Passive Crowdfunding Real Estate Investing

22 Replies

I have looked into many passive Real Estate investment tools like REITs, eREITs, etc. with companies like Fundrise, RealtyMogul, etc. but am finding a few major problems with them:

I have a few questions regarding investing with you guys.

1) No benefit of leverage by putting down 20% and having an asset worth 5x the investment and having the tenant pay down the debt with cashflow

2) The benefit of leveraged appreciation

3) Don't get the tax benefits like depreciation, mortgage interest, etc.

With that said, does anyone here have experience with these companies? And, what are the most passive investment opportunities out there in real estate that provide these benefits?

The most passive REI you can do to get all of those benefits is turnkey real estate where you don't close until the property is rehabbed and with tenant in place, and ongoing property management.

That said, some of the benefits can be had through some kinds of crowdfunding and other syndications.  For example if you are investing in an equity fund, the depreciation allowance can still be taken advantage of.  Further some funds will leverage their asset purchases with loans, which may be see as an advantage, but it also can carry additional risk, as is all borrowing.  When weighing the benefits, don't forget to also weigh the risks.

Larry Fried, Real Estate Agent in OR (#201211636)

Hey Nick.  Most of the investment opportunities you will find on the crowdfunding sites are leveraged deals.  Sponsors raise capital for the down payment from passive investors like yourself and they get the rest from their lenders.

For most of these deals, depreciation flows through to the passive investors as well.

You give up control and part of the deal to the sponsor and you get professionally run assets and little time commitment in return....that's syndication in a nutshell.

Ok guys this is exactly why I love BP! What funds or companies do you guys have experience with that do this and pass on all of these benefits and how have your experiences been?

A securities attorney may be able to introduce you to some of their clients who do this. Crowdstreet and RealCrowd are crowdfunding platforms that offer leveraged deals, but usually for accredited investors only. You will need to read the offering documents to make sure you will receive the depreciation benefit (or ask the sponsor). 

Hi @Nick McCandless - I agree, all this help is why BP is awesome! I'm trying to tag a few folks here that I'd recommend but it's not letting me tag them. Perhaps it's because they aren't on this thread?

Feel free to PM me and I can make a couple recommendations.

Jason 

(512) 981-7501
Originally posted by @Jason Magee :

Hi @Nick McCandless - I agree, all this help is why BP is awesome! I'm trying to tag a few folks here that I'd recommend but it's not letting me tag them. Perhaps it's because they aren't on this thread?

Feel free to PM me and I can make a couple recommendations.

Jason 

 Sent a Colleague Request :)

@Nick McCandless - I assume you are an accredited investor otherwise nearly all of the CF opps out there are not available to you. I am invested through several platforms and love the passive income generated. 

One of the great pros of CF is the ease of diversifying across geographies, sectors (MF, Industrial, office, retail etc.), and methods (debt, equity, etc.). instead of sinking all your hard earned savings in one or two properties.

An excellent place to begin learning and assessing is on @Ian Ippolito s site: https://www.therealestatecrowdfundingreview.com/ and here http://www.crowddd.com/

@Nick McCandless if you qualify as an accredited investor I personally like realcrowd.com because you invest directly with the sponsor and the fees are low. That's why we're using them for one of our upcoming deals and likely more after that.  There's others too; but we picked realcrowd for our deals after a lot of research.  

I would simply do your own homework on the sponsor of the deal and make sure you're directly investing in real estate so you get the benefits you're looking for. There's a lot of good content out there on underwriting sponsors.


Happy Hunting!

@Nick McCandless , are you an accredited investor or nonaccredited? The options you have will be very different, depending on your situation.

I also would not recommend choosing a platform as your 1st step. If you haven't done so already, your 1st step should really be to take a step back and figure out what percent of your portfolio should be allocated to real estate in the 1st place (after setting aside several months of savings as well as making sure you have a balance of investments in other areas as well).  Once you do that, then you should take a look at the different types of investment strategies: equity versus debt, commercial real estate versus residential, and if you go with commercial  than the different sub  asset types like  apartments, retail,  hotels,  self storage, etc.. Once you figured out what you're looking for, then you can narrow yourself down to 3 or 4  well-regarded platforms that offer what you're looking for.

If you go the opposite way, and start looking at platforms right off the bat, you have a good chance of picking something that would not be as appropriate for your portfolio as it could have been.

I am not currently accredited no, but will be in 2019. Are there any opportunities available like this for unaccredited investors?

Is there anything like this available for a non accredited investor?

@Ian Ippolito - is the real expert on this, but here is my $.02. 

I have invested in the following: 

1. Realty Mogul

2. Fundrise

3. Crowdstreet deals

4. Groundfloor

I am about to invest in another platform. I am happiest with the way Fundrise works - the platform is just the nicest (in my opinion.) I have been pleasantly surprised with Realty Mogul and their consistency as well as their technology. I think Crowdstreet has some of the better deals. 

Outside of real estate, I have invested on WeFunder and StartEngine.

