Real_Estate_Crowd_Funding

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Messy_Orchid_51
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Real_Estate_Crowd_Funding

Post by Messy_Orchid_51 »

I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!
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White Coat Investor
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Re: Real_Estate_Crowd_Funding

Post by White Coat Investor »

Messy_Orchid_51 wrote: I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.
That sums up my thoughts pretty well.

It's still early, but some of my investments have done about as well as advertised and some have underperformed. No wonderful surprises on the upside yet and no disasters. I expect to do more in the future.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Messy_Orchid_51
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Re: Real_Estate_Crowd_Funding

Post by Messy_Orchid_51 »

Thanks White Coat Investor!

Which platforms do you prefer?

On the face they looks better than a say, P2P lending for personal loans where there is no recourse for defaulting (maybe with real estate you could have a lien on the property per-say?)

I'm looking at deploying 4 to low 5 digit cash currently sitting in the traditional 1% online savings accounts in the effort to assume a bit more risk for hopefully better returns and encourage some diversity across my portfolio. Nothing drastic relative to the overall nature of index funds I primarily hold.
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willthrill81
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Re: Real_Estate_Crowd_Funding

Post by willthrill81 »

Messy_Orchid_51 wrote:On the face they looks better than a say, P2P lending for personal loans where there is no recourse for defaulting (maybe with real estate you could have a lien on the property per-say?)
The default risk of P2P lending is certainly high, but in my view it can be well compensated for by the returns achieved as well. Nearly four years into it, my returns are around 10%. If it weren't for the risk involved in the platform I used (LendingClub), I would certainly move a much higher proportion of my AA into it.

The comparable stability of real estate seems likely to result in lower returns as well unless your interest is leveraged, but there are obvious risks associated with that as well.

At this point, I see little to no real benefit of these compared to a decent REIT. Maybe WhiteCoat can elaborate on this.
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Valuethinker
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Re: Real_Estate_Crowd_Funding

Post by Valuethinker »

Messy_Orchid_51 wrote:I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!

When the next bear market comes in commercial RE you will find out how good an idea this was or not.

I doubt in the long run that it will prove superior to buying REITs or Mortgage REITs. Analytically it sounds like a mortgage REIT.

There may be superior returns for a while, but if there are, institutional investors will find a way into the asset class: as they have done with P2P lending.

It is absolutely the case, and I learned this with Business Angel type investing, that you either totally know a business and have some kind of control over what happens via Board Seat, majority equity position (in a small group of investors), or you spread your money in as diversified a way as possible (index funds).

Trying to be half way is like trying to be half pregnant. You are basically betting money on the roulette wheel at the casino. You neither have liquidity, nor do you have the rights and advantages of business ownership.
wolf359
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Re: Real_Estate_Crowd_Funding

Post by wolf359 »

Messy_Orchid_51 wrote:I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!
I heard the same podcast. Use the advice they talk about. Only use money you can lose, only invest the minimum for each deal, keep the payback times relatively short (no more than 2-3 years), and diversify, diversify, diversify.

Many require you to be an accredited investor.
Valuethinker
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Re: Real_Estate_Crowd_Funding

Post by Valuethinker »

wolf359 wrote:
Messy_Orchid_51 wrote:I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!
I heard the same podcast. Use the advice they talk about. Only use money you can lose, only invest the minimum for each deal, keep the payback times relatively short (no more than 2-3 years), and diversify, diversify, diversify.

Many require you to be an accredited investor.
Thinking back to my venture investing period.

"Money you can afford to lose" is a tricky one. Warren Buffett's worst mistake, ever, he says, was buying out Berkshire Hathaway-- that decision has cost him 10s of billions of dollars, he says.

Say it has been 17 years since the dot com crash. Invested 60/40 in stocks and bonds, reinvesting income, $1.00 is probably worth say $1.80?

In another 20 years it might be worth $3.60. x2 every 20 years is say 3.5% pa return. If you use historic returns, it's more like $7.20 I think.

