Friend netted $3m , looking to deploy newfound wealth into RE
Wilmington, NC · Member since 2016 · 12 posts · 13 votes
Friend netted $3m , looking to deploy newfound wealth into RE
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes@Louie Pullen I really appreciate your confidence in Praxis Capital, and it might come as a surprise that I would chime in with the downside of investing in syndicated offerings such as the ones we do at Praxis, or anybody else does, for that matter. But, you asked... :)
There are plenty of downsides. The company he invests with could be of low quality (present company excluded, LOL), could lack a track record, not have experience with having survived a market cycle, could produce inadequate reports that don't tell him what he needs to know...whatever it is, when investing in a syndicated offering there is an additional risk component that isn't present when buying real estate directly--the sponsor of the investment.
As an investor in a syndicated offering you can't typically 1031 exchange in or out, which you can do when buying real estate yourself. You also don't have full control over when the asset should sell, when you can refinance for cash out, or how you can make changes to the business plan.
When you buy real estate directly, you are in the pilot's seat. When investing in a syndication, you are a passenger and there is a professional pilot flying the plane (if you picked the right company).
But there are upsides too. I call it leverage. Not the type of leverage you usually think of in the context of real estate (debt), but leveraging the sponsor's track record, experience, skill, judgment, relationships, deal flow, financial strength, team, research and time to produce an outcome as good as or even better than one can achieve on their own.
So the question is, do the upsides out-weigh the downsides? And, what about the downsides in direct ownership (there are plenty)? And which one is a better fit? It's definitely an individual decision as each option isn't for everybody.
36 Replies
- Rental Property Investor · Dallas, TX · Member since 2015 · 501 posts · 504 votes8y
Originally posted by @Mike Dymski:
The answer is #4...the crowdfunding sites are for people who do not otherwise know how find to syndicated deals (they are not easy to find). That's their business model...they bring deals and capital together and there is a cost for that service (and the property pays for it...doesn't matter if it's the sponsor or investor, it's both in the end).
On your other question, there are investment clubs that provide different levels of participation (passive or mentorship) and many of their members start out as passives and move into sponsorship roles. The Old Capital podcast has a lot of guests from investment clubs.
I think an investment club is a good choice too. I'm in a group that did over 30 deals in 2017. That means I get offered a new opportunity an average of every ten days. I have to turn over 90% of them down because I simply can't afford to make that many investments at $50,000 a pop, but it could be a great way for someone with a large amount of capital to deploy it among a wide range of deals, with diversity in sponsors and markets.
I also agree that the Old Capital podcast is great for education. Even though most of the guests are from Texas (Dallas specifically), most of the lessons can apply to any market.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Hey Louie. It likely took a while for your friend to build a business that generated a handsome profit and it should take a while to figure out how to invest the proceeds.
I'd recommend discussions with commercial brokers, other investors, and RIAs...and more books, podcasts, blogs, posts, etc. His new work is now an investing business and that takes time (done correctly). Even experienced operators take a lot of time vetting their next move and pivoting with market conditions.
And stick by him...it's great to be surrounded by aspirational successful people (and he can afford to pick up the beer tab too).
- 8yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
@Brian Burke,
And you are also correct that they charge the sponsor, not the investor. That said, and please correct me if I'm wrong here, I'd think that the sponsor would be passing that cost to the investor either through a higher sponsor fee or making the cost a deal-level expense (which is very typical in the LP capital space for marketing costs). Either way, it ultimately costs the investor more, right?
I don't want to speak for every deal, and suspect there are some syndications that have a special PPM for investors coming through a crowdfunding platform, and charge them a higher sponsor fee or a higher marketing fee.
However, all of the deals I've seen on sites like Crowdstreet charge the same fees whether the investor comes through the platform, or comes to them directly.
Yes, since it's an expense to the syndication, someone has to pay it. Some sponsors absorb the cost themselves of marketing. Most pass it on to the fund, which means investors pay. However, as you mentioned, this isn't something unique to crowdfunding. Most non-crowd funded syndications are already doing this and paying for investors that are referred to them.
Also, I'm not sponsor so I haven't used any of the sites as one and can't speak from that perspective like you can. But the last time I spoke to Crowdstreet, they said the cost of the listing was very low: $5k-$10k plus a monthly subscription cost for as long as the sponsor was using it. If this is still the case, it probably isn't that much more expensive than what a sponsor would be paying through non-crowd funded means (and perhaps even cheaper).
