Crowd funded real estate?

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JonnyDVM
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Crowd funded real estate?

Post by JonnyDVM » Wed May 03, 2017 9:08 pm

Has anyone dabbled in crowd funded real estate? Im eyeballing sinking some money specifically into Realty Shares. I'm a little confused on exactly how it works. My rudimentary understanding is generally you're fronting working capital to house flipper who repays the loan over a predetermined short amount of time and then sells to exit the loan. The ROI looks promising. More promising than investing in REIT funds.
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Re: Crowd funded real estate?

Post by LadyGeek » Wed May 03, 2017 9:33 pm

This thread is now in the Investing - Theory, News & General forum (general question).
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Re: Crowd funded real estate?

Post by Derby » Thu May 04, 2017 1:16 am

I have, but there's a lot of things you need to be aware of. I recommend this website to get a good overview of what's out there and what to look for. http://www.therealestatecrowdfundingreview.com/
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Re: Crowd funded real estate?

Post by JonnyDVM » Thu May 04, 2017 8:07 am

Derby wrote:I have, but there's a lot of things you need to be aware of. I recommend this website to get a good overview of what's out there and what to look for. http://www.therealestatecrowdfundingreview.com/
Thanks for the link. Nothing in there to dissuade me. I'm planning to use some of the funds I would have invested in REIT and give this a whirl.
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Re: Crowd funded real estate?

Post by BolderBoy » Thu May 04, 2017 8:34 am

JonnyDVM wrote:Has anyone dabbled in crowd funded real estate? Im eyeballing sinking some money specifically into Realty Shares. I'm a little confused on exactly how it works. My rudimentary understanding is generally you're fronting working capital to house flipper who repays the loan over a predetermined short amount of time and then sells to exit the loan. The ROI looks promising. More promising than investing in REIT funds.
Website: https://www.realtyshares.com/

The graph cheery picked the '2000-2016' dates. If you select other the other dates the results are less interesting.

Seems a bit like real estate speculation moreso than "investing". Personally, between the two, I would stick with REITs.
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Re: Crowd funded real estate?

Post by jwhitaker » Thu May 04, 2017 8:37 am

I follow this stuff and have maybe 2% of my investments in there if you include lendingclub (not real estate put part of crowdfunding). I am actually less of a fan of it as time goes by. Swedroe is very bullish but recommends going through a fund (there are 2 I think) and that is only accessible through an advisor. He's probably right, but to me that defeats the purpose of crowd funding and I'm not willing to commit an amount high enough for that.

I have money in Fundrise ("challenged" according to the website provided above). I agree with the assessment. They recently tried to launch a private online IPO. To me that screams "we need money". I follow their actual investments on the SEC website and they seem fine though. I chose this because it was the most diversified crowdfund option since many have large minimums, e.g. 1,2 or 5 thousand versus $25 on lending club.

I also do Realtyshares. I think the ones I picked will be okay but the stuff they have offered lately have seemed bad to me. Like a luxury home in the bay area that would have to be the most expensive home ever sold in a square mile to meet the projection. Or a luxury home in Utah that would have to sell for double the zillow estimate. Just goofy things. Lot's of multiple listings for the same sponsor (really you're going to build 5 fast food joints in Nashville all at once??). A new trick they are pulling is to put loans in tranches. You can have at most 99 investors in the typical legal structure, but that means a 2M loan has a 20k minimum and that restricts access to far fewer investors. So they started putting multiple tranches to allow 99 * number of tranches to affect the minimum. To me that means they are having trouble filling deals which I think says something. On the flip side though it is a clever idea and the high minimum is one thing I don't like about it. If the minimums were lower I would be much more comfortable investing in this stuff.

I like some of the offerings of RealtyMogul but the lowest min I have seen there is 25k, too much for me.

I think in general it can scratch that active investing itch and probably won't lose tons of money. Swedroe says you are capturing a liquidity premium. Hope it's true because you are certainly giving up liquidity.

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Re: Crowd funded real estate?

Post by barnaclebob » Thu May 04, 2017 9:23 am

We must be getting close to a big correction...

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Re: Crowd funded real estate?

Post by Bud » Thu May 04, 2017 10:06 am

My 5 yr REIT mutual fund investment (XIRR) is 9.3%, 10 year, which includes the correction of 2008-2009, is 6.3%. My research on crowdfunding shows that it is difficult to surpass those results over the long term and thus, it is better to us REITs rather than crowd funding.

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Re: Crowd funded real estate?

Post by JonnyDVM » Thu May 04, 2017 6:07 pm

Most of these investments return in the neighborhood of 10%. Good, but not "this is suspicious, too good to be true" good. The argument that you're paying for a liquidity premium with REIT seems to be a logical one. I like Realty Shares because of the 4k or 5k investment minimums vs 25k on other sites. Other than my monies being locked up for a while I'm having trouble seeing a significant downside. I hear the tax forms are a PITA, but I can deal with that. In essence, it's like being part of a real estate flip, but I don't have to get my hands dirty.
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Re: Crowd funded real estate?

