We cannot tell you what your return will be.
It’s important to understand the mechanism behind the investment so that you can make an informed decision with regard to the potential for the investment.
When owners list their property, they offer investors a contractual right to an interest in the property’s future value. That contract is made between and a Special Purpose Vehicle (SPV) created for the purpose of the investment. The SPV is really an LLC that has one purpose and that is to hold the investments and the rights to the future value of the property. As an investor, you are buying shares in the SPV.
Here is a simple example:
An owner of a property, appraised at $200,000, proposes a 5-year agreement to raise $40,000 (20% of the value of the property).
- Two investors agree to fund the $40,000 equally.
- Each investor is investing in 50% of the SPV, which itself owns the rights to the entire 20% of the value of the property.
- At the end of the five-year term, the home is appraised again and appreciated by 10% to an ending value of $220,000
- The SPV is entitled to the same 20% of the value of the property: $44,000. Both investors, each a 50% owner of the SPV, are entitled to $22,000
- Conversely, if the property’s value decreased by 10%, to $180,000, In that case, the SPV is entitled to 20% of the property’s value of $36,000 and each investor, a 50% owner in the SPIC are then entitled to 50% of that: $18,000. There is a risk for investors, who share in any gains as well as losses.
- Those earnings are released back, proportionally, to the investor(s).
Note: This is an overly simplified example and does not include all steps or scenarios.
The scenario above is a straightforward illustration. Often owners will offer additional “Investor Points,” which translates into additional equity. Using the example mentioned above: A property with the value of $200,000 and the homeowner wants to raise $40,000 while technically 20% of the value of the property, the owner may offer 22% in exchange for the $40,000 to make the investment more attractive and so that the investor can get an even better return.
Your return as an investor is based on the percentage of the home’s future value that the owner offered at the time of the investment. In the example above, if the owner offered 22% in exchange for $40,000 and the home went up in value to $250,000 (+25%), the SPV would be entitled to 22% of the new value of $55,000 (instead of just 20%, $50,000) at the end of the term or at the time a financing event occurs. The SPV is owned by investors who would be paid out in proportion to their percentage of ownership in the SPV.
Note that there may be tax implications related to any payout on the future investment. Consult with a professional tax advisor to understand any tax implications related to this investment.
It is also important to point out the illiquid nature of this investment and that this is not an investment that can be easily sold. In addition, investing in these securities carry risks that include the potential complete loss of the invested funds.