So "afford to lose" comes with a *big* opportunity cost. It really does. The tax loss is helpful, though, if you can get that.
wolf359
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Re: Real_Estate_Crowd_Funding

Post by wolf359 »

Valuethinker wrote:
wolf359 wrote:
Messy_Orchid_51 wrote:I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!
I heard the same podcast. Use the advice they talk about. Only use money you can lose, only invest the minimum for each deal, keep the payback times relatively short (no more than 2-3 years), and diversify, diversify, diversify.

Many require you to be an accredited investor.
Thinking back to my venture investing period.

"Money you can afford to lose" is a tricky one. Warren Buffett's worst mistake, ever, he says, was buying out Berkshire Hathaway-- that decision has cost him 10s of billions of dollars, he says.

Say it has been 17 years since the dot com crash. Invested 60/40 in stocks and bonds, reinvesting income, $1.00 is probably worth say $1.80?

In another 20 years it might be worth $3.60. x2 every 20 years is say 3.5% pa return. If you use historic returns, it's more like $7.20 I think.

So "afford to lose" comes with a *big* opportunity cost. It really does. The tax loss is helpful, though, if you can get that.
The interviewee noted that his primary investments were in things he had more direct control over, such as rental real estate and sourcing private loans, where he did his own due diligence. The discussion about online crowd funding was for smaller amounts of money, because he stressed that the platforms were untested over time (the oldest is still less than 5 years old, because they were enabled by the JOBS Act of 2012.)

He stayed on the RE Loan side of the crowd funding, because they were effectively loans that were secured by the real estate. He also vetted each loan individually, to ensure he had confidence in the project and the collateral. The benefit of crowd funding versus doing private lending was that you can limit your risk by investing much smaller amounts to more projects. When he had a LendingClub loan go bad, there was no recourse. When he had a RE loan go bad, he only had a small amount of money at risk and the company handled foreclosure. His first failed deal has yet to complete, but he expressed confidence that they would be made whole.

Lending Circle wasn't actually Real Estate. It was loaning working capital to established small businesses. Again, his stress was on doing the due diligence, since the borrowers financials were available for review prior to making the loans.

He also stressed that you have to know what you're doing, how to vet a company, or how to vet a real estate deal.

The interviewee was pursuing RE crowdfunding more as a hobby than full income replacement. (His primary occupation is a cancer doctor, and he has no intention of stopping.) He had a rational risk-managing approach, and considered the whole online crowdfunding field as untested and risky. He cited he was able to get 12-14% returns starting 2 years ago. It looks like that ship may have sailed. Some of the same funds and opportunities he discussed now look like they're offering around 10%, unless you accept higher risk than he did. (The loans last multiple years, so he may well be still in the deals he was describing.)
wolf359
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Re: Real_Estate_Crowd_Funding

Post by wolf359 »

Messy_Orchid_51 wrote: I'm looking at deploying 4 to low 5 digit cash currently sitting in the traditional 1% online savings accounts in the effort to assume a bit more risk for hopefully better returns and encourage some diversity across my portfolio. Nothing drastic relative to the overall nature of index funds I primarily hold.
Why is it currently in a savings account? Is it an emergency fund? I'm not sure that's money I'd risk.

The platforms he was describing tie up the money for various time periods, some for 2-3 years (you can go for as many as 5).

Effectively, you're creating private, non-tradable, crowd-funded bonds. The real estate loans have collateral, but they'll still tie up the money for a while. In other words, it's not a good match for an emergency fund where you need the money to be liquid in a hurry.

I looked up some of the platforms he was describing. Your return is limited to the interest rates quoted. The platform itself collects money based on fees, which are generally 1% or higher. The promised returns are high enough to be interesting, but they're probably an indication of risk as well. They are definitely riskier than an FDIC-insured savings account.
highercall
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Re: Real_Estate_Crowd_Funding

Post by highercall »

This has been talked about before on this forum and everyone has a different risk tolerance. My experience, which is limited to around one year, is that so far the two platforms I have invested in has been satisfactory. However, out of the 30 some loans I have invested in 7 have been paid back and 2 or 3 are late. Average return has been around 10%. I use Patch of Land and Peerstreet.
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Re: Real_Estate_Crowd_Funding

Post by unclescrooge »

Valuethinker wrote:
Messy_Orchid_51 wrote:I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!