Post by zeugmite » Thu May 04, 2017 8:01 pm

JonnyDVM wrote:Most of these investments return in the neighborhood of 10%. Good, but not "this is suspicious, too good to be true" good. The argument that you're paying for a liquidity premium with REIT seems to be a logical one. I like Realty Shares because of the 4k or 5k investment minimums vs 25k on other sites. Other than my monies being locked up for a while I'm having trouble seeing a significant downside. I hear the tax forms are a PITA, but I can deal with that. In essence, it's like being part of a real estate flip, but I don't have to get my hands dirty.
The downside is the rather curious situation where they want to go to the trouble of getting financing this way, meaning they did not or could not get traditional financing. You should also wonder why.

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Re: Crowd funded real estate?

Post by KyleAAA » Thu May 04, 2017 8:07 pm

zeugmite wrote:
JonnyDVM wrote:Most of these investments return in the neighborhood of 10%. Good, but not "this is suspicious, too good to be true" good. The argument that you're paying for a liquidity premium with REIT seems to be a logical one. I like Realty Shares because of the 4k or 5k investment minimums vs 25k on other sites. Other than my monies being locked up for a while I'm having trouble seeing a significant downside. I hear the tax forms are a PITA, but I can deal with that. In essence, it's like being part of a real estate flip, but I don't have to get my hands dirty.
The downside is the rather curious situation where they want to go to the trouble of getting financing this way, meaning they did not or could not get traditional financing. You should also wonder why.
No real need to wonder why. There are some hard limits to traditional financing that have nothing to do with the creditworthiness of the borrower or potential of the deal. Try finding a bank that will Do traditional financing for your 80th investment property and you'll see what I mean. Doesn't matter that your credit is perfect, you have twice the purchase price in cash in the bank, and it's the deal of the century.

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Re: Crowd funded real estate?

Post by avalpert » Thu May 04, 2017 8:09 pm

Every time I've looked into one of these deals, and every time I showed one to my relatives/friends who are in real estate for a living, we've reached the same conclusion - they tend to be marginal investments for the risk that we wouldn't bother with.

My preference for real estate is either a traditional fund (which is rarely available to most retail investors), the TIAA Real Estate fund or your own investing if you have the time/finances/skills to do it yourself.

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Re: Crowd funded real estate?

Post by Valuethinker » Thu May 04, 2017 8:39 pm

JonnyDVM wrote:Has anyone dabbled in crowd funded real estate? Im eyeballing sinking some money specifically into Realty Shares. I'm a little confused on exactly how it works. My rudimentary understanding is generally you're fronting working capital to house flipper who repays the loan over a predetermined short amount of time and then sells to exit the loan. The ROI looks promising. More promising than investing in REIT funds.
So:

- you don't understand this investment

- you think you are financing house flippers - a strategy which led to financial disaster and bankruptcy for many individuals who do it

- US housing markets have had a 6-7 year recovery, with some markets looking distinctly bubbly, albeit no overall signs of overvaluation. Also the US is on track for one of the longest post WW2 recoveries in terms of months (albeit one after one of the worst post war recessions)

- this looks better than REITs, which tend to invest in commercial properties (plus rental apartments, empirically much more stable than homes in terms of rents v. prices for the latter). You don't explain why, but it looks better to you than REIT investing

This should make the independent reader bullish how?

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Re: Crowd funded real estate?

Post by djotham » Thu May 04, 2017 9:06 pm

Johnny,

I had the same curiosities as you and also from Atlanta. I have been following RE crowdfunding (Realty Shares, GroundFloor) and the opportunities and returns have been diminishing as they have more investors than developers.

I found a better solution by working directly with a local developer and avoiding the crowdfunding fees and establishing a true partnership with the developer. Feel free to contact me if you would like to hear more of my story as I am happy to share. I have been a lurker for a while and just now registered so I was unable to message you.

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Re: Crowd funded real estate?

Post by Derby » Fri May 05, 2017 2:54 am

You should decide if you're interested in debt or equity investing. Like the difference between stocks and bonds, equity returns are greater, but so is risk. From a paperwork POV, equity investments generate K-1s. It can be a pain to find that you have to file a state return just because you invested $5K somewhere. To be honest, I've decided that the best way to invest is in the funds run by the pros. For debt I like AlphaFlow, and for equity, there are funds on RealCrowd and CrowdStreet that offer diversification that can't be achieved with the sum of money I have available for this part of my portfolio. YMMV, of course.
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Re: Crowd funded real estate?

Post by JonnyDVM » Fri May 05, 2017 6:38 am

Valuethinker wrote:
JonnyDVM wrote:Has anyone dabbled in crowd funded real estate? Im eyeballing sinking some money specifically into Realty Shares. I'm a little confused on exactly how it works. My rudimentary understanding is generally you're fronting working capital to house flipper who repays the loan over a predetermined short amount of time and then sells to exit the loan. The ROI looks promising. More promising than investing in REIT funds.
So:

- you don't understand this investment

Understand the concept but trying to understand the nuances better. That's why I posted this thread. If I posted a thread titled "let me tell you how awesome crowd funded real estate is". That wouldn't generate the conversation I was hoping for.


