When we think of the word crowdfunding or crowdsourcing, often what comes to mind are companies like Kickstarter, IndieGoGo, and GoFundMe. Tech companies have run with the crowdfunding concept in recent years, and often with a high level of success.
Crowdsourcing has provided financial backing for some unique projects over the years, including $13 million for a cooler with some speakers in it, a new season of Veronica Mars, and $55,000 for a guy to make a bowl of potato salad.
Outside of the truly strange, crowdsourcing has also birthed many legitimate projects including multiple cryptocurrencies and blockchain technologies, many successful video games, movies and albums.
Whilst crowdsourced investments aren’t exactly like a Kickstarter campaign, they are very similar in nature. When funding a crowdfunding project, you expect a return, but it’s often in the form of merch or special access or just personal satisfaction from seeing a project come to fruition. When it comes to investments, crowdsourcing participants are after something much simpler, a return on their investment.
Surprisingly, one of the very first crowdfunding campaigns was actually created to fund the base of the Statue of Liberty in 1885 when finances were running out. It’s in this intersection between old and new that DiversyFund comes in. DiversyFund uses this method of investment funding, with one of the oldest investment asset classes in the world, real estate.
In this DiversyFund review, I’ll be explaining exactly how DiversyFund works, the types of investors it might work for, the downsides of using DiversyFund, and all the nuts and bolts such as fees and accreditation status.
How does DiversyFund work?
Put simply, DiversyFund invests into actual bricks and mortar real estate projects, using money it crowdsources from everyday investors like you and me. This is structured through what’s known as a Real Estate Investment Trust (REIT) which is essentially a mutual fund for real estate.
When you invest with DiversyFund, you do so by purchasing units in the DiversyFund DF Growth REIT. With the inflows from investors, DiversfyFund then researches, sources, purchases, and manages real estate projects in various locations across the US.
DiversyFund’s USP is that they actually own and operate all of these projects themselves. Many similar real estate investment vehicles don’t have this level of involvement in the underlying projects and instead act as a broker between projects looking for funding, and investors.
Rather than managing your investments and taking a percentage fee to do so, when you invest with DiversyFund, you are effectively going into a shared ownership agreement with them on the projects. I quite like this concept, as it means that the objectives of the company are going to be very much aligned with those of its investors.
Now the DiversyFund DF Growth REIT is unlisted, which means it’s not traded on any stock exchange, but it is still regulated by the SEC. From an investment protection standpoint, this means that DiversyFund is required to submit an annual audit detailing the fund information and holdings. This makes the level of transparency much higher than you find in many unlisted or private real estate investments.
With that said, it’s important to keep in mind that because the DiversyFund DF Growth REIT is unlisted, it is very illiquid. This means you should only be considering investing in the fund if you can afford to hold for the long term.
Whilst the Growth REIT is very illiquid, it is a time-limited fund and isn’t open-ended. With each REIT, DiversyFund aims to raise $50m for investment, at which point the fund is closed for new money and a new fund is opened for new investors. From this point when the investment is fully funded, DiversyFund estimates a time frame of approximately 5 years to fully realize and liquidate all the investments and pay proceeds and returns to investors.
This 5-year time frame is meant as a guideline, and depending on underlying market conditions could take up to 2 years longer than this.
One other really great feature of DiversyFund is the very low initial investment of only $500. This means that pretty much anyone can get started with real estate investing through DiversyFund. It also means you can allocate a small percentage of your portfolio if you are concerned about how long it might take you to receive your initial investment and returns.
Is DiversyFund Legit?
Yes, DiversifyFund is most definitely legit! In fact, not only are they a legitimate real estate investment platform, but they are also our neighbors here in San Diego!
Whilst we love to support local companies in our favorite part of California, there’s no need to just take our word for it. As mentioned above, Diversyfund is registered and audited by the SEC, they have been around since 2016 and as of late 2020 had approximately $75m of real estate investments under their management.
DiversyFund Returns: What Should You Expect?
Like any investment, there is no guarantee of what the future returns may be for the DiversyFund Growth REIT. What we can do is look to the historical returns filed with the SEC to gain an understanding of how the investment is performing for existing investors.
The total return of the Growth REIT is comprised of monthly rental income and the capital proceeds received once properties are sold. An important point to note is that this monthly rental income is reinvested into the projects, and isn’t paid out to investors.
In 2017 the annualized return figure for the DiversyFund Growth REIT was 18%, and in 2018 the annualized return was slightly less at 17.3%. These are obviously very attractive returns, but remember that these can’t be realized until the projects are complete and the REIT pays out in 5 or more years’ time.
Is DiversyFund a Good Investment?
