Let’s talk about what it looks like when you lose money in real estate crowdfunding, because let’s be real, it’s bound to happen since there are no sure bets.
Here’s a story for you. I once wrote about a reader who bought property in Las Vegas right before the 2008 crash. It was rough—he dealt with endless maintenance issues and difficult tenants. Eventually, the property turned into a nightmare with serious problems like drug activity because they started accepting government-subsidized rents for lower-income tenants.
And guess what? Shortly after I invested another quarter million into a real estate fund, making my total investment half a million, I got an email about this new property they bought—yep, in Las Vegas. It felt like the universe was playing a joke on me.
This property, a garden-style apartment complex with 168 units, was initially built as affordable housing back in 2001. Recently, it was sold under a condition that released it from having to be affordable housing anymore. Only a third of the apartments have transitioned to market rates since the change, with the rest under protected, below-market rents for up to three years.
The deal structure was mainly a preferred equity deal, which is more like a loan than owning part of the property. The company that put up the deal also threw in over $3 million, giving us some cushion. They even set aside money for 28 months’ worth of payments, which felt somewhat reassuring.
However, knowing it’s in Vegas and part of an affordable housing scheme made me uneasy. My gut remembered the landlord horror story all too well—tenants may not be able to afford rent hikes, and we might see forced evictions or have to pay to move tenants out.
The property does have its perks—it was bought below market value, and rents have gone up for units that were already renovated. Plus, it’s in a strong part of Vegas with very low vacancy rates and expected population growth. And it’s not far from the Vegas Strip, which is a plus.
Despite these upsides, I’m setting my expectations low for this investment. The potential return doesn’t seem worth the risk, especially with a modest 13% target internal rate of return, given the risks of converting more units to market rate.
Investing in funds means you’re not in control—you’re trusting someone else to make investment decisions with your money. As a hands-on investor all my life, it’s tough to let go and trust others with my investment choices. However, I recognize the importance of diversifying and possibly enjoying life more by not having to manage every detail of my investments.
So, while I hope this Vegas property turns out to be a profitable surprise, I’m prepared for any outcome. It’s just one of many investments in the fund, after all. And hey, if it does end up underperforming, it’ll be a valuable lesson in the risks of real estate crowdfunding.
