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DiversyFund Review – A REIT to Invest in Multifamily Real Estate

At a Glance
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4.4 / 5
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DiversyFund

  • What It Is: DiversyFund is a fintech platform that empowers everyday investors to diversify away from the stock market and pursue opportunities once reserved for the wealthiest 1%.
  • Advantages: No broker fees; low minimum investment requirement; DiversyFund Growth REIT open to any U.S. resident 18 years or older; strong historical performance for assets managed by DiversyFund since its inception in 2016; no middleman; potential for greater upside in a value-add portfolio; broad geographic diversification in DiversyFund Growth REIT; multiple investor protections; option to hold shares in DiversyFund Growth REIT in IRA.
  • Disadvantages: No cash distributions until asset sales begin; relatively long investment time horizon; no investment options beyond DiversyFund Growth REIT and DiversyFund Series A.

DiversyFund is a novel portfolio diversification solution for the millions of Americans who have access to an employer-sponsored retirement savings plan, such as a 401(k) or 457(b), the millions more who make regular contributions to tax-advantaged individual retirement accounts (IRAs), and many others who invest in equities markets through taxable brokerage accounts.

The vast majority of American retirement investors — and those who invest for other major life goals, such as their children’s education — put their money in the stock market. Over decades, the market tends to go up. At least, that’s what the past several decades of market history teach us. While it’s true that past performance doesn’t predict future results, it’s also true that “buy-and-hold” investors — those who don’t actively trade stocks — tend to make out well over longer time spans. For instance, without any withdrawals or additional contributions, a $10,000 investment in the S&P 500 index in January 1970 was worth about $844,000 in January 2019. That’s an approximate annual growth rate of 9.318%.

As every stock market investor knows, that impressive rate of long-term growth comes at a cost: short-term volatility. In the late 2000s, as a once-in-a-generation global financial crisis crested, major stock market indexes lost more than half their value in less than two years. Investors who panicked and pulled out their funds near the bottom — or had no choice but to take required minimum distributions from their retirement accounts — paid a heavy price.

DiversyFund isn’t a structural solution to short-term stock market volatility, which is and will remain a fact of life for investors. But it does provide middle-class investors with a valuable hedge against market swings: access to historically high-performing investment opportunities formerly reserved for the wealthy.

That’s possible thanks to the JOBS Act, an economic stimulus law passed by Congress during the Obama administration’s first term. The JOBS Act reduced regulatory red tape for small companies and startups seeking to access public funding markets. Among many other changes to existing securities regulation, the JOBS Act paved the way for the implementation of Regulation A, a new — and for emerging enterprises, vital — exemption from public securities registration requirements. Regulation A made certain nontraditional investment opportunities available to nonaccredited investors — individuals who do not meet accreditation requirements of $200,000 or higher income per year ($300,000 for married couples) or more than $1 million in investable assets.

Regulation A paved the way for an explosion in equity crowdfunding activity. It also spurred growth in investing opportunities like real estate investment trusts (REITs). The DiversyFund Growth REIT is DiversyFund’s flagship investment product. For retail investors with at least $500 to contribute, the DiversyFund Growth REIT might be a suitable component of a diversified investment portfolio — though like all investments, it’s subject to market risk and other factors that could potentially erode the value of its shares. Before investing, carefully read all offering materials, including supplements to DiversyFund’s offering circulars.

DiversyFund Growth REIT Key Features

DiversyFund presently has one investment opportunity open to all investors: the DiversyFund Growth REIT. The DiversyFund Growth REIT is an SEC-qualified real estate investment trust that invests in multifamily properties with existing cash flow and price-appreciation potential.

DiversyFund Growth REIT preferred equity shares are $10 apiece, with a minimum investment of 50 shares ($500). Shares are available to any U.S. resident age 18 or older.

The DiversyFund Growth REIT targets value-add properties in need of upgrades, such as new finishes and tenant amenities. These upgrades enable DiversyFund to position the properties to charge higher rents and boost their ROI when they sell. Through its subsidiaries, DiversyFund owns and manages each property in the DiversyFund Growth REIT.

