Does the JOBS act make being a landlord obsolete?

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doc01
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Does the JOBS act make being a landlord obsolete?

Post by doc01 » Wed Feb 28, 2018 2:59 pm

Question for those who own rental property. With the ability to invest in real estate through crowdfunding websites such as realtyshares, peerstreet, patch of land etc. what are the advantages of being a landlord? In doing my research the headaches of being a landlord (paying for management company, litigious tenants, maintenance, repair, illiquidity, ) don't seem to be worth the minimal profit difference from the crowdfunded real estate sites. With owning real estate being a traditional pillar of building wealth, I absolutely think it is a good asset class but the idea of "actively" being a landlord is less attractive than the more passive crowdfunding equity/debt. (I understand both have risks)

Hypothetically, With $200,000 to invest in real estate I think I would rather invest $50,000 in 4 crowdfunded properties than buy a $200,000 house and rent it out. It seems to this naive millenial :happy that the internet/JOBS act has given the ability to diversify into real estate with much less risk than being a landlord. Any thoughts or disagreements are much appreciated.

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Pajamas
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Re: Does the JOBS act make being a landlord obsolete?

Post by Pajamas » Wed Feb 28, 2018 3:09 pm

You're comparing apples to oranges. One is passive investing, the other is a business. There are other ways to passively invest in real estate which may be superior.

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C4NT
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Re: Does the JOBS act make being a landlord obsolete?

Post by C4NT » Wed Feb 28, 2018 3:15 pm

Or, you could also purchase the $200,000 house and hire a management company to manage the property.

Or, you could invest in REITs.

Which one would you make more money on? I don't know.

But if you include being an active landlord back in the mix, I would bet being a landlord would make you the most money (on average).

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C4NT
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Re: Does the JOBS act make being a landlord obsolete?

Post by C4NT » Wed Feb 28, 2018 3:17 pm

Forgot to add this..
doc01 wrote:
Wed Feb 28, 2018 2:59 pm
don't seem to be worth the minimal profit difference from the crowdfunded real estate sites.
What are you basing this statement on?

jminv
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Re: Does the JOBS act make being a landlord obsolete?

Post by jminv » Wed Feb 28, 2018 3:19 pm

I would invest in a lot more than 4 crowd funded houses if that's the route you pick. 4 is far too concentrated.

If you don't want the hassles of being a landlord and want a decent management team, invest in a REIT, not a crowdfunded investment site.

Main crowdfunding issues are: lack of control, yields that are not compensating for risk, and a related supply/demand imbalance.

Many of the crowdfunded sites suffer from a serious issue: very high investor demand and low supply of deals. The loans that are made available are often sold minutes later. This supply/demand imbalance pushes the yields down which is not good for an investor. Flippers or landlords use crowdfunded sites mostly because the interest rate is lower and the loan amount higher than they could receive by a bank or hard money lender. These are not good things for you. You're sacrificing yield while taking on additional risk from the higher loan amount. There's also a speed issue, but that's secondary. The borrowers that are attracted to these sites want to use more leverage, at a lower rate and are people you don't know so can't appropriately judge. As time goes on, there will probably be further yield compression as happened with prior unsecured consumer lending crowdfunded operators.

Also, because the loans are snapped up so quickly people miss out on instances where the appraisal doesn't appear to be accurate and consequently the house is over-leveraged considering the amount of repair work required. When I say so quickly, I mean within minutes. There are, of course, loans where the appraisal is spot on. Even when the appraisal is spot on, it's almost always exterior driveby not interior. This is not good when the target houses are usually targeted for a reason: functional obsolescence, serious issues, etc. When it does include interior, I have noticed that there is a back and forth between the appraiser and flipper as to the real value of the house because the appraiser marks it as unihabitable.

I've also noticed some small strip malls being essentially offloaded by a better informed investor to the crowdfunding masses. When you look at it, the occupancy rate is low and has been declining while the appraisal is unrealistic. The owner is bailing and cashing out. Similar issue in some very sketchy rentals.

You will lack control and only be given basic details about who is managing the flip or rentals. If they decide that they're going to lose money on your investment, they can run and your crowdfunded site will somehow have to go in, take control, and sell or finish the project. It's likely that you will lose money. If the housing market declines nationally, it's likely you will lose a lot of money.

