The investing atmosphere has changed significantly over the last decade or so thanks to advances in technology, which have made it possible to diversify investments well outside of the traditional options. Gone are the days of being limited to the stock market, bonds, or other well-known assets. These days, you can invest in just about anything.
Putting money into “alt” investments — things like cryptocurrency, altcoin, or even startups — can be just as lucrative as those traditional investments, and in some cases, even more so.
Take real estate crowdfunding, for example. This type of investing lets investors pool funds together to help fund real estate transactions through private REITs, which traditional brokerages don’t offer. Not only does this type of crowdfunding make it possible to source the cash for risky or high-cost real estate purchases, but in many cases, it offers significantly higher returns for investors.
While this type of investing was once limited to those with significant amounts of cash, the introduction of real estate crowdfunding platforms like DiversyFund have lowered the barrier for entry. DiversyFund makes it easy — and cheap — to start investing in real estate. Unlike other real estate crowdfunding platforms, this company owns and manages properties directly — and you can get started with as little as $500.
Ready to learn more about what DiversyFund offers investors? Let’s take a look at how this real estate crowdfunding platform can help you quickly and easily get started with investing in real estate without a huge financial commitment.
What is DiversifyFund and Who is Behind it?
DiversyFund is a San Diego, California-based REIT platform that has been in business since late 2016. It was started by founders Alan Lewis and Craig Cecilio, who raised $13.8 million through a Series A to help fund the venture.
As a company, DiversyFund markets itself as a good alternative to investing in stocks or other traditional investment assets. It only offers one product, which is a public REIT, via a real estate crowdfunding platform with a low buy-in for investors. In other words, using DiversyFund gives investors access to real estate via its private REIT, which invests in real estate.
That said, DiversyFund differs quite a bit from the competition. There are plenty of REIT crowdfunding platforms available to choose from, but in most cases, the platforms simply act as brokers to help pair you with specific projects that need funding. That is not the case with DiversyFund, which owns and manages its own properties.
The REIT offered by DiversyFund generally focuses on purchasing large-scale apartment complexes in need of updates and improvements. The goal is to make improvements and resell the properties purchases with the crowdsourced funds within five years. That helps cut down on costs associated with these types of investments, including management fees, which aren’t part of DiversyFund’s fee structure for investors.
And, there are more features that set this crowdfunding platform apart. While many real estate crowdfunding platforms require you to be accredited to invest, DiversyFund welcomes nonaccredited investors. This makes the barrier for entry much lower — and much easier to meet as a novice investor.
The buy-in is low for investors, too. In May 2019, DiversyFund dropped its minimum investment from $2,500 to $500, making it easier for investors of all types to dip their toes into the DiversyFund REIT pool.
Features and Benefits
The main draw of DiversyFund is that it allows investors to easily buy into its Growth REIT (featured properties shown above), a public, non-traded fund that invests in cash-flowing apartment buildings. The apartment buildings DiversyFund invests in are value-add investments that are at least 100 units in size.
Once DiversyFund obtains these cash-flowing apartment buildings, it renovates the properties and then re-positions them — marketing to a new clientele with upgraded amenities and features in hopes of attracting higher rents. The renovated, repositioned properties are later sold for a profit, which is when investors receive their principal investment back, along with a cut of the profits.
In general, it takes about five years for investors to make back their principal and reap the benefits of any profits when investing in this REIT. The soonest DiversyFund plans to sell off its current projects is 2023, which means that investors are in for a wait if they want to take advantage of what this REIT offers.
That said, if done correctly, this repositioning done by DiversyFund will pay off significantly for both the company and the investors, both of whom stand to make serious gains within a few years time. We’ll talk more about that below.
Profits aside, there are a number of other unique features and benefits of investing with DiversyFund, including:
- A much lower minimum investment compared to the competition: DiversyFund only requires investors to shell out a minimum of $500 to invest in the REIT it owns. That is significantly lower than the $1,000 to $25,000 minimum required by other private REITs.
- No accreditation requirement: There are quite a few real estate investment platforms that require investors to be accredited. The SEC requires a net worth of more than $1 million — not including your residence — or an annual income of at least $200,000 per individual (or $300,000 per couple) for at least two years to become accredited. That makes it tough for smaller investors to buy in.
DiversyFund, on the other hand, doesn’t require investor accreditation, so investing on this platform is open to all U.S. resident investors who can meet the $500 minimum.
- An invested company: DiversyFund owns and runs its own investment properties, which means that the company has a vested interest in maximizing profits. That isn’t the case for other platforms, which act as matchmakers between projects and investors.