DiversyFund Growth REIT properties include:

  • Goshen, a small-scale student housing development in Linda Vista, California
  • Park Boulevard, a 59-unit mixed-use development in San Diego, California
  • Summerlyn, a 200-unit apartment complex ripe for upgrades in Killeen, Texas
  • Corsicana, a 211-unit value-add apartment complex under contract in Corsicana, Texas

According to DiversyFund, the company delivered an annualized return of 18% in 2017 and 17.3% in 2018 from projects they managed before the launch of the Regulation A Growth REIT. Individual components’ projected internal rates of return (IRRs) — the potential rates of return on capital investments — inside the Growth REIT range from 15% to 21%.

Refer to the DiversyFund Growth REIT offering circular and supplements (available on the bottom of this page) for more information.

Fund Fees & Expenses

Compared with other REITs and with post-JOBS Act alternative investments in general, DiversyFund’s fees and expenses are very low. There is no upfront sales commission, DiversyFund waives management fees, and the fund-level profit share is lower than that of many comparable investments because DiversyFund acts as the sponsor rather than outsourcing to a third party, which would raise fees. Organizational and offering costs are estimated at 1%, subject to change.

This is not an exhaustive accounting of potential DiversyFund fees and expenses. Review the DiversyFund Growth REIT offering circular for more information.

Self-Directed IRA Account Investing

In addition to investing via a taxable account set up through DiversyFund, prospective DiversyFund shareholders have the option to use funds held in self-directed IRA accounts to purchase shares in the DiversyFund Growth REIT.

Shareholder Protections

DiversyFund provides shareholders with several important protections, some required by law:

  • SEC audits required annually
  • SEC qualification as of November 2018
  • 7% preferred return, meaning investors have first claim on fund returns up to 7% (in other words, DiversyFund pays investors before paying itself)

Because it owns the properties held in the DiversyFund Growth REIT, DiversyFund can characterize itself as a “sponsor with skin in the game.” That’s not the norm in the REIT space. While owner-sponsors certainly aren’t immune to failure, DiversyFund’s ownership structure may increase investor confidence.

Investor Education Resources

DiversyFund has a robust investor education portal with articles, guides, and how-tos about REITs and real estate investing. If you’re not yet familiar with the basics of real estate investing, spend some time with these resources before creating your account.

Shareholder Distributions

The DiversyFund Growth REIT is an illiquid investment designed for investors with long time horizons. Although the fund does offer important shareholder protections, it’s not intended for investors seeking short-term income. DiversyFund reinvests the entirety of the portfolio assets’ cash flow in the fund, which they say is to maximize return on investment. Shareholders don’t receive any cash distributions until portfolio assets are sold — at least five years from inception, per DiversyFund’s offering circular.

Advantages

These are among DiversyFund’s top advantages.

  1. No Broker Fees. DiversyFund doesn’t charge broker fees. And though it does earn money as a sponsor of the DiversyFund Growth REIT, its fund-level profit share is relatively low because DiversyFund doesn’t outsource sponsorship to a third party.
  2. Low Minimum Investment Requirement. DiversyFund shareholders can get started with a minimum investment as low as $500. That’s far lower than most alternative investment opportunities and vastly lower than opportunities reserved for accredited investors.
  3. Any U.S. Resident 18 or Older Can Invest in the DiversyFund Growth REIT. Investment in the DiversyFund Growth REIT is open to any U.S. resident age 18 or older. There’s no qualification process.
  4. Strong Historical Performance. Although it hasn’t been around very long, DiversyFund has demonstrated impressive historical performance since inception — approximately 18% annualized, which is significantly higher than stock market returns during the same period. And the projected IRRs for individual DiversyFund Growth REIT components range from 15% to 21%. Bear in mind that past performance does not necessarily predict future results.
  5. Direct Investment With No Middleman. Through its subsidiaries, DiversyFund owns REIT components outright, with no middlemen or mixed sponsors crowding the party. For investors, that means transparency in ownership and one point of contact throughout the investment term.
  6. Value-Add Portfolio May Offer Greater Upside. DiversyFund limits REIT investments to value-add opportunities — properties with substantial income upside after capital improvements. While value-add real estate does come with risks, the upside may also be greater for investors with a higher risk tolerance.
  7. Broad Geographic Diversification. DiversyFund’s real estate investments are in California and Texas, with additional geographies targeted for expansion. That’s good news for investors who’d prefer to spread their investments across multiple regions rather than a single metro area.
  8. Multiple Investor Protections. DiversyFund offers several protections for investors, including an annualized 7% preferred return. While there’s no guarantee investors won’t lose principal — as with any investment — DiversyFund’s investor protections provide some peace of mind.
  9. Investors May Hold DiversyFund Growth REIT Shares in Self-Directed IRA Accounts. Investors seeking tax-advantaged exposure to real estate investments may hold DiversyFund Growth REIT shares in self-directed IRAs. Funding a self-directed IRA is as simple as rolling over an employer-sponsored 401(k) account.