- you think you are financing house flippers - a strategy which led to financial disaster and bankruptcy for many individuals who do it

It's also made a lot of people a solid amount of money including myself. Risk/reward

- US housing markets have had a 6-7 year recovery, with some markets looking distinctly bubbly, albeit no overall signs of overvaluation. Also the US is on track for one of the longest post WW2 recoveries in terms of months (albeit one after one of the worst post war recessions)

You could say the same thing about equity investing. But I'm not seeing anyone advocating against that. In fact what I do see is people on this site time and time again forecasting miserable long term gains from the market. Wouldn't it be logical then to start poking around alternative investments ?

- this looks better than REITs, which tend to invest in commercial properties (plus rental apartments, empirically much more stable than homes in terms of rents v. prices for the latter). You don't explain why, but it looks better to you than REIT investing

I explained the returns looks better than REIT. I'm trying to determine if that's all due to this so called "liquidity premium".


This should make the independent reader bullish how?

You're welcome to keep slogging away getting meager returns from a fixed income heavy portfolio. I'm trying to find a way to increase returns. I found this. I brought the topic to a financial forum for discussion. I'm not advocation putting 100% of my portfolio in it. I'm thinking about investing a small portion in it. Money that would otherwise be headed towards REIT.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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Re: Crowd funded real estate?

Post by JonnyDVM » Fri May 05, 2017 6:40 am

djotham wrote:Johnny,

I had the same curiosities as you and also from Atlanta. I have been following RE crowdfunding (Realty Shares, GroundFloor) and the opportunities and returns have been diminishing as they have more investors than developers.

I found a better solution by working directly with a local developer and avoiding the crowdfunding fees and establishing a true partnership with the developer. Feel free to contact me if you would like to hear more of my story as I am happy to share. I have been a lurker for a while and just now registered so I was unable to message you.
Thanks. This is something I might be interested in.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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Re: Crowd funded real estate?

Post by White Coat Investor » Fri May 05, 2017 11:07 am

I've also been exploring, dabbling in, investing in crowdfunded real estate the last few years. I wrote a big blog post about it a little while ago which detailed my returns so far, successes, disappointments etc.

Far more work than just buying some REIT index fund. Hopefully worth it.
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Re: Crowd funded real estate?

Post by JonnyDVM » Fri May 05, 2017 11:38 am

White Coat Investor wrote:I've also been exploring, dabbling in, investing in crowdfunded real estate the last few years. I wrote a big blog post about it a little while ago which detailed my returns so far, successes, disappointments etc.

Far more work than just buying some REIT index fund. Hopefully worth it.
To be honest this is where I got the idea. I had heard about it in passing, but didn't really explore until I read about it on your blog. Most of the reaction I'm getting seems to be "stick to REIT". The idea is intriguing though. I'll probably toss in 10k as a test and see what happens. I'm most concerned with how complicated it's going to make my taxes. I'm already itemizing and entering both W2 and K1 income. I can't imagine it's going to make things significantly more involved for me.
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Re: Crowd funded real estate?

Post by KyleAAA » Fri May 05, 2017 11:43 am

JonnyDVM wrote:
White Coat Investor wrote:I've also been exploring, dabbling in, investing in crowdfunded real estate the last few years. I wrote a big blog post about it a little while ago which detailed my returns so far, successes, disappointments etc.

Far more work than just buying some REIT index fund. Hopefully worth it.
To be honest this is where I got the idea. I had heard about it in passing, but didn't really explore until I read about it on your blog. Most of the reaction I'm getting seems to be "stick to REIT". The idea is intriguing though. I'll probably toss in 10k as a test and see what happens. I'm most concerned with how complicated it's going to make my taxes. I'm already itemizing and entering both W2 and K1 income. I can't imagine it's going to make things significantly more involved for me.
The asset class intrigues me as well, but I plan on waiting to see how things shake out in terms of returns, platform risk, transparency, etc before jumping in. I don't see REITs as a close substitute for direct real estate investment. It is related and a decent proxy, but not the same thing. Ideally, I think I'd like to own both for diversification purposes. I, too, already enter K1 income every year and it's incredibly quick and easy to do. I don't anticipate a lot of tax issues.

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Re: Crowd funded real estate?

Post by SpaceCowboy » Fri May 05, 2017 2:46 pm

I tried a couple of investments on PeerStreet. Loans were paid off but one got extended a couple of times.
What I didn't like is that when issues came up on a loan, there was no reporting. I had to proactively contact them to find out what was going on. Lending Club has a contact log for each loan, which I found helpful. PeerStreet could use this capability. They manually diligence each loan, which helps with quality.
I've exited all my P2P investments since the issues with Lending Club arose.

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Re: Crowd funded real estate?

