can do through a regular mutual fund company. However a new way of doing it, which RealtyShares was at the forefront of is crowdfunding of specific real estate projects by acting as a broker. The idea is once approved by the company you would invest directly in a selected real estate project; it might be a shopping mall in St Louis or an apartment complex in Dallas. In theory these should be good investments as the projects have been hand picked and once built would return 10% or more annually.
Too good to be true? It looks like it was.
So what went wrong? A year ago it all looked rosy with $27M in investment from venture capital firms. However it looks like a classic case of large demand, not enough supply, so the company expands until something eventually had to give.
It is a great shame as this looked like a great next generation way of investing. I think crowdsourcing these kind of projects with a company acting as the middle man is definitely the way forward for people looking for something a little different to standard investing.
I had been seriously considering putting some money into the platform over the next couple of years, I like the idea of owning (part of) something tangible. I think this has been a wake up call to the whole community, and it will be interesting to see if this is the start of a collapse or consolidation in the investment community or just a small bump in the road.