Disadvantages

Consider these drawbacks before investing with DiversyFund.

  1. No Option to Take Cash Distributions. DiversyFund doesn’t allow shareholders to withdraw cash distributions from their accounts. Until DiversyFund sells assets in its portfolio, all distributions are reinvested in the REIT. While this may increase returns in the long run, it’s frustrating for income-seeking investors.
  2. DiversyFund Growth REIT Is an Illiquid Investment With a Relatively Long Investment Time Horizon. DiversyFund makes clear that its Growth REIT is an illiquid investment with a projected time horizon of five years. It’s therefore unsuitable for short-term investors hoping to withdraw principal sooner.
  3. Investors Aren’t Paid Until Properties Sell. DiversyFund investors can’t cash out of the fund until properties sell and the final distribution is made. There’s no guarantee this will occur at or near the five-year mark, as market conditions determine DiversyFund’s selling decisions.
  4. No Investment Options Beyond Value-Add Real Estate and DiversyFund Series A Round. DiversyFund presently offers just two investment opportunities: the DiversyFund Growth REIT and the company’s own Series A round. Other opportunities may be on the horizon, but nothing is set in stone yet.

Final Word

DiversyFund is a valuable tool for middle-class investors seeking exposure to investment opportunities heretofore reserved for the well-to-do.

It’s not the only one. Investing platforms like DiversyFund have proliferated since the passage of the JOBS Act and the finalization of Regulation A. Like DiversyFund, each has its own merits and demerits, but all share a common goal: to democratize investing by broadening access to nontraditional asset classes.

Ultimately, it’s up to you — ideally, in consultation with your financial advisor — to determine whether platforms like DiversyFund are suitable for you and your family. But overall, DiversyFund and its ilk serve an important purpose for rank-and-file savers, and the investing public is better off for their existence.

Are you diversifying your investments with DiversyFund? How do you like your experience so far?

Verdict
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4.4 / 5
Rating

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DiversyFund

DiversyFund is a low-friction investing platform for middle-class investors seeking exposure to real estate assets with substantial appreciation potential. While its present offerings are limited to a single real estate investment trust (REIT) and DiversyFund’s own Series A round, DiversyFund plans to expand its opportunities in the years to come, further democratizing alternative investing for everyday Americans.

DiversyFund does have some drawbacks, including a relatively long time horizon of five years and no cash distributions until DiversyFund sells portfolio assets. But it’s difficult to argue it’s not a net positive for regular folks who, until recently, have been limited in their ability to invest in nonowner-occupied real estate.

DiversyFund’s top advantages include no broker fees, low minimum investment requirements, and direct investment with no middleman. Its drawbacks include a relatively long investment time horizon with no cash distributions to shareholders until assets sell and few investment options other than the DiversyFund Growth REIT. Before opening an account with DiversyFund, carefully read all offering materials and understand the risks of investing in real estate.

Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

Comments Disclosure: The below responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

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