Post by Valuethinker » Fri May 05, 2017 3:47 pm

JonnyDVM wrote:
Valuethinker wrote:
JonnyDVM wrote:Has anyone dabbled in crowd funded real estate? Im eyeballing sinking some money specifically into Realty Shares. I'm a little confused on exactly how it works. My rudimentary understanding is generally you're fronting working capital to house flipper who repays the loan over a predetermined short amount of time and then sells to exit the loan. The ROI looks promising. More promising than investing in REIT funds.
So:

- you don't understand this investment

Understand the concept but trying to understand the nuances better. That's why I posted this thread. If I posted a thread titled "let me tell you how awesome crowd funded real estate is". That wouldn't generate the conversation I was hoping for.
Fair enough, although I didn't read your post as a request for information from experts?
- you think you are financing house flippers - a strategy which led to financial disaster and bankruptcy for many individuals who do it

It's also made a lot of people a solid amount of money including myself. Risk/reward
The US may be different, but I could not do this through a form of corporate ownership, with non recourse bank debt. Or at least I'd need serious equity (more than 40%).

Flipping is, to my mind, a game of musical chairs. When the music stops, somebody gets hurt-- badly. Maybe they have offloaded that risk onto banks, but maybe not. (there is a market for people who buy and do up buildings to a tight budget-- but you need to know your budgets, know your contractors, not go over budget (houses have an ugly way of doing that-- problems not identified at purchase) and know your market. It's not easy money by any stretch of the imagination. I know John Dizard (credit columnist at Financial Times, US based) pointed out that a lot of distressed building buyers in Florida were unaware of just what Florida law said about landlord liability, and it was pretty scary).

If you think you add some Alpha to flipping, why not do it yourself? i.e. since you have made money from it in the past, why not keep doing that? Offer others equity stakes, and take a management fee?
- US housing markets have had a 6-7 year recovery, with some markets looking distinctly bubbly, albeit no overall signs of overvaluation. Also the US is on track for one of the longest post WW2 recoveries in terms of months (albeit one after one of the worst post war recessions)

You could say the same thing about equity investing. But I'm not seeing anyone advocating against that. In fact what I do see is people on this site time and time again forecasting miserable long term gains from the market. Wouldn't it be logical then to start poking around alternative investments ?
I am always sceptical that there are "undiscovered" and "cheap" markets out there other than plain vanilla equity & bonds *other than* ones which we create ourselves (my building buyer & renovator, above). And those aren't easy, they just have a barrier to entry & success.

In other words, if bonds and equities are expensive, then so are other assets, even private ones. I know more about Private Equity & Venture Capital than I do about US real estate, and for sure those markets are expensive right now. Capital flows towards returns, and it's usually a mistake to think you've found something that was unavailable to institutional and professional investors.
- this looks better than REITs, which tend to invest in commercial properties (plus rental apartments, empirically much more stable than homes in terms of rents v. prices for the latter). You don't explain why, but it looks better to you than REIT investing

I explained the returns looks better than REIT. I'm trying to determine if that's all due to this so called "liquidity premium".
REITs are yielding c. 3.5% ? I was hearing that the underlying cap rate at Prologis for example was 5-6%, which is not great for industrial property, but they are in a growth segment (distribution centres for the likes of Amazon) so credible.

Retail I basically don't care what the cap rate is, there's a huge cloud over the sector. Only the very strong will survive (US has something like 60% more retail square footage per capita than *Canada*-- and Canada is not underspaced). When you've got the sort of tectonic changes we are going through in the retail sector... well, I'm not even sure the experts can spot opportunity that is separate from risk.

What cap rates are you aiming at, here? What types of properties?

Personal investing in real estate generally takes time, patience and market knowledge. It's a business in other words. Because of the leverage effect, you can get rich slowly-- impatience is generally not a good strategy, because RE is a cyclical business. And if you buy in the next Buffalo... it's not likely to be a great investment. There's a lot of specific risk in other words.
This should make the independent reader bullish how?

You're welcome to keep slogging away getting meager returns from a fixed income heavy portfolio. I'm trying to find a way to increase returns. I found this. I brought the topic to a financial forum for discussion. I'm not advocation putting 100% of my portfolio in it. I'm thinking about investing a small portion in it. Money that would otherwise be headed towards REIT.
[/quote]

Just as an aside I am a UK investor. Crowdfunding seems to be ahead of the US in some areas, at least. But it looks really dangerous to me, here. Next downturn we will find out how dangerous. VC angel investing? Been there, done that, lost the money (but great tax benefits ;-)). It wasn't worth the risk.

OK REITs are equities NOT bonds. I would hope everyone here would realize this. Take a look at the volatility in 2008-09-- higher than a Total Stock Market index fund. This is an equity investment not a bond investment.

What's the upside case for you? What return are you looking at? Split capital v. income? What assumptions re loss rates?

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Re: Crowd funded real estate?

Post by unclescrooge » Fri May 05, 2017 4:23 pm

jwhitaker wrote:I follow this stuff and have maybe 2% of my investments in there if you include lendingclub (not real estate put part of crowdfunding). I am actually less of a fan of it as time goes by. Swedroe is very bullish but recommends going through a fund (there are 2 I think) and that is only accessible through an advisor. He's probably right, but to me that defeats the purpose of crowd funding and I'm not willing to commit an amount high enough for that.