I’m sure you already know what I’m going to say to this question. It depends! This type of investment would suit those who are looking for a higher level of potential returns than those that can be achieved through the stock market and are prepared to accept the higher risk that comes with that.
There are some key risks to this type of property investment. The first is the risk that you need the funds back before the holding period is up. Because the REIT is so illiquid, you could potentially be stuck with an asset on paper that you aren’t able to realize cash from, should you need it. It goes without saying that because of this, you should only invest money with DiversyFund that you can afford to leave it there for 7 years plus.
The other main risk is that you are relying on the expertise of DiversyFund to source, evaluate, manage and liquidate the property assets in an efficient way that generates above-average returns. This is a risk you take with any manager, but I would consider this risk to be higher with an investment that you can’t move out of should things start to look a bit hairy.
What Are the Downsides of DiversyFund?
The main downside of DiversyFund I’ve touched on already and is the lack of liquidity or the fact that you can’t get out of the investment once you are invested. Once you hand your funds over, things are out of your hands until the managers at DiversyFund have done their job and completed the property projects.
In addition to the locking away of your initial investment, the monthly dividends are also maintained inside the fund.
As well as these issues, the range of investment properties that DiversyFund invests in is out of the investors’ control and is quite narrow, targeting mainly apartment buildings across California, Texas, and North Carolina.
I will caveat this point in saying that whilst I believe diversification tends to lead to better long-term investment outcomes for the majority of investors, I can see the benefits of a lower level of diversification in real estate. This is an industry where detailed knowledge of an area can yield big dividends. Knowing upcoming local developments such as potential rezoning, future transport link plans and planned commercial or retail redevelopment projects can create a scenario where a skilled and knowledgeable investor can generate outperformance.
Who Can Invest With DiversyFund?
As mentioned, the minimum investment amount with DiversyFund is a low $500. This makes the barrier to entry minimal for pretty much any investor, and this is aided by the fact that DiversyFund is open to all US investors, both Accredited and non-Accredited.
Real estate is generally an investment class that has very high barriers to entry, and one that is very difficult to properly diversify in because of this. Obviously, most investors can’t afford to purchase 100+ apartments, but DiversyFund provides the opportunity to gain this type of exposure with a significantly lower outlay.
It’s important to remember that the DiversfyFund DF Growth REIT isn’t an open-ended investment and once it is fully subscribed it will close to new investors. DiversyFund has stated that a new fund will open at this point, but it’s just important to keep in mind that each fund offered by DiversyFund will likely invest in a range of different properties, and therefore the risk and returns for each will be unique.
The DiversyFund fees are unique due to the fact that they directly manage and profit from the individual property projects. Most REITS work by acting as a middleman between property developers and/or managers and investors, rather than doing the property development and/or management themselves.
Put really simply, DiversyFund charges no ongoing management fees and instead shares the profit with investors.
In a traditional REIT, the investment middleman charges an ongoing management charge of usually between 1-2%. DiversyFund doesn’t charge this fee at all, and only takes their profit from the returns of the underlying property projects. There are still underlying costs involved with the property investments, but these are the same as with any REIT.
DiversyFund vs FundRise
There are a growing number of alternative real estate investment platforms in the market. One of the highest-profile of these is FundRise, and many investors will likely compare these 2 when deciding where to allocate this portion of their portfolio.
Both DiversyFund and FundRise invest in real estate, and below is a summary of the key differences in how they do that and the access requirements for investors.
|Management fees||0% annual management fee||.15% annual advisory fee.85% annual management fee|
|Asset classes||Mainly Apartment Buildings||Mixed Commercial and Residential|
|Are withdrawals allowed?||Not allowed||Yes, during first 90 days onlyEarly withdrawals can be requested, but are not guaranteed.Early withdrawals may be subject to a penalty.|
|Who can invest?||U.S. citizens|
Visa holders with valid Social Security number
U.S. permanent residents
|Accredited Investor Status||Not Required||Not Required|
|Holding period||Minimum 5 years||Minimum 5 years|
Should You Invest with DiversyFund?
In summary, the potential returns on offer with DiversyFund are attractive, and it offers exposure to an asset class that can sometimes be difficult for retail investors to access in a diversified way.
With no annual management charges, low minimum investment amounts, and availability to non-Accredited investors, there is a lot to like about DiversyFund.
However, if you are considering investing, you should keep in mind that DiversyFund is a very illiquid investment that can’t easily be moved out of, and you need to be prepared to invest for the long term. This also means that should the property market suffer a significant downturn, you won’t be able to cut your losses and move your money elsewhere.
Like any investment, in order to answer the question of whether you should invest with DiversyFund, it’s important to review how these pros and cons match with your own risk profile and investment objectives.