Crowdsourcing vs Turnkey

11 Replies

What is your opinion on the big crowdsourcing platforms for real estate investing now vs Turnkey? 

This is not a question about active real estate rentals or flipping or wholesaling, I understand those are better returns for the right people. 

But for the more passive real estate income people, what are your thoughts on this? Any difference in returns? Much less hassle with crowdsourcing now? Any reason to continue with turnkey? 

If your focus is hands-free passive income then crowdfunding platforms like Fundrise or Realty Shares may be appropriate for you.

I prefer turnkey/income producing rental units due to the potential for: higher consistent monthly returns, tax benefits, equity building and leverage options.

While crowdfunding is more passive, I believe that you're paying a fairly large premium for that benefit.  With that being said, I do invest in crowdfunding and it makes up about 6-8% of my portfolio at any given time.  My primary reason for this is that I enjoy having some commercial exposure with less downside risk.  Also, I would have no idea what I was doing if I were to try to do a commercial deal on my own, lol.  

Crowd funded investments have a lot more flexibility. You can choose to invest in residential rentals, just like a turnkey provider (but with several advantages I’ll mention next). Or you can invest in residential debt instead of equity, or commercial real estate, or almost anything. And you can also invest in value added or opportunistic strategies, which come with higher returns, but of course more risk.

If you are wanting to stick purely to owning residential rental properties in a city that you don’t live in, there are still several advantages to going with Crowdfunding/syndication, versus a turkey provider.

With a turnkey provider, you have to purchase the entire property yourself. So most people can only own one or a handful. You could invest the same money in a crowdfunding/syndication residential rental deal and be diversified into hundreds of properties, because you own a portion of each instead. That eliminates a lot of individual property risk.

You can also diversify into a lot more markets than most people could afford to do on their own using turn key. That eliminates single market risk.

However, the biggest advantage of going Crowdfunding over turn key is much better alignment of incentives.

In a proper crowdfunding/syndication fund, the manager should be compensated based mostly on the profit. So it’s in their best interest to make sure that you make the most money, and for the duration of your entire investment.

On the other hand, turkey providers are compensated simply on completing the transaction and they are done. The structure creates more conflicts of interest and potentially an adversarial structure. If they took shortcuts and did cheaper work on the rehab, that helps them profit at your expense. (You have no way of knowing for years, and by then it’s too late to do anything about it).

Plus, the whole business model of a turnkey provider is that they take all of the profit from the rehab to fund their business. With Crowdfunding, that is *your* profit instead. 

@Ian Ippolito

Excellent comment Ian, I totally agree. I think with crowdfunding, these turnkey providers will start to significantly decline in demand. Most of them are too selfish and as you stated they rob all the profit from the buyer. 

I think the only way for turnkey to survive is for them to up their game significantly and decrease the profit they take on the rehabs. Otherwise crowdfunding seems to be the future for the passive investor. 

There is barely any profit in turnkey to begin with. The only "advantage" one could say about turnkey is you get some tax benefits, but you get those same benefits with crowdfunding, it is just already built into your return. 

@Kyle Scholnick just realize that both options has an extra layer of handling in there and they talk another portion of profits. But if you can’t network and find your ideas then I guess it’s cool.

I’d prefer turnkey because I can at least control where I buy and who manages it. Can you sell your state in crowd funding or is there several year hold period ?

Every crowdfunding deal is different as far as term is concerned. Debt deals can be 6 months and some equity deals 10+ years.  The term is listed on the deal.  You want to give the sponsor flexibility on the exit time table.  You would never want to force an exit to an exact date...ie  to a period similar to 2009.  By and large crowdfunding is just old school syndications online.

Originally posted by @Kyle Scholnick :

@Ian Ippolito

Excellent comment Ian, I totally agree. I think with crowdfunding, these turnkey providers will start to significantly decline in demand. Most of them are too selfish and as you stated they rob all the profit from the buyer. 

I think the only way for turnkey to survive is for them to up their game significantly and decrease the profit they take on the rehabs. Otherwise crowdfunding seems to be the future for the passive investor. 

There is barely any profit in turnkey to begin with. The only "advantage" one could say about turnkey is you get some tax benefits, but you get those same benefits with crowdfunding, it is just already built into your return. 

 Kyle many crowdfunders FUND TURNKEY companies.  LOL..  and most turn keys are not knocking down an unreasonable profit given the risk time experience..   10 to 20% profit on a deal is standard in all forms of value add real estate.  

if one wants to save that money they need to do it themselves.

if we used the logic you state above you would be dictating profit a new home builder should charge.. when in fact the market dictates what we can sell a new home for.

some homes we only make 30k on which is 10% or less and given time and risk not that great.. other new homes we build same amount of time and a little more money risk we make 150k on them... or more. not often but it does happen.

you don't have the retail buyers saying hey these builders are making too much money its not sustainable etc.. they simply don't buy... anyone can buy their own lot and build their own home and save some money.. or they can do it and maybe get a divorce :) given how stressful building a new home can be for retail folks.

Thanks Kyle for this post. I had the same question and was about to post it on the forums.

Would love to get more insight on this.