I have money in Fundrise ("challenged" according to the website provided above). I agree with the assessment. They recently tried to launch a private online IPO. To me that screams "we need money". I follow their actual investments on the SEC website and they seem fine though. I chose this because it was the most diversified crowdfund option since many have large minimums, e.g. 1,2 or 5 thousand versus $25 on lending club.

I also do Realtyshares. I think the ones I picked will be okay but the stuff they have offered lately have seemed bad to me. Like a luxury home in the bay area that would have to be the most expensive home ever sold in a square mile to meet the projection. Or a luxury home in Utah that would have to sell for double the zillow estimate. Just goofy things. Lot's of multiple listings for the same sponsor (really you're going to build 5 fast food joints in Nashville all at once??). A new trick they are pulling is to put loans in tranches. You can have at most 99 investors in the typical legal structure, but that means a 2M loan has a 20k minimum and that restricts access to far fewer investors. So they started putting multiple tranches to allow 99 * number of tranches to affect the minimum. To me that means they are having trouble filling deals which I think says something. On the flip side though it is a clever idea and the high minimum is one thing I don't like about it. If the minimums were lower I would be much more comfortable investing in this stuff.

I like some of the offerings of RealtyMogul but the lowest min I have seen there is 25k, too much for me.

I think in general it can scratch that active investing itch and probably won't lose tons of money. Swedroe says you are capturing a liquidity premium. Hope it's true because you are certainly giving up liquidity.
If there minimums were lower you'd spend less time doing due diligence and end up losing a whole lot more.

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Re: Crowd funded real estate?

Post by unclescrooge » Fri May 05, 2017 4:38 pm

Valuethinker wrote:
JonnyDVM wrote:
Valuethinker wrote:
JonnyDVM wrote:Has anyone dabbled in crowd funded real estate? Im eyeballing sinking some money specifically into Realty Shares. I'm a little confused on exactly how it works. My rudimentary understanding is generally you're fronting working capital to house flipper who repays the loan over a predetermined short amount of time and then sells to exit the loan. The ROI looks promising. More promising than investing in REIT funds.
So:

- you don't understand this investment

Understand the concept but trying to understand the nuances better. That's why I posted this thread. If I posted a thread titled "let me tell you how awesome crowd funded real estate is". That wouldn't generate the conversation I was hoping for.
Fair enough, although I didn't read your post as a request for information from experts?
- you think you are financing house flippers - a strategy which led to financial disaster and bankruptcy for many individuals who do it

It's also made a lot of people a solid amount of money including myself. Risk/reward
The US may be different, but I could not do this through a form of corporate ownership, with non recourse bank debt. Or at least I'd need serious equity (more than 40%).

Flipping is, to my mind, a game of musical chairs. When the music stops, somebody gets hurt-- badly. Maybe they have offloaded that risk onto banks, but maybe not. (there is a market for people who buy and do up buildings to a tight budget-- but you need to know your budgets, know your contractors, not go over budget (houses have an ugly way of doing that-- problems not identified at purchase) and know your market. It's not easy money by any stretch of the imagination. I know John Dizard (credit columnist at Financial Times, US based) pointed out that a lot of distressed building buyers in Florida were unaware of just what Florida law said about landlord liability, and it was pretty scary).

If you think you add some Alpha to flipping, why not do it yourself? i.e. since you have made money from it in the past, why not keep doing that? Offer others equity stakes, and take a management fee?
- US housing markets have had a 6-7 year recovery, with some markets looking distinctly bubbly, albeit no overall signs of overvaluation. Also the US is on track for one of the longest post WW2 recoveries in terms of months (albeit one after one of the worst post war recessions)

You could say the same thing about equity investing. But I'm not seeing anyone advocating against that. In fact what I do see is people on this site time and time again forecasting miserable long term gains from the market. Wouldn't it be logical then to start poking around alternative investments ?
I am always sceptical that there are "undiscovered" and "cheap" markets out there other than plain vanilla equity & bonds *other than* ones which we create ourselves (my building buyer & renovator, above). And those aren't easy, they just have a barrier to entry & success.

In other words, if bonds and equities are expensive, then so are other assets, even private ones. I know more about Private Equity & Venture Capital than I do about US real estate, and for sure those markets are expensive right now. Capital flows towards returns, and it's usually a mistake to think you've found something that was unavailable to institutional and professional investors.
- this looks better than REITs, which tend to invest in commercial properties (plus rental apartments, empirically much more stable than homes in terms of rents v. prices for the latter). You don't explain why, but it looks better to you than REIT investing

I explained the returns looks better than REIT. I'm trying to determine if that's all due to this so called "liquidity premium".
REITs are yielding c. 3.5% ? I was hearing that the underlying cap rate at Prologis for example was 5-6%, which is not great for industrial property, but they are in a growth segment (distribution centres for the likes of Amazon) so credible.