Finally, a personal story about one of these crowdfunded sites:
I looked at this house on a trip back to the states recently as a personal investment since I know a reliable remodeler. An amateur decided to flip a house in what seemed like a nice, gated subdivision. The house was a steal at $350k, previous owners had filed for bankruptcy. He used hard money lenders to buy it first, then paid them back with a crowdfunded site. Then, when he got to 'working' on it he realized he couldn't open up the floor plan like he had planned on. This was an essential element of his plan because it was a weirdly arranged, closed layout and buyers want an open floorplan. There were holes in the drywall everywhere and I mean everywhere. Carpet half installed, had started to paint too. Probably spent around 3k and his budget had been $45k. Realized it would cost more than $100k (we estimated 150+), gave up, and the investors are losing badly. House has been on the market like this for 6 months now. It's only sellable to another flipper who wants to take on the same risks and costs or someone happy with a bargain and a weird floorplan...and willing to repair substantial drywall damage. The investors will take a haircut. I wouldn't expect the house to sell for more than $270k now.
Last edited by jminv on Wed Feb 28, 2018 3:42 pm, edited 5 times in total.

clutchied
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Re: Does the JOBS act make being a landlord obsolete?

Post by clutchied » Wed Feb 28, 2018 3:21 pm

doc01 wrote:
Wed Feb 28, 2018 2:59 pm
Question for those who own rental property. With the ability to invest in real estate through crowdfunding websites such as realtyshares, peerstreet, patch of land etc. what are the advantages of being a landlord? In doing my research the headaches of being a landlord (paying for management company, litigious tenants, maintenance, repair, illiquidity, ) don't seem to be worth the minimal profit difference from the crowdfunded real estate sites. With owning real estate being a traditional pillar of building wealth, I absolutely think it is a good asset class but the idea of "actively" being a landlord is less attractive than the more passive crowdfunding equity/debt. (I understand both have risks)

Hypothetically, With $200,000 to invest in real estate I think I would rather invest $50,000 in 4 crowdfunded properties than buy a $200,000 house and rent it out. It seems to this naive millenial :happy that the internet/JOBS act has given the ability to diversify into real estate with much less risk than being a landlord. Any thoughts or disagreements are much appreciated.
I think your comfort level is a pretty big part of the equation.

I personally like being a landlord. Are their headaches? Yes. Are there risks and significant issues? Sure.

but... I get to direct what I want and purchase what I want.

Maybe it's just old school but I keep hearing the siren's call of "real estate investment" and people losing money because whoever they invested with had no idea what they were doing. Perhaps tech has changed things and maybe the past 8 or 9 years has made people think RE is a sure thing... I don't know.

Hulu
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Re: Does the JOBS act make being a landlord obsolete?

Post by Hulu » Wed Feb 28, 2018 4:28 pm

Currently, I think it makes more $ and sense to continue as a landlord because I have the infrastructure and experience. If I could safely expect anything close to 20% yields through crowdsourcing I'd switch in a heartbeat. Also a major disadvantage is the sustainability. To keep reinvesting profits in lower and lower yielding investments is a risk. Like how peer to peer lending yields keep shrinking and shrinking

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Sandtrap
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Re: Does the JOBS act make being a landlord obsolete?

Post by Sandtrap » Wed Feb 28, 2018 4:48 pm

doc01 wrote:
Wed Feb 28, 2018 2:59 pm
Question for those who own rental property. With the ability to invest in real estate through crowdfunding websites such as realtyshares, peerstreet, patch of land etc. what are the advantages of being a landlord? In doing my research the headaches of being a landlord (paying for management company, litigious tenants, maintenance, repair, illiquidity, ) don't seem to be worth the minimal profit difference from the crowdfunded real estate sites. With owning real estate being a traditional pillar of building wealth, I absolutely think it is a good asset class but the idea of "actively" being a landlord is less attractive than the more passive crowdfunding equity/debt. (I understand both have risks)

Hypothetically, With $200,000 to invest in real estate I think I would rather invest $50,000 in 4 crowdfunded properties than buy a $200,000 house and rent it out. It seems to this naive millenial :happy that the internet/JOBS act has given the ability to diversify into real estate with much less risk than being a landlord. Any thoughts or disagreements are much appreciated.
Levels:
1 REIT > completely passive. A fund. Zero hands on control. Risk unknown.
2 Probably "crowdfunding in this slot. Unanimous investors taking a chance. Zero hands on control for investors except for the "hands on person". Very limited return. High risk.
3 "Hui" (in Hawaiian) or group of folks pooling money for an investment. All are known. Small business group or family. Many help or have active roles of involvement. Hands on control over outcome, or limited. Limited Return. Moderate Risk.
4 Personal R/E investment, own money/or loan, full control over outcome, maximum return (not shared). Minimal risk except for what is generated by self.

These are all very different strategies for different things.
The "headaches" you list for being a landlord as researched "online" are painting everything with the same brush. Very different in real life in the real world.