The Real Estate Crowdfunding Review - 8yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
(Something strange happened to my last post and it won't let me edit it now, so reposting:)
@Brian Burke, I don't want to speak for every deal, and suspect there are some syndications that have a special PPM for investors coming through a crowdfunding platform, and charge them a higher sponsor fee or a higher marketing fee.
However, all of the deals I've seen on sites like Crowdstreet charge the same fees whether the investor comes through the platform, or comes to them directly.
Yes, since it's an expense to the syndication, someone has to pay it. Some sponsors absorb the cost themselves of marketing. Most pass it on to the fund, which means investors pay. However, as you mentioned, this isn't something unique to crowdfunding. Most non-crowd funded syndications are already doing this and paying for investors that are referred to them.
Also, I'm not sponsor so I haven't used any of the sites as one and can't speak from that perspective like you can. But the last time I spoke to Crowdstreet, they said the cost of the listing was very low: $5k-$10k plus a monthly subscription cost for as long as the sponsor was using it. If this is still the case, it probably isn't that much more expensive than what a sponsor would be paying through non-crowd funded means (and perhaps even cheaper). But you can probably comment on that more than I can. I know there are some funds that pay quite a bit to registered investment advisors, for example.
The Real Estate Crowdfunding Review - 8yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Originally posted by @Ian Ippolito:
@Brian Burke
I don't want to speak for every deal, and suspect there are some syndications that have a special PPM for investors coming through a crowdfunding platform, and charge them a higher sponsor fee or a higher marketing fee.
However, all of the deals I've seen on sites like Crowdstreet charge the same fees whether the investor comes through the platform, or comes to them directly.
Yes, since it's an expense to the syndication, someone has to pay it. Some sponsors absorb the cost themselves of marketing. Most pass it on to the fund, which means investors pay. However, as you mentioned, this isn't something unique to crowdfunding. Most non-crowd funded syndications are already doing this and paying for investors that are referred to them.
Also, I'm not sponsor so I haven't used any of the sites as one and can't speak from that perspective like you can. But the last time I spoke to Crowdstreet, they said the cost of the listing was very low: $5k-$10k plus a monthly subscription cost for as long as the sponsor was using it. If this is still the case, it probably isn't that much more expensive than what a sponsor would be paying through non-crowd funded means (and perhaps even cheaper).Without going into specifics about Crowdstreet's pricing (but you are on the right track, Ian) I calculated all-in it would cost us about 3-1/2% of the funds raised over the life of the deal including the onboarding and monthly fees. This could swing up or down depending on the negotiation and on the size of the raise, I suspect. It certainly doesn't break the bank, but it is a cost nonetheless.
I would not be inclined to bring parallel offerings to investors depending on how they came to us which means that all investors in the fund would be burdened by the load of the crowdfunded capital (which is OK to do under our offering documents and I suspect most offering documents as they typically allow for broker-dealer commissions and marketing as part of the sources and uses of funds).
And you're right, Ian, someone has to pay it...and I suspect it's never the sponsor. And if it is, they'd most likely raise their acquisition fee to the deal to cover it (unless they are running a charity!). So like you said--they'd pass it on to the fund. That said, I haven't crowdfunded yet and we've never paid to have investors referred to us (I didn't know that most non-crowdfunded syndications were doing that--it's against SEC regulations!) so crowdfunding would raise our cost of capital (and cost the investors).
That's just a cost of doing business, which is fine, but I guess my point is just to respond to the earlier question related to the distinctions between crowdfunded and non-crowdfunded deals, so this is an interesting discussion!
- 8yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
@Brian Burke, Yes definitely an interesting discussion and I appreciate you giving the information from your point of view. And I certainly understand where you're coming from. If you're already raising more capital then you need from existing investors and other sources, it really doesn't make sense to pay an unnecessary 3 1/2% to crowd fund.
Regarding sponsors paying for investors from an RIA or other source: Thinking back on it, I can't claim to speak for the majority, since I only talk to a small minority that passes my pretty strict criteria. And at least a few of them that talked about this were really big ones that was already registered with the SEC. My guess is that they don't have the same legal restrictions as non-registered sponsors do.