- No expensive management fees: It’s common for crowdfunding real estate sites to charge management fees. These fees are meant to cover the costs associated with the platform as well as the costs incurred to pair investors with projects. These types of fees start at about 1% on average, though they vary from platform to platform.
These fees don’t exist with DiversyFund. This platform owns and operates all of the real estate projects investors buy into, which means that there aren’t the extra management costs to cover by investors.
- Easy investment tracking: DiversyFund currently invests in properties in three areas — California, Texas, and North Carolina — though its website notes that it makes investments nationwide. Any property that DiversyFund invests in is included in the same REIT. Investors can keep tabs on the property performance through the website, which makes it easy to keep track of where your money is going and how the investment is performing over time.
Average Return to Investors
When DiversyFund sells the properties it invests in, the investors will get their principal back and a 7% preferred return before the company receives any profits. This guarantees investors a 7% return on the money they invested in the Growth REIT. That said, the profits aren’t limited to just 7%.
If the assets are sold at a profit above 7%, subsequent profits of up to 12% will be shared between the company and the investors. Investors stand to earn 65% of the profit above 7%, while the other 35% goes to the company. Any remaining profits over 12% are split 50/50 between the investors and the company.
That means the profits can vary greatly with this REIT, and what you stand to make will depend heavily on the projects that DiversyFund has invested in. On average, though, most investors make a return of between 10% and 20% with the Growth REIT, according to the company.
As with any type of investment, there are also potential drawbacks to investing with DiversyFund. These include:
A long investment period: Investing in the Growth REIT requires you to part with your money for a long period of time. It takes about five years for investors to receive their principal and profits from DiversyFund, which means this longer-term investment may not work for people looking for quick profits.
No dividends: Unlike other types of investments, you won’t receive cash flows or dividends from DiversyFund. Any dividends are reinvested into the fund, so you’ll have to wait until the properties are sold at the close of the project to receive any profits at all from your investment.
No option to sell your interest: Many types of investments will allow you to sell your interest to recoup your money at any point. That is not the case with DiversyFund, as there is no secondary market that allows you to sell your interest in the fund. Once you’ve invested, your money is tied up until DiversyFund sells the properties and pays out your principal and profits.
Limited control over investments: DiversyFund is in control of what they invest in from start to finish, which means you don’t have a choice in what projects you’re lending your money to. If you’re uncomfortable with the idea of a company having complete control over the projects that your money funds, you may want to choose another real estate crowdfunding platform that allows you to pick and choose by project.
Cost Associated with DiversyFund
Unlike other real estate crowdfunding platforms, DiversyFund is fee-free because it owns the properties you are investing in. That eliminates the high cost of management fees that can come with other REITs.
When you sign up for DiversyFund, every dollar of your investment goes toward your shares. Each share is $10, and the minimum amount you can invest is $500, which gives you 50 shares in the Growth Fund.
You can choose from three different types of investor options: Starter Investor, Auto Investor, or High Growth Investor. The minimum investment for Starter or Auto is $500; the High Growth Investor minimum is $15,000. The difference between the Starter and Auto Investor options is that the Auto Investor requires you to set up monthly automatic deposits following your initial $500 deposit.
Other than that initial investment requirement (and any additional money you invest), you won’t be required to cover any other costs when investing in the Growth REIT.
How are DiversyFund’s Investments Sourced?
DiversyFund has a lot of skin in the game when sourcing investments for its real estate crowdfunding platform. It only invests in multifamily real estate — otherwise known as apartment buildings — and the properties have to meet the strict criteria set by DiversyFund’s real estate experts.
According to DiversyFund, the investments have to offer strong potential for increased value at the time of resale. The properties they acquire also have to have 100 units or more.
The downside to DiversyFund owning the properties you’re investing in is that details about the vetting process or other proprietary information hasn’t been made readily available. Aside from the primary parameters spelled out on the website, it’s unclear how DiversyFund is choosing the properties it purchases and repositions.
There are only three investment properties listed on DiversyFund’s website currently; it’s unclear whether there are more that will be sourced in the future.
Who is this Platform For?
The DiversyFund platform is a great option for investors who can’t meet the accreditation parameters set by the SEC but want to invest in real estate crowdfunding. It can be difficult to find platforms that allow non-accredited investors to buy into these types of REITs, and that’s what makes DiversyFund stand out.
Investing with DiversyFund can also lead to a solid return on your investment, but you’ll need to be certain that you can part with your money for at least five years before investing in this fund. If you can afford to invest the capital without receiving dividends or cash flow for a few years, DiversyFund is a great way to earn a high rate of return on your money.