@Nick McCandless , as Jillian said, there are a lot of choices. In addition to the one she mentioned, there's also Rich Uncles, stREITwise and BxReit.

Fundrise has the most diversification variety right now, since they have about 7 different funds, which is the most of any platform for national nonaccredited investors.

stREITwise has the best fee structure, which is significantly less than all the competitors.

RichUncles is the only one investing in triple net leases, if that's of interest to you.

Ian Ippolito

Hey Ian and Jillian,

Thanks for this information, I guess my main concerns with those platforms, and please correct me if I am wrong, is that I don’t get any of the tax benefits of owning real estate like depreciation, mortgage interest, etc. which can make a huge difference. Also if I invest let’s say $100,000 in one of these I am getting an asset worth $100,000 at that time, but if I used it to buy a property I would get a property with a value of $400,000 or more so if the property appreciated 10%, that would be a 40% return just with appreciation let alone the cash flow, debt paydown, and the tax benefits.

Do any of these platforms provide these benefits I have mentioned above?

Yes, some of them do. It's not really about the platform - it's about the particular offering. So take the tax section of any offering and have your CPA review. At the end of the day, you invest in these for the passive nature of the investment opportunity more than anything else. (At least, that's my perspective.)

@Nick McCandless , You're absolutely right.  The two biggest benefits for real estate investing are the tax benefits during your investing career and the ability to easily leverage.  I like @?Jillian Sidotis advice.

There are some passive investments that will pass most real estate tax benefits on to investors via a K1.  I view that as very different than direct real estate tax benefits but that's just me.  Certainly when you are receiving a partnership return you lose the ongoing benefit of the 1031 exchange.  Passive investments that are actual real estate ownership and that qualify for 1031 are out there but they're not the normal "crowdfunding"/syndication thing.

The other thing to consider is that it's not just the leverage you are losing in the scenario you described above.  You're $100K is typically not purchasing an asset worth $100K.  It is purchasing $100K of a partnership or corporate entity.  Your investment ceases to exist if the partnership does not produce.  That also is very different than direct asset ownership.  

@Nick McCandless , no, practically every investment on every platform is set up as a pass-through entity, meaning everything gets passed to you (including tax benefits). So if you're investing in equity (which 99% of these nonaccredited investor funds are) then you are getting the tax advantage of depreciation, for example. As Jillian recommended, just have your accountant review the legal document, to make 100% sure it does what you're looking for.

This post has been removed.

@Ian Ippolito , Not sure what you said "no" to but thank you for the clarification.  I believe that's what the partnership return K1 exists for - the pass through of tax benefits as I said and you reinforced.  You're  absolutely correct on most  benefits going to investors within a pass through structure with two exceptions.  

In situations like the equity sharing pass throughs you mention  there is no fixed asset to own.  Your ownership is of the entity.  

You may get most of the tax benefits of real estate ownership but you cannot defer tax on the sale of the asset through a 1031 exchange in that situation.  

The second major difference may be something  you've yet to experience if your investing career has not yet spanned an entire real estate cycle.  But when markets correct or the market begins to collect it's "rookie tax" on every investor who thinks yesterday is like today and tomorrow will be the same, Ownership of a share of a company will only get you the notice of bankruptcy.  Ownership of the asset leaves you some options at the end of the day if/when things go south.

I like what you've done on your review site.  There's a huge need for people to be able to pool resources with experienced investors to reap returns.   And youl attempt shed light on the good bad and ugly. But it's a different paradigm and ball game. And a potential investor's approach to it from due diligence to expectation and exit also needs to be different than traditional real estate investing.

   

@Dave Foster , the “no” was in reply to this: 

>>Thanks for this information, I guess my main concerns with those platforms, and please correct me if I am wrong, is that I don’t get any of the tax benefits of owning real estate like depreciation, mortgage interest, etc. which can make a huge difference.

The OP didn’t mention the issue of tax deferral on sale via 1031 exchange. But in addition to companies like yours there are also Crowdfunding sites that also do this, like 1031exchange.com. 

Regarding bankruptcy, you bring up a good point about being concerned about the company going bankrupt. However there are ways to protect yourself with Crowdfunding. An investor should make sure that the LLC structure is bankruptcy remote so that it survives in a bankruptcy. And the agreement should either specify a back up administrator or allow shareholders to vote on a new one. That way the company itself can go bankrupt, but the shareholders can continue to have their investment perform.

And the LLC does indeed own the physical property, and has all of the resources and rights to enforce, if the investment itself goes bad as direct ownership.

Arguably, it has much more resources than the typical small, direct,  private real estate owner, with millions of dollars on hand to pay legal fees, foreclosure proceedings, rehab foreclosed properties, etc..

@Ian Ippolito, As a non-accredited investor with a self-directed IRA, would I be subject to UBIT if I invest some of my SD IRA funds in one of the non-accredited platforms? I subscribe to your emails and saw something about UBIT exposure if investing in a debt fund.

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