Retail I basically don't care what the cap rate is, there's a huge cloud over the sector. Only the very strong will survive (US has something like 60% more retail square footage per capita than *Canada*-- and Canada is not underspaced). When you've got the sort of tectonic changes we are going through in the retail sector... well, I'm not even sure the experts can spot opportunity that is separate from risk.

What cap rates are you aiming at, here? What types of properties?

Personal investing in real estate generally takes time, patience and market knowledge. It's a business in other words. Because of the leverage effect, you can get rich slowly-- impatience is generally not a good strategy, because RE is a cyclical business. And if you buy in the next Buffalo... it's not likely to be a great investment. There's a lot of specific risk in other words.
This should make the independent reader bullish how?

You're welcome to keep slogging away getting meager returns from a fixed income heavy portfolio. I'm trying to find a way to increase returns. I found this. I brought the topic to a financial forum for discussion. I'm not advocation putting 100% of my portfolio in it. I'm thinking about investing a small portion in it. Money that would otherwise be headed towards REIT.
Just as an aside I am a UK investor. Crowdfunding seems to be ahead of the US in some areas, at least. But it looks really dangerous to me, here. Next downturn we will find out how dangerous. VC angel investing? Been there, done that, lost the money (but great tax benefits ;-)). It wasn't worth the risk.

OK REITs are equities NOT bonds. I would hope everyone here would realize this. Take a look at the volatility in 2008-09-- higher than a Total Stock Market index fund. This is an equity investment not a bond investment.

What's the upside case for you? What return are you looking at? Split capital v. income? What assumptions re loss rates?
[/quote]
x100.

Sounds like the OP just wants to outsource his speculation, with the hope that the borrowers know what they're doing.

From my personal,and very humbling experience, everyone's an expert (especially with other people's money) until the cycle peaks and everything crashes. When this happens, it doesn't matter whether you're preferred equity or senior debt, you're going to lose a lot of money. Somewhere in the realm of 100% of your investment.

But until then, keep dancing while the music is playing and pretend there isn't any risk!

You might have a few good years, or even a dozen. But remember if you're going to panic and bail, it pays to panic early :mrgreen:

PS: I made a lot of money in the previous real estate cycle and I got out early. In hindsight, it was great timing.

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Re: Crowd funded real estate?

Post by Jim21713 » Fri May 05, 2017 5:04 pm

I have looked into Peerstreet for some months. It generally appears to offer real estate first mortgage backed taxable returns of 7 to 8% on an annual basis. Essentially they are cutting the private money lender (PML) out of the existing business cycle. A private money lender would often charge 12% to 15% for short term real estate secured loans to real estate investors. Two things have kept my money out of. this venture:
1. The delta on what a PML can charge (12 to 15%) vs the Peerstreet published payouts (7 to 8%) is not really explained. Where is that delta going?
2. You (the investor) have no insight as the the business stability of the company (Peerstreet). It would not be impossible to find them insolvent one day and your investment gone.

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Re: Crowd funded real estate?

Post by White Coat Investor » Sat May 06, 2017 9:22 am

JonnyDVM wrote:
White Coat Investor wrote:I've also been exploring, dabbling in, investing in crowdfunded real estate the last few years. I wrote a big blog post about it a little while ago which detailed my returns so far, successes, disappointments etc.

Far more work than just buying some REIT index fund. Hopefully worth it.
To be honest this is where I got the idea. I had heard about it in passing, but didn't really explore until I read about it on your blog. Most of the reaction I'm getting seems to be "stick to REIT". The idea is intriguing though. I'll probably toss in 10k as a test and see what happens. I'm most concerned with how complicated it's going to make my taxes. I'm already itemizing and entering both W2 and K1 income. I can't imagine it's going to make things significantly more involved for me.
It's no big deal to me to add another K-1 or 1099. I mean that's like 3 minutes a piece, right? But what I'm trying to avoid is doing a state tax return for another state. So that means I'm only going to do equity projects in my state, tax-free states, and states that require the LLC to do a composite return.

However, I think you can do a debt deal in any state.

There is no doubt that people make money in real estate. It's a good asset class. It's a good opportunity to use leverage and add (or subtract) value given its inefficiencies. But the best way to invest in it? That's the tough part and the answer might be different for different people.
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Re: Crowd funded real estate?

Post by JonnyDVM » Sat May 06, 2017 9:33 am

I'm sort of baffled by the counter argument I keep hearing that "well the market is going to crash and you might lose your investment". Ok. How did equities fare last crash ? How about REIT's? I'm seeing more risk in exchange for the prospect of higher returns. I'm not really seeing a significantly higher risk then posed by equity investments.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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Re: Crowd funded real estate?

Post by JonnyDVM » Sat May 06, 2017 10:05 am

Valuethinker wrote:
If you think you add some Alpha to flipping, why not do it yourself? i.e. since you have made money from it in the past, why not keep doing that? Offer others equity stakes, and take a management fee?

