Investing as an Accredited Investor: Is it worth it?

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falcon
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Investing as an Accredited Investor: Is it worth it?

Post by falcon »

We maximize our tax deferred accounts. Our current investments are in stock/bond index funds. We have some funds left over for taxable investing and are thinking about real estate but do not want to take on the responsibilities of a landlord. We are trying to learn about investing as accredited investors and how that compares to indexing in terms of returns, risk etc. We expect to qualify as accredited investors.

My understanding is that the future returns from a stock/bond (70/30) index fund portfolio are expected to be less than 5%.
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Real estate crowd funding websites for accredited investors are displaying debt investment returns around 9% and equity investment returns around 12%. (We are not members of any real estate crowd funding website yet.)
Comparing Real Estate Crowdfunding Websites
http://whitecoatinvestor.com/comparing- ... -websites/

Please share your thoughts/experiences about investing as an accredited investor. Do you think such investments will have higher returns than stock/bond index funds and REIT index funds? Would investing in real estate projects in fast growing regions of the country reduce risk?

If you are a member of a real estate crowd funding website - How many new investments are posted per week? Are good investments (with higher expected returns, in fast growing areas etc) snapped up quickly or is there sufficient time to evaluate and decide?

I look forward to hearing from you.
Hogan773
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Hogan773 »

Very interested to learn more here too, although in general I have a BS detector and believe that just because someone is "rich" doesn't mean that the opportunities for them are better than for others. I would argue that they can be worse. I could be an accredited investor many times over, but I am not convinced that signing up for some random hedge fund, where they take 2% fees and 20% of the gains, while locking up my money, is going to produce better returns than just putting my money in a group of ultra low cost index funds through Vanguard. Hence my money is in Vanguard.

You'd have to compare this real estate "crowdfunding" thing to just owning shares in REITs but I am guessing that they are at least a few "catches" in the crowdfunding option

EDIT - I just read that crowdfunding link. Haven't dug deeper than that. A few things strike me 1) you are going to be very concentrated, putting your money in discreet projects like an apartment building in Indianapolis or a self storage unit in Bumblefreak. 2) Fees are going to be high and probably somewhat murky 3) you will get K-1s for these investments which become painful at tax time 4) you are beholden to the integrity of the platform/advisors in question

Also don't get fooled by the "PROJECTED RETURN OF 9% vs historical in the market of X%" On what basis are we to believe the accuracy of the stated projected equity return of a discreet real estate project from some developer that you've never met?
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Jack FFR1846 »

Perhaps you should read about peer to peer (Lending Club) or P2P real estate (Peerstreet) and do lower level investing. MMM did a piece on Peerstreet http://www.mrmoneymustache.com/2016/05/02/peerstreet/ and also has his tally of his Lending Club investments (which have NOT been doing well lately) http://www.mrmoneymustache.com/the-lend ... xperiment/. I am very skeptical about alternative investments. I have invested all of $125 in Lending Club and my return is higher than MMM has shown. I do the opposite of what he does, investing mostly in A level risk with some B and almost no C. MMM is on the riskiest side of notes with tons of write offs, offsetting his higher initial interest rated loans.

Look at Peerstreet and see what you think. I think it's less risky than what you're talking about but also think it's more risky than good rated loans on Lending Club. I'm above 9% with my LC portfolio.

This is all just my own opinions.
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Meg77
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Meg77 »

Being an accredited investor can get you access to many different investment opportunities that non-accredited investors cannot participate in. These can be more lucrative, but they also come with above-average risk. That doesn't necessarily mean that the investment itself is more risky than the stock market, but the risk is greater because of factors like not having control of the investment, not having liquidity, and the investment and related statements/projections not being regulated by the SEC. You are largely at the mercy of the investment principals' trustworthiness and aptitude.

I am not familiar with the crowd-funding real estate opportunities, but investing directly into specific projects versus going that route could have more benefits. At least then you can share in the tax benefits of RE ownership, which I'm not sure the crowdsourcing investment would allow. There are some that are large funds you can get access to directly if you have enough to invest or via a financial advisor; some advisors pool money from their clients and invest the larger minimums in pools that way. Others you learn about through word of mouth. My husband and I have begun investing in several "private equity" type investments in the last year which are limited to accredited investors.

Example One
We've put money into three different apartment building projects in the last year. The plan that this team specializes in is a "fix and flip" model. They purchase a B class apartment building in a growing area, renovate the exterior, add amenities like playgrounds and pools, rebrand, aggressively manage it (get rid of deadbeat tenants, cut costs that mom and pop folks were overpaying for, etc.), renovate half the units (this leaves half to be done by the next buyer/investor so they are incented to buy), raise rents accordingly, and then let the property stabilize for a year before listing it for sale at a higher price. This model has worked well for the team for over a decade, even through the recession (they just hold for longer if the market isn't conducive to selling) and consistently generates IRRs of over 20% and equity multiples over 2x over a 2-3 year hold period.

Example Two
We put some money into a Tech startup accelerator which recruits, supports and coaches tech start up companies. Each fund (they do one a year) gives you a piece of ownership of 25-40 start ups and has an 8-10 year hold time approximately. The hope is that one or two of the start ups make it big and preferably get bought out by a competitor for a big liquidity event (or go public eventually, which is a lot less likely). When any of the companies have a capital raise, we have the option to participate first as investors in the fund as well, at a fraction of our initial investment level (we've done this twice, putting $5K into two start ups that we like a lot which have grown and demonstrated value and revenue, etc.).