As in most things, it depends on one's level of experience, expertise, education, business savvy, maturity of mind, and resources.
mahalo,
j :D

gsmith
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Re: Does the JOBS act make being a landlord obsolete?

Post by gsmith » Thu Mar 01, 2018 1:40 am

Sandtrap wrote:
Wed Feb 28, 2018 4:48 pm
Levels:
1 REIT > completely passive. A fund. Zero hands on control. Risk unknown.
2 Probably "crowdfunding in this slot. Unanimous investors taking a chance. Zero hands on control for investors except for the "hands on person". Very limited return. High risk.
3 "Hui" (in Hawaiian) or group of folks pooling money for an investment. All are known. Small business group or family. Many help or have active roles of involvement. Hands on control over outcome, or limited. Limited Return. Moderate Risk.
4 Personal R/E investment, own money/or loan, full control over outcome, maximum return (not shared). Minimal risk except for what is generated by self.
In between 2 and 3 would be "Hard Money Lending", which is.... kind of a hybrid passive
You lend money to real estate flippers, landlords, and speculators for a couple points + 10-15%, secured by a first position on a property as collateral.
If they pay you off, everyone walks away happy
If they don't pay you off, you foreclose and get the property at the sheriff's sale if noone outbids you.
Hopefully you did the LTV right, and the value of the property exceeds your acquisition fees.

arsenalfan
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Re: Does the JOBS act make being a landlord obsolete?

Post by arsenalfan » Thu Mar 01, 2018 2:37 am

I see crowdfunding vs landlording as 2 different investment time horizons. Crowdfunding for 1-4 years and tax inefficient, landlording as a part time job with leverage, depreciation tax benefits, and possible appreciation over a decade plus. To wit:

If you are in a high tax bracket, REIT, crowdfunding, hard money lending are taxed at ordinary income levels if returned < 1year. I suppose lower long term cap gains applies to crowdfunding >1 year? Either way, not the best investment. REITs in tax sheltered certainly advisable. Hardmoney loans are returned in less than a year, and the CrowdFunding/private equity "accredited investor" deals I get floated are often multi-year with 3-4% return in years 1-3, then a magical sale to a REIT or Private Equity in year 3-5 which brings IRR up to 15% annualized or something (never sure how confident to be about that).

Landlording is a part time job and definitely not passive, but the draw is the leverage, the tax benefits of depreciation, and the longterm cashflow it will throw off once loan paid off in a decade or so.

To your example, take your $200k and put four $50k downpayments on four $250k homes that cashflow (20% down). If you've done the numbers correctly/want to landlord/etc, over the next 15 years you have a $1mm asset that paid $750k for itself, and is now throwing off cash flow to you rather than the mortgages. Clearly this is a long haul proposition.

It being the internet, anecdotes abound of horror stories and grand slams in both CrowdFunding and Landlording are out there to support either argument.

Katietsu
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Re: Does the JOBS act make being a landlord obsolete?

Post by Katietsu » Thu Mar 01, 2018 9:50 am

Anecdotal experience, nearby town had a true need for a certain level of apartment/townhouse housing units. These national crowdfunding kind of deals were put together with truthful brochure showing projected need. However, dozens of projects were started by different groups over the course of a few years. I am sure that the 5 year old statistics were still be used to convince investors from 2000 miles away to participate. Anyone who took a 5 minute spin through town would have known better than to break ground on a new complex. A lot of fire sales ensued on half vacant buildings or, worse yet, half finished buildings.

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JoMoney
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Re: Does the JOBS act make being a landlord obsolete?

Post by JoMoney » Thu Mar 01, 2018 10:04 am

Owning 'crowdfunded' real estate is more comparable to REITs than to directly owning and running a real estate business / being a landlord.
If you're not wanting to actively run a business or be a landlord or understand the real estate market you're operating in, then a diversified passive option like a REIT is probably the way to go.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

travellight
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Re: Does the JOBS act make being a landlord obsolete?

Post by travellight » Thu Mar 01, 2018 10:46 am

Landlording is a part time job and definitely not passive, but the draw is the leverage, the tax benefits of depreciation, and the longterm cashflow it will throw off once loan paid off in a decade or so.

To your example, take your $200k and put four $50k downpayments on four $250k homes that cashflow (20% down). If you've done the numbers correctly/want to landlord/etc, over the next 15 years you have a $1mm asset that paid $750k for itself, and is now throwing off cash flow to you rather than the mortgages. Clearly this is a long haul proposition.
/quote]

Well put, arsenalfan. I like those numbers and having maximal control.

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