What cap rates are you aiming at, here? What types of properties?

Capital flows towards returns, and it's usually a mistake to think you've found something that was unavailable to institutional and professional investors

REITS are not bonds
Well that's the point. Flipping houses/apartments is a lot of trouble. Especially when you have another job. I would much prefer to throw some capital behind someone that does this exclusively for their living.

Type of property and cap rate- That's also the point. I'll let someone else do the legwork. Most of the investments appear to be residential house flips. There are also other options. On RealtyShares right now there's an opportunity to invest in a Charleston hotel project. Most of the cap rates on the residential flips are in the neighborhood of 10% which seems realistic.

Professional investors- I do think this is available to institutional and professional investors. I'm sure they'll ruin it soon enough like they helped ruin peer to peer lending.

REITs vs bonds- Yes yes. We all all know REITs are not bonds. I was being a bit of a jerk with some sarcasm there. My point was, once again, if the majority here is forecasting pessimistic long term market returns logically we should be seeking alternative investments.

I might add I've made a significant amount of money buying and selling two houses. Buying and selling real estate had earned me a rate of return significantly better than equities. That was with barely trying. Got me thinking that I really should be more invested in real estate. Not exclusively by any means. But more than the 10% REIT tilt I currently have.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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Re: Crowd funded real estate?

Post by Valuethinker » Sat May 06, 2017 2:38 pm

JonnyDVM wrote:I'm sort of baffled by the counter argument I keep hearing that "well the market is going to crash and you might lose your investment". Ok. How did equities fare last crash ? How about REIT's? I'm seeing more risk in exchange for the prospect of higher returns. I'm not really seeing a significantly higher risk then posed by equity investments.
Because RE investing is normally leveraged, when a crash comes the lower tiers of debt and equity get crushed-- 100% crushed.

That is different from ordinary equities. There, some proportion of companies go bankrupt but generally companies don't go bankrupt, even in an economic downturn. Because of the leveraged nature of their balance sheets, banks and insurance companies can (and do) go bankrupt during a financial crash (separate from an economic downturn). Economic downturns do tend to claim the heads of one or more financial institutions (2000-03 was an exception) simply because of loan losses-- Continental Bank, the S&L debacle etc.

A REIT fund, the constituent companies have leverage. So in a financial crash, again, REITs get hit. Hence 2008-9 when the REIT index fund dropped c. 70% at worst. However, that is still considerably more diversified than a handful of personal RE investments, which could have lost 100%.

You mention cap rates on house flipping of 10%, and that confuses me mightily:

- cap rate = Net Operating Income/ value of property -- this is independent of how much debt or equity you have in financing the property. 10% cap rate is pretty good in the current environment, I would guess it only applies to very marginal/ risky projects (like hotels or leisure properties, or secondary retail)

Did you mean cap rate? Or your expected return from flipping? I had thought true "flippers" would aim for 20-30% returns per property, to compensate them for the considerable risks and hassle associated with buying properties, rehabilitating them and re-letting them.

Total Return from RE = cap rate +/- change in valuation - taxes & other transactions costs (EDIT: note cap rate is per annum, so you have to annualize these numbers-- in effect calculating an Internal Rate of Return using the investment cash flows, over the period held)

Cap rate is the equivalent of dividend yield on an ordinary stock. Much more of the return from RE generally comes from income/rental i.e. cap rate, rather than capital gain, vs. a conventional stock.
Last edited by Valuethinker on Sun May 07, 2017 1:50 pm, edited 2 times in total.

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Re: Crowd funded real estate?

Post by Valuethinker » Sat May 06, 2017 2:41 pm

JonnyDVM wrote:orecasting pessimistic long term market returns logically we should be seeking alternative investments.

I might add I've made a significant amount of money buying and selling two houses. Buying and selling real estate had earned me a rate of return significantly better than equities. That was with barely trying. Got me thinking that I really should be more invested in real estate. Not exclusively by any means. But more than the 10% REIT tilt I currently have.
I have been through 3 real estate crashes (residential; there's probably 1 more that happened to my parents in the 1970s that I don't remember-- when inflation is 10%+ housing prices going nowhere for 3 years does not feel like a crash like the early 1990s).

My sense is that buying and reselling houses (assuming no major repairs or renovations) is a game that works.. until it does not. The main thing is not to be over-leveraged when the cycle turns-- you have to be out before the majority of people try to get out. Because you can wipe yourself out doing that if you miss the turn, a project gets delayed in completion etc. Use a corporate form of ownership as much as possible to prevent bank recourse onto your personal assets.

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Re: Crowd funded real estate?

Post by EasilyConfused » Sat May 06, 2017 6:17 pm

I invest in real estate, but I sure wouldn't want to invest in someone else's real estate. I wouldn't be comfortable unless I were 100% certain that the person getting my money knew his market inside and out, put his investors' interests at least on par with his own, and had the morals of a saint. I've never met that person.

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Re: Crowd funded real estate?

Post by abuss368 » Sat May 06, 2017 7:40 pm

If you generate income in another state you may have additional tax filing requirements.
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Re: Crowd funded real estate?