I don't know how likely it is that we'll make a lot of money in this one; some funds have been flops and others score big wins in the past. But there are some fringe benefits as well. As investors we get to go to a lot of investor-only events which is fun but also great networking for me and my husband who are both bankers. We also learn a lot since the tech culture and the people involved in it are so different from us and the conservative suit and tie types we usually are surrounded by (CPAs, financial planners, other bankers, etc.).

Hope this helps! We are fairly new to this type of investing so I can't share returns or long term averages or anything. But we think it's a good way to diversify a smaller portion of our investments and a way to possibly generate returns higher than the stock market over time.
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Dale_G
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Dale_G »

So I am an "accredited investor". Big deal. There are probably another 10,000 or so other Bogleheads in the same category - and I haven't seen many waxing enthusiastic about their crowd-funding deals. Total Stock Market, Total International Stock Market and a variety of bonds funds work for most of us.

I would have near zero confidence in 9% returns from a crowd-funded real estate venture. There are way too many middlemen involved. Publicly traded REITs also have middlemen, but at least they are subject to scrutiny by professionals.

Dale
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Chicago60
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Chicago60 »

Dale_G wrote:So I am an "accredited investor". Big deal. There are probably another 10,000 or so other Bogleheads in the same category - and I haven't seen many waxing enthusiastic about their crowd-funding deals. Total Stock Market, Total International Stock Market and a variety of bonds funds work for most of us.

I would have near zero confidence in 9% returns from a crowd-funded real estate venture. There are way too many middlemen involved. Publicly traded REITs also have middlemen, but at least they are subject to scrutiny by professionals.

Dale
"Big deal", indeed. Being an accredited investor simply means you have a sufficient net worth, or meet certain income thresholds over the prior two years, to "qualify" for the investment. It means you can, in theory, suffer a loss of the investment. Investments that require accredited investor status are almost always higher (or high) risk, and almost certainly no better than a good low cost diversified index fund.
highercall
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Re: Investing as an Accredited Investor: Is it worth it?

Post by highercall »

I have invested some in Peerstreet and Patch of Land. So far (about 6 months) I have been pleased with both. Some loans have been paid off and I reinvested in other loans. POL tends to offer more loans at higher rates than Peerstreet. My average interest rate across the loans in Pol is aprox. 10.5% and Peerstreet is approx. 9.25% although the current available loans are lower. Loans are paid into my account monthly. I am somewhat cautious as it is a relatively new investment platform for investors and I have read about some loans going bad.
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Re: Investing as an Accredited Investor: Is it worth it?

Post by sperry8 »

highercall wrote:I have invested some in Peerstreet and Patch of Land. So far (about 6 months) I have been pleased with both. Some loans have been paid off and I reinvested in other loans. POL tends to offer more loans at higher rates than Peerstreet. My average interest rate across the loans in Pol is aprox. 10.5% and Peerstreet is approx. 9.25% although the current available loans are lower. Loans are paid into my account monthly. I am somewhat cautious as it is a relatively new investment platform for investors and I have read about some loans going bad.
Yup, it is a good deal until 1 defaults. It is hard to be properly diversified via these platforms. All it takes is one default within your "book" and you'll notice the interest you are earning drop away to 0. Times are good now... so the tide is high. When the next recession hits and the tide goes out, defaults will likely occur.
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Dale_G
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Dale_G »

The theory behind "accredited investor" is that not only can they can afford to lose the money, but they are also sophisticated enough to understand the investment. I would be sure that almost all of Bernie Madoff's investors were accredited.

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SpaceCowboy
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Re: Investing as an Accredited Investor: Is it worth it?

Post by SpaceCowboy »

Also that you are sophisticated enough and have the resources to hire professionals, lawyers and accountants, as necessary for your diligence.
Much easier to get ripped off as an accredited investor. There are less safeguards.
Since the Lending Club scandal earlier this year, I've wound down all my crowdfunding investments, both accredited and unaccredited.
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Northern Flicker »

Just allocate your taxable account to a tax efficient index fund and hold a REIT fund like TCREX or VGSLX in a qualified account if you don't wish to be a landlord.
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Dottie57 »

What is an accredited investor?
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Dale_G
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Dale_G »

Dottie57 wrote:What is an accredited investor?
Assets of $1,000,000 excluding home or two successive years of $200,000 income if single - $300,000 if married. These are supposed to be smart people - or at least few will feel sorry for them if they lose.

Dale
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Northern Flicker
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Re: Investing as an Accredited Investor: Is it worth it?

Post by Northern Flicker »

Dale_G wrote:The theory behind "accredited investor" is that not only can they can afford to lose the money, but they are also sophisticated enough to understand the investment. I would be sure that almost all of Bernie Madoff's investors were accredited.

Dale
Sadly, that was not the case. There were also many victims of Madoff who were not accredited, and who were fleeced out of their life savings.
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Re: Investing as an Accredited Investor: Is it worth it?

Post by abuss368 »

What is the difference between real estate crowdfunding and REITs in a taxable account?
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BL
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Re: Investing as an Accredited Investor: Is it worth it?

Post by BL »

There are few enough protections for ordinary investors. This just gives them license to fleece the rest even more.
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Re: Investing as an Accredited Investor: Is it worth it?

Post by inbox788 »

Beware. It means you can afford to lose your investment and expect to lose your investment. Sometime you get unlucky the first time, other times, the 3 or 4th time just when you decide to raise the stakes. Win, win, win, raise stakes 10X and lose big!

Expect to get pitched a lot of poor investments. You have to be keen enough to recognize the 1% that are actually good risk/reward. If you have the patience and skill, then try it, but beware!
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