However there was at least one that I do not believe was registered and they mentioned about how they got most of their investors from RIAs, and how important preserving that relationship was to them, etc. etc.. They didn't go into low-level details, but they certainly gave me the impression that there was some sort of quid pro quo there.
I'm not an attorney, and it was mentioned so casually that it makes me wonder if perhaps there is a workaround that they discovered that could be done legally. Or perhaps they were venturing into gray areas of the law. Or perhaps they were organized under a different area of the law then typical offering. Or perhaps they were pushing things too far.
(From my brief experience talking to a few attorneys on related issues, much of the syndication and crowdfunding law is vague, gray and not enough of it has been tested in court to provide clarity. If I ask 3 different attorneys the same question, I might get 3 different answers.)The Real Estate Crowdfunding Review - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Originally posted by @Ian Ippolito:
@Brian Burke, Yes definitely an interesting discussion and I appreciate you giving the information from your point of view. And I certainly understand where you're coming from. If you're already raising more capital then you need from existing investors and other sources, it really doesn't make sense to pay an unnecessary 3 1/2% to crowd fund.
Regarding sponsors paying for investors from an RIA or other source: Thinking back on it, I can't claim to speak for the majority, since I only talk to a small minority that passes my pretty strict criteria. And at least a few of them that talked about this were really big ones that was already registered with the SEC. My guess is that they don't have the same legal restrictions as non-registered sponsors do.
However there was at least one that I do not believe was registered and they mentioned about how they got most of their investors from RIAs, and how important preserving that relationship was to them, etc. etc.. They didn't go into low-level details, but they certainly gave me the impression that there was some sort of quid pro quo there.
I'm not an attorney, and it was mentioned so casually that it makes me wonder if perhaps there is a workaround that they discovered that could be done legally. Or perhaps they were venturing into gray areas of the law. Or perhaps they were organized under a different area of the law then typical offering. Or perhaps they were pushing things too far.
(From my brief experience talking to a few attorneys on related issues, much of the syndication and crowdfunding law is vague, gray and not enough of it has been tested in court to provide clarity. If I ask 3 different attorneys the same question, I might get 3 different answers.)I work with an RIA who gets compensated for raising capital for sponsors and network with others who do as well. There are BP members who do this for a living or it's part of their investing strategy...they don't have deals but can bring capital to the table (they network here for investors).
They get part of the GP or "consulting" fees on the structure/paperwork (or compensated other ways...IDK, not my area). I have referred enough people to sponsors or the RIA that I have been approached to raise capital as well...just have not looked into it. I'll leave managing other peoples' money to folks like Brian. I've got my hands full managing my own family finances.
- JV Contractor Syndicate Piscataway, NJ · Member since 2015 · 283 posts · 24 votes8y
Dear Louie,
I am a licensed contractor and licensed Home inspector in NJ and have rehabbed several fix and flips profitably 35% return. If you are interested in investing in a LLC that will hold the title to the property and we shall JV. You shall be the equity partner. Approx capital needed $ 250K to $400K per property
Thanks
Vijay K Chopra
- 8yYonah WeissPro MemberCost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
Check out this discussion from today. relates to what we discussed last week about finding a partner.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes8y
Originally posted by :
DIVERSIFICATION .... don't put all your eggs in the real estate basket....
He may want to retain a good Money manager that is fee based not commissioned based and have him go into some different asset class's.
Even a builder type for this big hits put 500k into equity with a top shelf builder developer like the deals that @Will Barnard does there in LA .
spread it around if your going into real estate.. one could always buy into another business as well that has upside
Thanks for the shout out @Jay Hinrichs
I could not agree more, particularly with an inexperienced real estate investor, that diversification not only on all asset classes but within real estate itself is essential. With $3M, taking say a 1/3rd of that and investing in a sponsor provided long term buy and hold for income and tax shelter is definitely a solid goal and idea. Another 1/3rd into other Investments outside of real estate, and then up to the balance 3rd into shorter term real estate deals like trust deeds or equity shares in rehab flips and/or development projects allows the Investor to keep a good portion somewhat liquid as the short term development deals, at least mine, have 6-12 month terms with double digit returns typically and can be rolled over to the next or pulled back after you term out.
So to reiterate, diversify is the best plan of attack in my humble opinion.
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