It’s also a smart way to gain some experience in this type of investment before trying to tackle other types of real estate crowdfunding investments. If you’re a novice investor who can meet the accreditation requirements but aren’t sure about investing in REITs, DiversyFund can offer you a safe way to try it out.
Is DiversyFund Safe?
No investment is without risk. That said, it appears — at least on the surface — that DiversyFund is a relatively safe investment. There are downsides, like the lack of dividends or the long investment period, but there aren’t any red flags in regards to safety with your money.
That said, there are some red flags to note about Craig Cecilio and Alan Lewis, the founders of this REIT.
Both Cecilio and Lewis have been defendants in three different real estate-related lawsuits. It’s important to note that none of these lawsuits were related to DiversyFund transactions, so it’s wise to take the information with a grain of salt.
An SEC filing spells out more about the issues Cecilio and Lewis have faced over other real estate ventures:
“In 2015, before the Sponsor or the Company was formed, Mr. Cecilio raised capital for a project involving ground-up construction located in La Jolla, California. When the project ran into financial difficulty, with the lender threatening to foreclose, Mr. Cecilio and Mr. Lewis both personally guaranteed a loan from a new lender to protect the interests of the equity investors, although they were not obligated to do so. Although the project was completed, it was financially unsuccessful and unable to repay all the guaranteed debt. The lender has brought suit against Mr. Cecilio and Mr. Lewis for the deficient loan balance of approximately $1.9 million.
Mr. Cecilio and Mr. Lewis have asserted counterclaims against the lender. Among other things, they allege that the general contractor hired at the insistence of the lender was responsible for the failure of the project by causing significant delays and budget overruns, and that the lender and the contractor should be viewed as joint-venturers.
In the same project, an individual loaned money to the borrower entity, secured by a second lien and personal guarantees by Mr. Cecilio and Mr. Lewis. When the project ran into financial difficulty it was discovered that the second lien had not been properly recorded, resulting in a significant loss to the lender. The lender sued her lawyer for legal malpractice and the lawyer has made a cross-claim against Mr. Cecilio and Mr. Lewis relating to their personal guaranty. The amount of the cross-claim is approximately $1 million.
An equity investor in the same project has filed a lawsuit alleging that the Sponsor, Mr. Cecilio, and Mr. Lewis failed to provide adequate disclosure, were professionally negligent, and breached their fiduciary duty on several projects, all funded before the Sponsor or the Company were formed. The investor is claiming damages of approximately $774,000 in the aggregate. On a separate project, the same investor is suing on a personal guaranty of approximately $55,000.”
The California Department of Real Estate also investigated Cecilio for the following:
“The company stands accused of secret profit or undisclosed compensation, use of false or Fictitious Business Names, failing to submit independent audit report, failing to file with the BRE the Quarterly Threshold Reports, failing to supervise the real estate activities of the company, inaccurate and incomplete trust fund records, inaccurate and incomplete recording of separate record for each beneficiary or transaction, and failing to maintain the monthly reconciliation of all the separate records or transactions to the balance of the record of all trust funds received and disbursed.“
The settlement in that case included a fine paid by Cecilio, who also had his license suspended for 30 days. You can learn more information on this settlement by looking at the files for case H04876SD on the California Department of Real Estate website.
That said, none of this means there are issues with DiversyFund. It is something to weigh before investing in this REIT, though.
How DiversyFund Differs from the Competition
As noted above, the main difference between DiversyFund and the competition is that this company owns and manages properties directly. Most real estate crowdfunding platforms act as a middleman for investors and projects, but DiversyFund is all in from start to finish.
The other main difference is that it allows non-accredited investors to invest in REITs. That is not the case for most other crowdfunding real estate platforms. Most require you to meet the laborious accreditation standards set by the SEC. With DiversyFund, you only have to have $500 to invest.
DiversyFund’s lack of fees is another unusual feature. Many of the similar platforms require investors to pay a management fee starting at 1%, while DiversyFund is fee-free.
If you’re looking for a high rate of return and can part with your money for at least five years, DiversyFund makes it possible to earn significant gains on your investment capital without having to be accredited. There are some downsides to this type of investment, of course, but there is also a lot to gain for the right investor.
With an average return of 10% to 20%, novice investors, long-haul investors, and those who are new to real estate investing may appreciate the no-hassle, fee-free structure of this type of investment. Those looking for a quick return, or those who like to pick and choose the real estate transactions they help fund, may not find what DiversyFund offers to be nearly as appealing.