Post by Valuethinker » Sun May 07, 2017 1:52 pm

EasilyConfused wrote:I invest in real estate, but I sure wouldn't want to invest in someone else's real estate. I wouldn't be comfortable unless I were 100% certain that the person getting my money knew his market inside and out, put his investors' interests at least on par with his own, and had the morals of a saint. I've never met that person.
And one certainly meets the opposite in Real Estate ;-) .

If one turns it into one's business activity, with hands on involvement (and eventually the scale to hire others to manage the day to day stuff) then because you can borrow against RE, it is possible to make a lot of money. Mind, most of the RE billionaires out there appear to have either gone broke, or nearly gone broke, at least once.

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Re: Crowd funded real estate?

Post by LarryAllen » Sun May 28, 2017 8:35 pm

I am considering a CrowdStreet fund investing in some storage lockers. Always wanted to invest in those but don't have the cash for a larger, more direct partnership, so thought this would be a good option. Anybody had good or bad luck with Crowdstreet?

10 Federal
TARGETED INVESTOR IRR 15%+
TARGETED EQUITY MULTIPLE 1.75x*
TARGETED INVESTMENT PERIOD 3-5 Years
INVESTMENT PROFILE Equity Fund
MINIMUM INVESTMENT $25,000
https://app.crowdstreet.com/properties/

It says 8% preferred payment and then some split above that. I would be happy with 8% though. :)

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Re: Crowd funded real estate?

Post by runner540 » Sun May 28, 2017 8:59 pm

LarryAllen wrote:I am considering a CrowdStreet fund investing in some storage lockers. Always wanted to invest in those but don't have the cash for a larger, more direct partnership, so thought this would be a good option. Anybody had good or bad luck with Crowdstreet?

10 Federal
TARGETED INVESTOR IRR 15%+
TARGETED EQUITY MULTIPLE 1.75x*
TARGETED INVESTMENT PERIOD 3-5 Years
INVESTMENT PROFILE Equity Fund
MINIMUM INVESTMENT $25,000
https://app.crowdstreet.com/properties/

It says 8% preferred payment and then some split above that. I would be happy with 8% though. :)
No experience with this class of investment, and I don't want to register with them to access the prospectus with details. In a vacuum, that return rate is attractive. But far from risk free. Here are some questions:
Why can't these ventures get cheaper traditional financing? Banks are tightening lending on commercial real estate (just google this to get more info). What do you know/believe that they don't?
What is the track record of the asset class (storage lockers) and the investment manager through the last downturn?
What is the structure of the investment (closed or open end mutual fund? LP? other?). Will you get a K-1 and pay taxes on earnings that are not realized/paid yet?

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Re: Crowd funded real estate?

Post by Valuethinker » Mon May 29, 2017 8:11 am

LarryAllen wrote:I am considering a CrowdStreet fund investing in some storage lockers. Always wanted to invest in those but don't have the cash for a larger, more direct partnership, so thought this would be a good option. Anybody had good or bad luck with Crowdstreet?

10 Federal
TARGETED INVESTOR IRR 15%+
TARGETED EQUITY MULTIPLE 1.75x*
TARGETED INVESTMENT PERIOD 3-5 Years
INVESTMENT PROFILE Equity Fund
MINIMUM INVESTMENT $25,000
https://app.crowdstreet.com/properties/

It says 8% preferred payment and then some split above that. I would be happy with 8% though. :)
What is the split (if any) in that 8% between capital gain and income? I.e. to what extent are you getting paid with your own money?

What are the Risk Factors in the Prospectus?

Is the 8% in any way guaranteed? The "targetted investment multiple" is just that, a target. No guarantees, I presume?

Basically I wouldn't put more money into this than I could afford to lose.

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Re: Crowd funded real estate?

Post by brybogle » Mon May 29, 2017 9:25 am

LarryAllen wrote:I am considering a CrowdStreet fund investing in some storage lockers. Always wanted to invest in those but don't have the cash for a larger, more direct partnership, so thought this would be a good option. Anybody had good or bad luck with Crowdstreet?

10 Federal
TARGETED INVESTOR IRR 15%+
TARGETED EQUITY MULTIPLE 1.75x*
TARGETED INVESTMENT PERIOD 3-5 Years
INVESTMENT PROFILE Equity Fund
MINIMUM INVESTMENT $25,000
https://app.crowdstreet.com/properties/

It says 8% preferred payment and then some split above that. I would be happy with 8% though. :)
Crowdstreet is a marketplace, think of it more like Craigslist. It's up to you to vet the sponsor and read through the ppm.

At a high level, they appear to acquire facilities and convert them to fully automated. That seems like both a benefit (save 50k employee) and drawback (no onsite security, no upselling of boxes, uhauls, etc). Do other facilities automate, why or why not? Has this sponsor been successful with this strategy? How does this asset class do during a recession?

If this is something you'd do yourself, and you trust this sponsor to execute, then invest. If not, don't.

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