When the next bear market comes in commercial RE you will find out how good an idea this was or not.

I doubt in the long run that it will prove superior to buying REITs or Mortgage REITs. Analytically it sounds like a mortgage REIT.

There may be superior returns for a while, but if there are, institutional investors will find a way into the asset class: as they have done with P2P lending.

It is absolutely the case, and I learned this with Business Angel type investing, that you either totally know a business and have some kind of control over what happens via Board Seat, majority equity position (in a small group of investors), or you spread your money in as diversified a way as possible (index funds).

Trying to be half way is like trying to be half pregnant. You are basically betting money on the roulette wheel at the casino. You neither have liquidity, nor do you have the rights and advantages of business ownership.
Having lost money in similar real estate investments in the past, I totally agree. Just because your interest is secured, doesn't mean you can get your money back when things go south.
Valuethinker
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Re: Real_Estate_Crowd_Funding

Post by Valuethinker »

unclescrooge wrote:
Valuethinker wrote:
Messy_Orchid_51 wrote:I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!

When the next bear market comes in commercial RE you will find out how good an idea this was or not.

I doubt in the long run that it will prove superior to buying REITs or Mortgage REITs. Analytically it sounds like a mortgage REIT.

There may be superior returns for a while, but if there are, institutional investors will find a way into the asset class: as they have done with P2P lending.

It is absolutely the case, and I learned this with Business Angel type investing, that you either totally know a business and have some kind of control over what happens via Board Seat, majority equity position (in a small group of investors), or you spread your money in as diversified a way as possible (index funds).

Trying to be half way is like trying to be half pregnant. You are basically betting money on the roulette wheel at the casino. You neither have liquidity, nor do you have the rights and advantages of business ownership.
Having lost money in similar real estate investments in the past, I totally agree. Just because your interest is secured, doesn't mean you can get your money back when things go south.
If we are not quoting John Bogle here, the next best thing is Warren Buffett ;-).

But seriously, Buffett is right. You either have an egg in your basket that you watch like a hawk *or* you diversify as widely as possible.

I worry about being in the equity layer on Real Estate, where you don't have control, and there's always a lot of debt/ leverage. Or being in one layer of debt, where there are other debts with a higher claim on assets ahead of you.

It seems to me you can synthesize that with a REIT fund without taking on the additional risk.

Losing most or all of your money has a considerable opportunity cost-- you lose the chance to invest that money in say the 60/ 40 equity/ bond fund that returns say 5% pa. Over 30 years, that's 4x your money, roughly.
Valuethinker
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Re: Real_Estate_Crowd_Funding

Post by Valuethinker »

wolf359 wrote:
Valuethinker wrote:
wolf359 wrote:
Messy_Orchid_51 wrote:I heard an interesting Podcast about alternative investments including real estate crowdfunding and am curious if anyone has any experience or insight into this world?

They mentioned various platforms such as GroundFloor, RealtyShares, RealtyMogul and Funding Circle etc.

I'm intrigued with the idea of fractional shares of real estate deals but concerned with the risks of these relatively new businesses.

Thoughts anyone?

Thanks!
I heard the same podcast. Use the advice they talk about. Only use money you can lose, only invest the minimum for each deal, keep the payback times relatively short (no more than 2-3 years), and diversify, diversify, diversify.

Many require you to be an accredited investor.
Thinking back to my venture investing period.

"Money you can afford to lose" is a tricky one. Warren Buffett's worst mistake, ever, he says, was buying out Berkshire Hathaway-- that decision has cost him 10s of billions of dollars, he says.

Say it has been 17 years since the dot com crash. Invested 60/40 in stocks and bonds, reinvesting income, $1.00 is probably worth say $1.80?

In another 20 years it might be worth $3.60. x2 every 20 years is say 3.5% pa return. If you use historic returns, it's more like $7.20 I think.

So "afford to lose" comes with a *big* opportunity cost. It really does. The tax loss is helpful, though, if you can get that.
The interviewee noted that his primary investments were in things he had more direct control over, such as rental real estate and sourcing private loans, where he did his own due diligence. The discussion about online crowd funding was for smaller amounts of money, because he stressed that the platforms were untested over time (the oldest is still less than 5 years old, because they were enabled by the JOBS Act of 2012.)

He stayed on the RE Loan side of the crowd funding, because they were effectively loans that were secured by the real estate. He also vetted each loan individually, to ensure he had confidence in the project and the collateral. The benefit of crowd funding versus doing private lending was that you can limit your risk by investing much smaller amounts to more projects. When he had a LendingClub loan go bad, there was no recourse. When he had a RE loan go bad, he only had a small amount of money at risk and the company handled foreclosure. His first failed deal has yet to complete, but he expressed confidence that they would be made whole.

Lending Circle wasn't actually Real Estate. It was loaning working capital to established small businesses. Again, his stress was on doing the due diligence, since the borrowers financials were available for review prior to making the loans.

He also stressed that you have to know what you're doing, how to vet a company, or how to vet a real estate deal.
Thank you, that is all really interesting-- sounds like you really need to do your homework though.
The interviewee was pursuing RE crowdfunding more as a hobby than full income replacement. (His primary occupation is a cancer doctor, and he has no intention of stopping.) He had a rational risk-managing approach, and considered the whole online crowdfunding field as untested and risky. He cited he was able to get 12-14% returns starting 2 years ago. It looks like that ship may have sailed. Some of the same funds and opportunities he discussed now look like they're offering around 10%, unless you accept higher risk than he did. (The loans last multiple years, so he may well be still in the deals he was describing.)
And we are that much closer to the next downturn in the US. Bloomberg has been citing cases of problem loans and Commercial Mortgage Backed Securities in the commercial RE sector for a couple of years now.

You *do* get these moments in markets, when you can have superior returns- -inefficient markets. But they are usually not easy to exploit, can take a lot of time and effort and you can often find that you were brought in in part to bail the smart money.

I guess I am a perpetual cynic, but having lost money investing in private companies in the dot com era (but great tax breaks ;-)) I am pretty sceptical of the ability of even an intelligent investor to pick the right ones. I realize the characteristics of the companies were significantly different.
Derby
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Re: Real_Estate_Crowd_Funding

Post by Derby »

I would start by reading some of these websites:

BiggerPockets has an entire forum devoted to RECF. You can get a lot of info browsing through some of the threads. https://www.biggerpockets.com/forums/52 ... eal-estate

I also recommend these two websites for general education, as well as specific information on the different platforms.

http://www.therealestatecrowdfundingreview.com/

https://www.crowddd.com/

There is quite a lot of variation in how the platforms and the compensation is set up. Some are just listing sites, others co-invest in the properties they list. Some deals are debt, some are equity, some are residential fix and flip, some are fairly standard commercial property type deals, some have a duration of 6 months, some of 5-7 years. Most require you to be an SEC accredited investor.

I started investing a few years ago, but I'm backing off now. It seems to me that the number of deals and the quality is dropping a bit. Some of the platforms have started their own REITs and debt funds, and that may be the future. I have not lost money, but most of my deals were extended past the original window, and I have 2 deals that are in foreclosure right now, although I suspect that I will get my money back with a small return. This made me realize that I didn't like not being very diversified, so I've decided to switch this part of my portfolio to AlphaFlow's debt fund. They invest in the same deals on the various platforms, but though the fund I can get diversification into 75+ deals. The 1% they take off the top seems reasonable to me, for a 8 or 9% return. Another advantage to the fund is not having to file out-of-state returns for all the K-1s from OOS deals!

TL;DR: RECF can be a useful method of gaining exposure to RE in your portfolio, but do your due diligence.
Carpe Diem.
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